Commercial deposits have provided an important source of stable and low-cost funding in a turbulent banking era. Assured by enhanced FDIC guarantees, American businesses have been content to maintain sizable deposit balances within the banking system, especially at a time when rates are low and there's less motivation to shop elsewhere.
According to the Federal Reserve, U.S. nonfinancial businesses held about $1.5 trillion in bank-related products at midyear, an increase of $44 billion since the end of 2007.
Analyzed checking, the principal banking operating account used by U.S. corporations, has been particularly hot. Related deposit balances soared by an estimated 26% during the first half of 2009, according to a Novantas survey of the largest banks.
But as banks look to 2010, they are increasingly concerned about retaining this valuable portfolio on profitable terms. Most forecasters expect wholesale interest rates to begin rising gradually in 2010, prompting companies to seek higher yields in less profitable savings and term products, sweeps and even money funds.
Also threatening deposit retention is an expected increase in relationship churn as credit eases and companies evaluate other options. According to recent Greenwich Associates research, 41% of commercial banking relationships will be in play in 2010.
The upshot for banks is that commercial deposit gathering will become a high-stakes exercise next year.
Once the environment shifts, banks must be prepared to act quickly, and the winners will already have built a set of well-constructed strategies.
There are five major success factors in the quest for commercial deposits.
Targeting. As competition for commercial deposits heats up, leading banks will use customer targeting to pick their battles. The goal is to focus pricing and sales strategies where they are most likely to be successful and profitable, using segment-level knowledge of customer preferences, revenue potential and product usage patterns.
By focusing on relationship-based accounts where a full range of treasury management services is provided, for example, the bank can align itself with a less rate-sensitive deposit base that is more likely to be retained in the emerging environment.
Products. Too often commercial banking calling officers are equipped with a generic product suite when they call on clients. This practice overlooks very real differences in deposit and cash management needs among various types of customers.
For example, many banks have segmented their business customers by size, but they haven't developed distinctive deposit products for these groups.
Pricing. Banks place heavy emphasis on internal performance goals and the actions of competitors when they set deposit rates. The banks that succeed under pressure next year will go a step further by analytically evaluating customer rate-sensitivity, as reflected in precise measurements of price elasticity of demand.
Such measurements are increasingly being used in the commercial deposit business to juggle the twin goals of balance growth and margin enhancement. Increasing the level of pricing precision will be absolutely critical in a more rate-sensitive and competitive deposit pricing environment.
Customer outreach. The past year has witnessed a transformation in the role of the commercial sales officer as growth priorities have shifted from loan generation to liquidity and transaction services.
A continuing challenge is adequately preparing loan-oriented banking officers to purvey the fuller suite of commercial banking products and services, particularly in gathering profitable deposits. In many cases, further work is needed to realign training and incentives for relationship managers and treasury management officers, as well as implementing team-based calling programs.
Field officer support. For sales officers to become trusted advisers and establish anchor account relationships, it is essential to free up their time in the field.
It is not uncommon for relationship managers to spend nearly half their time on administrative and general marketing activities, according to Novantas surveys, while only a fourth of their time is devoted to customer acquisition.
Each of these factors will be essential in next year's more challenging commercial deposit environment, where the banks best prepared to execute focused strategies will have a clear competitive advantage.