Financial Marketers May Be Ambushed By Deposit-Flight Risks

Consumers are becoming rate shoppers again. Now that online and direct banks are offering attractive rates, financial marketers may watch those Millennial deposit dollars they fought so hard for walk right out the door. Marketers must assess the potential for depositor ‘flight risk,’ and spot opportunities to pick off depositors from competitors.

Financial institutions are in a bit of a grace period for deposit gathering. The expected erosion of low-rate deposits hasn’t come to pass… at least not yet. But experts say the clock is ticking, and that financial institutions should be rethinking their deposit marketing strategies now.

Traditional institutions today face a balancing act. With savings interest rates on the rise, and the ongoing need to fuel loan growth, there’s greater pressure to pay up — but without raising the cost of funds more than necessary. Financial marketers are in the thick of this deposit scrum, including designing accounts and even rethinking what institutions call them.

Andrew Vahrenkamp, Senior Research Analyst and Program Manager at Raddon Research, says he is surprised that consumers are not yet as rate sensitive as might have been assumed. In his research, three in ten consumers said they wouldn’t move their deposits for any reason and most said they wouldn’t change institutions for a rate less than 3%.

“I expected a higher degree of rate sensitivity,” says Vahrenkamp, “But it will come out eventually. Rates have been so low for so long, there’s been little reason to move accounts.” Overall, more depositors are getting used to the idea of shopping around, and more will follow.

Mike Moebs, Economist and CEO at Moebs Services, sees the economy at a turning point not seen by most of the current generation of retail bankers.

“Consumers, until recently, have been stockpiling money in banks and credit unions,” says Moebs. Many hadn’t completely bought into the long-running economic recovery. “After ten years, consumers are becoming fully engaged again.”

“Consumers are starting to overcome their inertia,” says Byron Marshall, Director of Research at BAI. They won’t move for a pittance, and many aren’t looking outside of their primary financial institutions, but already internally some funds have been shifting from Money Market Deposit Accounts into Certificates of Deposit.

“The challenge for banks and credit unions is to identify those consumers who are more rate-sensitive and those who are less rate-sensitive and to plan accordingly,” states Raddon’s study.

Generational differences are now beginning to emerge. Marshall says that BAI found that among Baby Boomers and the Silent Generation, six in ten planned no move at all, and about one in ten would shift to higher-paying accounts at their primary institution.

Among Gen Xers, about the same portion, one in ten, would move, but outside their current provider, to a higher-paying online bank.

But most significantly, 22% of Millennials are going to online banks — twice the rate as among Gen Xers. 42% of Millennials plan no movement.

“Recent rate increases have helped boost the direct online banks, with their higher rates causing more challenges to traditional financial institutions using traditional appeals such as branch proximity,” says Mark La Penta, Principal at CCG Catalyst Consulting Group.

This throws a spotlight on Millennials that some bankers and credit union executives may be missing. Not so long ago scoffing about Millennials having no money was common. But now the eldest among them are approaching 40.

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