In the quest for deposits, one successful tactic at top performing banks is to target the right customers. While banking everyone in your community is egalitarian, it is also a poor use of resources. Some customers offer better returns because they use more banking services and have more deposit balances. Not to say you want to ignore some parts of your community, but why not focus more of your resources on those customers that are going to make your bank more profitable? In this article, we look at those top 15 industries that can get your bank the most deposit balance and have above average profitability.
Not All Companies Are Equal
As they say, if you want to catch fish, you need to go to where the fish are. The same is true for deposits. If you need deposits before you resort to paying a high rate on your CDs, why not go after the customers that have larger deposit balances? Not only will you be able to gather cheaper deposits, but the performance will be better as rates go up. To top it all off, the customer lifetime value is hundreds of times greater for a customer niche than it is for the CD-only customer.
The graph below compares our data for a customer that uses only a certificate of deposit compared to a customer that falls within a commercial niche such as faith-based accounts. While banks lose money on many CD-only customers, and CD-only customers have a relatively short average life, a niche customer such as a church, are almost always profitable because the bank has much higher retention rates and the average niche customer uses an average of four bank products.
Increasing Deposit Balances and Profit
Consider this case study - customer acquisition costs for a company that provides security guards and patrol services is about $8,000. That figure is approximately the same cost as going after banking a trade organization. The average security company has about $80,000 of deposits balances while the average trade association has about $501,000 in balances.
Since the time of acquisition, the cost of acquisition and the overall effort are about the same, why not target state and national trade associations?
They are also more plentiful. While there are approximately 4,400 independent security firms in the U.S., there are more than 8,000 trade associations. Almost every trade association needs a checking and savings account, a money market account, debit/credit cards (and processing), remote deposit capture, ACH/wire services, bill pay, health savings, and 401k services. Why spend your resources on paying higher rates when you can put that money into sales and marketing to specific customer segments and see a much better return?
Top 15 Industries for Deposit Balances
We looked at major industries where we have the data and that have above average balances that community banks have had success with in the past. While many banks know about and have specialties in industries like the legal field and labor unions (there are whole banks that are devoted to these niches), there are many other overlooked customer segments that few banks have specialties.
Further, we point out that there are many other specialties such as family offices, municipalities, asset managers, venture capitalists, technology companies, money service bureaus, sports teams, holding companies, and political entities that we either don’t have the data for or are not categorized as “industries” but would be included among the customer-types with highest deposit balances.
Below are our estimates of the top 15 industries based on growth projections for next year:
Putting This Into Action
Before you start raising your rates on CDs to attract deposits, consider developing a focus on a particular industry. To have a niche, you need separate marketing materials, at least one dedicated person, some industry knowledge/experience and a plan to specialize in a customer segment. Any time you believe you can get 15 or more customers over three years in a particular industry is likely worthy of having some dedication to. Banks can start small with one or two niches depending on their state and then grow their focus from there.
Not only will your bank find it easier to bring on more deposit balances, but profitability will increase, and you will find your cost of acquisition drops as your bank gets known within the industry. Banks like Silicon Valley Bank, Live Oak Bank, and many others have proven this model time and time again. While you don’t need to turn your whole bank into a specialty bank, 2019 is probably a good time to shift some resources into this effort and grow your deposits through strategy instead of using the brute force of paying higher interest rates.
Submitted by Chris Nichols on November 13, 2018