The French Defense in Deposit Pricing

Playing Deposit Chess

It was the famous England vs. France chess match back in 1834, where the French opened with a simple, yet potent attack. England came out moving a pawn to the center of the board. The French stopped the pawn’s advanced and then used the combination of their bishop, rook, and knights to counterattack England’s exposed players. The set of moves have become known as the “French Defense” or “The French” and is one of the most popular opening moves in chess. The objective of the French is to signal to your opponent that aggression will be met with aggression while opening up the center of the board. Banks can do the same tactic when it comes to deposits.


Deposit Chess 


The French Deposit Defense


The French Deposit Defense is used to stop a bank executing a deposit promotion in a local market. Let’s say Bank A comes out with a 2.00% money market account, which is currently substantially above market. At this point, Bank B can choose to ignore it and risk losing rate sensitive customers (which isn’t a bad thing) or match it which serves to drive up Bank B’s cost of funds while making the deposit base more sensitive to higher rates. Most banks would do one of these tactics. 


Money Market Account


However, there is second order thinking that asks, “How can I not only stop the deposit aggression but better my bank’s position in the process?” The answer is the French Deposit Defense.


Here, Bank B stops the advance by countering with a message of service. First, it goes and reinforces its training to its employees with the message that underscores the problem of marketing with rates. Next, Bank B sends a message to its customers and potential customers that while a high money market rate might seem nice, it is inconsistent and that building quality relationships based on trust and service are more important. Bank B highlights its mobile capabilities, its bundled products, its cash management capabilities and its commitment to the customer’s dreams. The intent is to make clear that your bank is about service and building a bank that will be around for the long-run, through multiple generations.


After the initial move, Bank B has served to slow Bank A’s advance while using the event to strategically differentiate itself.


The Counterattack


Now, Bank B uses its bishops, knights, and rooks. While there are many variations, one counter is to find a product or service to issue a press release around while instituting a social media and a digital marketing campaign. The goal is to find a product or solution bundle that delivers service. The CEO of Bank B works a quote in there that while it could pay a high money market rate, it chooses to invest in product and services that deliver value. If Bank A is paying a high deposit rate to just new customers, so much the better as Bank B can highlight the fact that it doesn’t believe that paying new customers a higher rate than your existing customers is the recipe for building trust.


Here, this effort not only highlights Bank B’s service and commitment to the long-term relationship but helps indirectly highlight Bank A’s money market rate. Hopefully, this will drive more rate sensitive customers to Bank A while hopefully speeding the cannibalization of their existing deposit base. The net result should leave Bank A with a higher cost of funds and a more rate sensitive deposit base – the exact opposite of where you want to be in a rising rate environment.


The Coup de Grâce


As a final blow, Bank B’s CEO then calls up the CEO of Bank A and offers to move over $100k of deposits because that 2% money market is too good to pass up. The worst case is that Bank B gets a decent yielding money market investment and the most probable case is Bank A thinks twice about continuing the high-price deposit tactic.


Putting This Into Action


Once you know this tactic, the French Deposit Defense is simple to put into action as all it takes is a little marketing with some pre-planning when it comes to creating a press release template, digital ad creation, and an email campaign. Having this collateral ready to go combined with some talking points are clear next steps.

A successful strategy in deposit building, like chess, requires a long-game that looks many moves ahead. Like chess, deposit value creation often means controlling the center of the board. It is no surprise that national banks like Wells Fargo and Bank of America firmly control their deposit market from the center and not from the fringes. However, smaller banks such as USAA, MidFirst, FirstBank, First-Citizens, Western Alliance, Bank of Hawaii, Silicon Valley Bank and others have created strong deposit value attribution by having a clearly defined strategy in their core deposit products and then letting other banks react to it.


Bankers need to understand not only what builds deposit value, but how their competition will react. By focusing on service and using your competition to help better define your brand, banks can come out ahead. Given the potential for rising rates and greater demand for deposits, extending your foundation of low rate sensitive deposits is one of the smartest ways to creating franchise value and checkmating your competition.