Rare earth elements are a set of 17 metallic elements used in many high-tech devices and critical to the production of low-carbon technologies needed for a green transition. Worldwide deposits were estimated at 115MM tonnes in 2021, with China holding just short of 40%. US extraction is currently limited to one site, the Mountain Pass Rare Earth Mine and Processing Facility in California. Recently, deposits have been discovered in Montana and Wyoming, but it can take decades for the mines to become operational.Deposits — albeit of a different kind — are also highly prized by financial institutions (FIs). As a result of the Federal Reserve’s (Fed) quantitative tightening, US FIs experienced six consecutive quarters of declines in deposits. According to McKinsey, between Q4 2022 and Q3 2023, money flowed out of midsized US FIs to the tune of 11% for the $100B - $1T segment, and 5% for the $10B - $100B. The largest and smallest FIs each added 2% to their deposits. The rest was mostly lost to the money markets.Growth finally resumed in Q4 2023, with an uptick of 2% by Q1 2024. This has come at a cost to FIs, as they have had to defend their deposits with increasingly higher rates, in order to narrow the gap with high-yielding alternatives in the Treasury and money markets. With the first interest-rate cut of 50bp this month, there is hope for relief. However, it is likely that a decline in deposit costs will lag the Fed’s easing cycle. Even with declining interest rates, FIs, under regulatory pressure to maintain liquidity, will remain focused on boosting and retaining deposits, while improving margins.In this challenging environment, it is essential to be prepared. We explore five strategies to ensure your community financial institution (CFI) is ahead of the game.
- Plan Ahead: Review and Adjust Your Deposit Mix
- Evaluate Current Holdings. Analyze your existing deposit portfolio to understand the distribution between short-term and long-term products. With one-year Treasury rates dropping, it's likely that CD pricing will follow suit. Assess whether it's time to shift your focus toward products that better align with the new rate environment.
- Anticipate Customer Behavior. Consider how customers might react to rate changes, especially those with a history of rate sensitivity. Prepare to offer alternative products or incentives to retain funds that might otherwise be moved.
- Determine a Nuanced Pricing Strategy
- Conduct Price Sensitivity Analysis. Different customer segments will respond differently to rate changes. Use data analytics to understand these variations in price sensitivity and tailor your pricing strategy accordingly. This approach allows you to retain rate-sensitive customers while maintaining or improving your net interest margins.
- Segment and Target. Develop a pricing strategy that segments customers by their rate sensitivity and financial behavior. For instance, offer tiered interest rates or bundled products to attract and retain deposits from those most likely to seek higher returns elsewhere.
- Balance Liquidity Needs with Cost Management
- Strategic Liquidity Management. In the wake of recent banking challenges, maintaining ample liquidity is crucial. However, it’s equally important to manage the cost of funds. Revisit your liquidity strategies to ensure you have sufficient access to funding while minimizing the impact of reduced deposit rates on your balance sheet.
- ALCO. Ensure that your ALCO committee’s objectives are being met.
- Diversify Funding Sources. Keep multiple funding channels open and ready to activate. This might include lines of credit, wholesale funding, or alternative financing options that provide flexibility without excessively increasing costs.
- Launch Targeted Campaigns to Reclaim Lost Deposits
- Data-Driven Outreach. Use your customer data to identify those who shifted funds to money market accounts or other higher-yield options during the rate hikes. Develop targeted campaigns that offer compelling reasons for them to return, such as promotional rates or bundled services that enhance the value proposition.
- Tailored Product Offers. Consider offering products that align with the current rate environment, such as step-up CDs or loyalty bonuses for returning customers. These can be effective in regaining lost deposits and reinforcing customer loyalty.
- Prioritize Relationship Building to Reduce Funding Costs
- Deepen Customer Engagement. For commercial clients, McKinsey estimates that the return on equity on clients with a primary banking relationship is approximately 20 percentage points higher than for clients with a lending-only relationship. Strong relationships with clients, particularly in commercial banking, can lead to lower funding costs and higher returns. Focus on enhancing the customer experience through personalized services, proactive communication, and relationship-based pricing.
- Cross-Sell and Upsell. Use the opportunity to deepen relationships by cross-selling other services that can lock in primary banking relationships, thereby reducing the likelihood of deposit attrition when rates fluctuate. Offer financial planning, cash management services, or advisory services to strengthen ties with your clients.
Relationship Building at the Core of Many CFIs’ Deposit StrategiesTrue to CFIs’ reputation for service, many institutions have chosen to focus on relationship building rather than engage in a price war. For example, Bridgewater Bank, a $4.7B-asset CFI in MN, has honed its industry-specific offering on key segments and hosts networking events for its business customers. “Given our vast networks and relationship focus, we continue to get in front of new client opportunities,” says Lisa Salazar, chief deposit officer.Paducah Bank and trust Co., a $953MM-asset CFI in KY, engages in continuous staff training to ensure it is able to truly benefit its customers. “Our role extends beyond traditional banking; we act as consultants, understanding our clients’ goals and guiding them toward achieving those objectives,” says Terry Bradley, chief deposit officer.Finally, INSBANK, a $850MM-asset CFI in TN, relies on innovation, technology, and expertise in commercial banking and treasury management to support its relationship banking approach. Two additional divisions target customers outside its primary market: one provides banking services to the healthcare industry, while the other offers a ‘virtual private client experience’ for depositors across the country. Now that interest rates have started to fall, CFIs should experience some relief on deposit pricing pressure. However, in this evolving landscape, it is key to be prepared. Make sure you plan ahead, use price sensitivity analysis to inform your pricing strategy while keeping liquidity front of mind, consider how you might regain some of the lost deposits, and continue to play to your strengths by focusing on relationship building.
