Navigating the Conflicted Demands of Deposit and Account Growth: Insights from 2023 and Strategies for the Future
Financial services leaders face
the same problem every business faces. When prioritizing marketing, sales and
operational needs, is it better to prioritize quantity or quality? Some argue
that attracting a high volume of new customers leads to more opportunities for
success and improvement in the long term. Others believe focusing on
higher-quality deposits and customers yields deeper insights and more
meaningful outcomes.
This dichotomy plays out in BAI’s 2024 Banking Outlook Research. The research found that the two most pressing concerns for financial services leaders are increasing deposits (quality) and growing new accounts (quantity). While both approaches are vital to long-term success, fulfilling those goals requires two different strategies. Financial services leaders should consider their institutions' current needs and adjust their strategies to solve their challenges.
Whether quantity or quality reigns supreme at your organization, BAI’s research provides some insights to help maximize both strategies.
Increase Quality Deposits with Alternative Account Types
Deposit growth has supplanted customer acquisition as the top business challenge in this year’s research, breaking the top three for the first time. Deposit growth, considered the cornerstone of financial stability and liquidity, demands a focus on cultivating quality customer relationships. In an era of fierce competition and shifting consumer preferences, simply amassing large numbers of new accounts is no longer sufficient.
This shift in priority reflects the declining deposit levels for all generational cohorts in consumer banking. When asked about their deposits compared to six months ago, Gen X reported the most challenges, with 41% saying that deposits decreased or that they were facing expenses that exceeded savings. The other cohorts reported similar levels of distress, with 36% of Millennials, 31% of Boomers and 30% of Gen Z reporting lower deposits or negative cash flow.
Consumers cited several reasons for lower deposits. More than two-thirds of consumers cited inflation as the primary reason for deposit decreases, with rising housing costs coming in second, impacting more than a third of respondents. Millennials also cited higher job loss than other generations, while Gen Z was more likely to be actively paying down loans.
With interest rates maintaining their highest levels in the last 20 years, numerous financial institutions are leveraging high-rate offerings like CDs to attract more affluent customers. BAI research found that a quarter of mass affluent customers with more than $100,000 in investable assets moved deposits into either CDs or insured money market account for better rates.
Rates and pricing are most competitive among smaller traditional financial services organizations and direct banks. BAI’s Benchmarking research also found that alternative and direct banks without branches could grow deposits with a higher mix of competitive CD pricing. This also demonstrates that banks do not need to be customers’ primary institutions to attract deposits. BAI Banking Outlook found that only 14% of CD accounts are with a consumer’s primary institution. Looking further into 2024, as interest rates hold steady or begin to decline, leaders should look to products such as money market accounts to continue attracting deposit balance growth.
Increase Account Opening by Aligning Priorities with Consumers
Despite the top priority of deposit quality (aka deposit balance growth), growing new accounts still remains a key priority for financial service organizations. Adding new accounts requires financial services organizations to align their offerings with their target audience's desires. This becomes a challenge when financial service leaders and consumers have differing priorities regarding improving customer experience.
According to the 2024 BAI Banking Outlook, bankers’ number one way to improve customer experience is to use data more effectively for product and service recommendations, while consumers’ number one way is to give them the tools and options to customize their solutions. According to consumers, other ways financial service organizations can improve customer experience across all generations include improving the omnichannel experience, making it easy to report problems and enhancing the mobile app or branch experience. Financial service leaders should consider integrating consumer priorities to ensure they serve their communities to the best of their ability.
While growing new accounts might not be an answer to increasing quality deposits, it is imperative to prioritize when focusing on the longevity of your financial services organization. Developing and deepening relationships with younger consumers now will promote long-lasting loyalty with consumers who will hold the majority of quality deposits in the future.
Focusing on increasing
high-quality deposits while still considering new account growth might require
two different strategies but will help financial service organizations navigate
the demand for deposits now while preparing for the future. Offering alternative
account types of targets more affluent customers and increases high-quality
deposits while shifting customer experience priorities to align with customers
helps to increase account openings. It is important to remain educated on
changing priorities to provide the most relevant solutions for customers now
and create successful strategies moving forward.
About Author:
Mark Riddle is Director, Research Intelligence Expert at BAI, a nonprofit,
independent organization that delivers the financial services industry’s most
actionable insights.