From The Data: Learn This Tactic That Few Deposit Managers Know

Lessons From The Data: Deposit Management

As many of you heard, Charles Barkley got into a verbal battle with the General Manager for the Houston Rockets, Daryl Morey, last week. The money quote was Sir Charles’ Luddite-like statement that Morey is “one of those idiots who believes in analytics.” Part of that is Charles being Charles, but part of that is the all-too-common fear of the unknown and fear of anything new. Barkley should know that 75% of the NBA teams not only believe in analytics but have full-time statisticians on staff. In fact, every NBA arena now has motion tracking cameras that collects data on every player. Teams use the data to set strategy/tactics and it is no coincidence that the last four teams to win the NBA Championship all are big data users.


Banks are five years behind the NBA, as less than 10% of banks have a full-time data analytics professional. This is going to change as banks are learning that respecting data has a bottom line impact, in the same way that basketball came around to data analytics five years ago. In basketball, most teams now understand that shooting a three-point shot can give your team a statistical advantage in winning. This actionable data has impacted strategy, which is why long-range shot attempts are up more than 25% from a decade ago and three-point shooters are more in demand. On a tactical level, analytics helped the Mavericks adjust their lineup to beat Houston on the road to winning the finals in 2011 and helps teams box out Kevin Durant five feet from the rim versus three feet from the rim, as the later will allow Durant to get the rebound 80% of the time.


Analytics In Deposits


In similar fashion, banks that understand analytics have a competitive advantage in almost all areas of banking. If Charles Barkley had to raise deposits at his bank, he would likely make sure he paid one of the highest rates in the area. This is the traditional “gut instinct” move by many bankers and it is what has seemed to work in the past. The problem is, it is not the most effective tactic and it is the most costly.


Aside from cannibalizing the deposit base, hurting relationship profitability and teaching both customers and staff that paying a high rate is acceptable, it doesn’t even attract the most deposits. Advanced depositors know from the data that consumer deposit behavior is more sensitive to the net change in deposit rates than the absolute rate level.


An Actionable Example


At CenterState Bank, we call the above phenomena “Short Maturity Rate Change Attraction.” If you look at deposits during the last rising rate cycle back in 2003 to 2007, there is empirical evidence that suggest it is not the highest absolute rate than fuels the greatest behavior change, but the net change in rates. During that time period, short-term deposit rates rose twice as fast as long term rates and captured many more volume as a result. In other words, a bank that pays 30 basis points for a one-year CD and moves their rates to 60 basis points will attract more new money than a bank that is already at 60 basis points. Movement, in other words, captures depositors’ attention.


This is why many retailers, including Amazon, always display the discount next to the price. The larger the discount the more sales occur independent of the absolute price.


While we are not fans of ever marketing on rate, for banks that need deposits quickly this insight means deposit managers should think several moves ahead and change rates rapidly instead of slowly. In addition, banks should go to great marketing lengths to show their net change.


Data Continues To Change Banking


As readers of our blog know, we are huge fans of banking data and we publish many of our findings. Data has influenced us in almost all areas including M&A, customer engagement, sales, marketing, loan pricing, credit, human resources and profitability management. Bankers, like Charles Barkley, can say only idiots believe in analytics but that group will probably not be winning any championships or producing a return on equity above 15%.