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“We have liftoff!”

After seven years, rates have increased a little bit. What will your bank do next?

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ALCO Beat articles featured exclusively on are written by the asset-liability management experts at Darling Consulting Group. ALCO Beat articles featured exclusively on are written by the asset-liability management experts at Darling Consulting Group.

By Keith Reagan, managing director, Darling Consulting Group

On Dec. 16, 2015, the Federal Reserve finally increased the Fed Funds rate by 25 basis points—marking seven years to the day since the rate reached 0.00%-0.25%.

I say “finally” because this step is something financial institutions have been anticipating for a very long time. As each of the seven years passed, that anticipation turned to fear in many institutions, fear of what was going to happen to their deposit bases when rates did go up.

What goes down, finally went up

So, here we are. Short-term rates have increased 25 basis points. How many of your customers came to you and demanded higher rates on their deposits?

I have asked that question of every bank I have met with since Dec. 16th. The overwhelming answer I have received is zero.

This is not to suggest that none of your customers are rate sensitive. Nor that you won't eventually have to increase deposit rates and/or introduce new special products. What it highlights is that there is not a 100% elastic relationship between short-term rates and deposit pricing. It underscores that your customers bank with you for more than just rate.

Understanding your deposit base

Is rate the most important aspect to some? Of course, but I would argue that those are the customers you do not want.

If rate (meaning the highest rate in town) is the most important variable, these customers are truly “borrowings,” not really deposits. You likely have much cheaper borrowing options that can be accessed on your own terms, versus the terms of a rate-sensitive "customer" who will flit away for a few basis points.

Assuming short-term rates do rise more throughout 2016 (admittedly a bigger “if” than just 30 days ago, given the Fed’s recent):

1. What is your game plan for deposit pricing?

2. At what point will you increase deposit rates?

3. Will you introduce new products to limit the marginal cost of funds?

Is everyone within the organization (from the board to the folks on the front line) prepared and ready to execute the plan?

While every institution will have a different plan, one constant needs to be in each plan—understanding your customers.

• What is it they want?

• What is it they need?

• Are they truly rate sensitive?

• Are they profitable relationships for you?

To answer these questions, you can use anything from the back of a napkin to a full blown MCIF system and everything in between.

Executing the plan

The best research and plan can be destroyed by miscommunication of the plan (both internally and externally). The consequences of this can be devastating to employee morale, customer satisfaction, the overall cost of funds, and ultimately the franchise value.

How do you ensure the least amount of miscommunication? Think of every customer interaction as a sales opportunity.

Any sales training program I have ever seen will tell you to ask as many questions as possible to fully understand the customers' needs. Is everyone at your institution trained enough as to the right questions?

Anyone communicating with a customer needs to fully understand your entire deposit suite, not just the product with the highest rate, to be able to ask the right questions.

The question cannot be, "Would you like a higher rate?" It needs to be more along the lines of, "What else can we do to serve you better?"

Everyone in your organization is a salesperson when speaking to a customer or a potential customer. However, not everyone is a natural salesperson. In fact, most people are not. If you agree with both of these statements, you need to help your people.

• Give them training.

• Give them a script that steers them away from rates.

• Change their roles.

Strategic planning

How do you determine the proper course of action for each employee, branch, department, and institution?

Consider a strategic planning session focused solely on managing the deposit base. Anyone who talks to customers, from the board down to the front line, needs to be involved at some level.

Good strategic planning sessions include questionnaires filled out in advance that should be done by everyone in the institution to help determine their strengths, weaknesses, opportunities, and threats (SWOT). Not everyone can be involved in the actual planning session, but you will get good ideas and suggestions by soliciting help from everyone.

Consider focus groups that include customers. Let them tell you what they want.

• Strengths: Every bank says “service,” which means it cannot be true. Be honest with yourself or the results will not be worthwhile.

• Weaknesses: Every institution has some. Ask all levels within the organization and you will get different answers and perspectives.

• Opportunities: Most households have between 3 and 4 banking relationships. Your best opportunity may not be with new customers but with the ones you already have.

• Threats: Identify customers at risk (e.g. accounts with declining balances). Develop a game plan to retain (or even grow) these relationships.

Obtaining different opinions within the organization may highlight that one group sees an issue as a strength, while others see the same issue as a weakness.

Some opportunities may also be a threat.

The subject of fee income will likely elicit these vastly different opinions, for example. If you have more than your share of deposit-related fee income, it is clearly a financial strength. Your employees in the branches, however, could see it as a weakness when they speak with someone who was charged a fee. Some in your organization will view fee income as an opportunity to improve the bottom line, while others (i.e. compliance) may view fees as a threat given recent heightened regulatory scrutiny.

This is just one example of many I'm sure you will uncover once you start digging.

As with any strategic planning exercise, once the SWOT has been assessed, it is time to formulate a plan to reach goals. A goal of 5% deposit growth is more attainable by using the results of the SWOT analysis to enhance your strengths, improve your weaknesses, and fully understand opportunities and threats.

For example, attaining a growth objective by enhancing sales training and initiating a call campaign to expand wallet penetration of existing customers (both deposit and loan) is a clearer goal than 5% deposit growth because last year was 4%.

Looking forward

What will rising rates do to your deposit base? How will changes impact liquidity and interest rate risk?

You likely have stress tested each of these and have a historical core deposit analysis. Hopefully, you use these tools for more than regulatory appeasement and incorporate the results into a proactive strategy to enhance the bottom line.

The more fully the deposit side of the balance sheet is understood, the more likely you are to reach your goals—whether rates rise or not.


ALCO Beat articles featured exclusively on are written by the asset-liability management experts at Darling Consulting Group. Individual authors' credentials appear with their articles. DCG's consultants have served the banking industry for more than 30 years. You can read more about the firm's history here.

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