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4 Factors Impacting Regional Bank Deposits—and How to Combat Them

4 Factors Impacting Regional Bank Deposits—and How to Combat Them

Regional banks are facing challenges as several factors put pressure on deposits. First, changes in interest rates have impacted bank profitability. Second, many banks are over-indexed in commercial real estate, which, due to the rise in hybrid and remote work, now presents increased risk.

The failures of Silicon Valley Bank (SVB), Signature Bank and First Republic Bank (and other recent bank runs) have exacerbated deposit flight, and the impact of that flight is impacting regional banks to a greater degree than their larger, super-regional and national counterparts. With the initial failures of SVB and Signature Bank, deposits began to flow from smaller banks to larger banks, which consumers perceived to be safer, given their size, diversification, and importance to the U.S. banking ecosystem. Now, the impacted regional banks must rebuild their deposits.

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To complicate matters, the rise of digital banking and fintech startups has disrupted traditional banking practices and increased competitive pressure on banks to innovate and offer a better customer experience. Here, we examine four key factors putting pressure on deposits in the banking industry and offer actionable tips and solutions.

What is Putting Pressure on Deposits? 

The pressure on deposits for regional banks is influenced by four main factors. First, positive duration gaps have posed a challenge as banks sought higher returns by investing in long-dated Treasury securities. However, this strategy has backfired due to decreased valuations and increased exposure in a rising interest rate environment. Second, declining asset values, particularly in U.S. commercial real estate, have further contributed to the pressure on deposits. The shift to hybrid or work-from-home models during the pandemic has led to high vacancy rates and a decline in the value of these loans, creating additional risks for banks heavily invested in commercial real estate.

In addition, there is a flight to perceived safety, meaning deposit outflows are increasingly directed towards larger banking institutions deemed less likely to fail and are shifting to higher-yield options. Recent bank failures have further fueled this flight to perceived safety, leading to a shift of deposits from smaller to larger institutions.

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Consequently, regional banks face intensified competition as they struggle to compete with digital-only banks and aggressive competitors who offer attractive incentives, high interest rates, and seamless digital experiences. However, engaging in aggressive discounting to match these offers is not a sustainable solution for regional banks.

Strategies to Combat Deposit Flight 

To address these challenges, banks must devise innovative strategies to retain deposits.

To remain competitive in the long run, banks must adapt to the changing needs and expectations of their customers and embrace digital transformation. That means investing in innovation, customer experience, and personalization to drive customer loyalty.

Strengthen Customer Relationships With Digital Communication

Banks can strengthen customer relationships by using targeted, two-way digital communication. This allows for personalized and timely interactions with customers, as well as gathering valuable insights to tailor messages. Channels like email, chatbots, mobile apps, and social media enable direct conversations and delivery of relevant information. Self-service functions such as online banking portals and mobile apps give customers control over managing their finances, enhancing loyalty.

For instance, in the case of a potentially fraudulent transaction, the bank can send an SMS to the customer for confirmation, ensuring security and customer satisfaction.

Create a Customer-First Digital Experience

To meet customer expectations, banks should provide a seamless and intuitive online experience that aligns with industry standards. This includes visually appealing interfaces, easy navigation, and clear instructions for customers. Implementing value-added solutions like peer-to-peer payment services and digital wallets, as well as adopting innovations like FedNow for instant payments, can enhance customer satisfaction and loyalty. Banks can leverage digital channels to gather valuable data for measuring campaign effectiveness, optimizing marketing strategies, and improving customer experience.

By delivering timely, relevant, and personalized communications, regional banks can retain deposits and foster customer confidence, engagement, and loyalty.

[To share your insights with us, please write to sghosh@martechseries.com]

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