Always be a deposit gatherer — Learn to never turn away a client, regardless of the environment

A version of this article first appeared in the April BAI Executive Report: Growing quality deposits and customer acquisition. In the report, you’ll find content tackling deposit behavior trends, tech-enabled deposit growth strategies, liquidity and funding flexibility, plus more.

Depositors are the foundation of any bank. It’s one of the reasons why they create franchise value. And depositors bring more than simply dollars placed in an account. They bring an entire financial relationship, spanning the spectrum from checking accounts to mortgages to credit cards and loans.

Sometimes, a bank may not need that deposit today, but the relationship is still of keen interest for other reasons. “We talk to members of our network of 3,000-plus financial institutions daily, and a common theme is how to best grow and preserve depositor relationships given evolving balance sheet demands,” says Joe Hooker, chief sales officer at IntraFi.

Banks find they need to be prepared to welcome and preserve high-value depositor relationships even when they may not have immediate plans for deposit deployment.

Competition for deposits is unlikely to ease in the near term. In fact, per IntraFi’s Bank Executive Business Outlook Survey, deposit competition intensified significantly between the first quarter of 2022 and late 2023 and has remained at this elevated level. The most recent survey shows that 91% of respondents predict this level of competition will stay the same or increase over the next 12 months.

Deposit networks—an adaptable solution for building franchise value

“Bankers consistently tell us they want a flexible deposit funding solution that helps them deepen relationships and stand out from others,” adds Hooker. “Deposit networks can deliver powerful customer growth and retention capabilities as well as more balance sheet flexibility.”

Deposit networks enable customers to diversify their deposits across a network of banks and to receive protection for deposits that, in the aggregate, are over the FDIC standard maximum of $250,000. Networks give depositors access to millions in aggregate FDIC insurance at network banks, all with the simplicity of doing so through just one bank relationship. And importantly, most such networks offer banks the flexibility to move deposits on and off the balance sheet as needed, thus enabling much needed optimization on the liability side of the balance sheet.

Each network member bank acts as the relationship bank for its own depositors and maintains ownership of that relationship. Depositors work directly with and receive regular statements from their relationship bank. Banks enjoy the ability to offer a service that attracts high-value, large-dollar customers, along with control to set customer interest rates as they see appropriate. Once a bank builds a one-to-one relationship with these depositors, it can offer additional services, such as mortgages, loans and insurance, etc., as depositors’ financial lives evolve. As core clients of the bank, these depositors truly build franchise value.

Relationship-based deposits that strengthen communities

A key feature of deposit networks, reciprocal deposits enable banks to maintain usage of such deposits for loans and other investments while at the same time enabling depositors to have access to millions in aggregate FDIC insurance across network banks. Importantly, these depositors are no different than any other depositor that has walked through their door and with whom they have developed a relationship.

Reciprocal deposits are relationship-based deposits of the bank. Likely the bank is offering several other financial products to the associated depositors, one of many reasons the Economic Growth, Regulatory Relief and Consumer Protection Act, signed into law in 2018, provides that most reciprocal deposits are no longer treated as brokered deposits.

 Reciprocal deposits demand has grown significantly as banks have recognized their value. They are often less expensive than other deposits, including brokered deposits, collateralized deposits and listing service deposits. Plus, they build franchise value.

An additional benefit of reciprocal deposits—appreciated by bankers and depositors alike—is that the full amount of funds placed through reciprocal deposit services can stay local to support community lending. Reciprocal deposits help keep locally sourced deposit amounts in local institutions, which in turn helps drive economic growth in communities of all sizes and types throughout the U.S., including some of the most underserved locales.

An off-balance sheet option can provide important flexibility

Deposit networks not only help banks bring deposits on balance sheet with a reciprocal option, but also enable selling deposits to other network members—allowing banks to “store” deposits off balance sheet for a future need.

Banks that take advantage of this liquidity management tool like having the ability to move deposits off balance sheet, reduce concentration risk and accept large deposits from important clients without increasing liabilities. Additionally, fee income earned from placing deposits using the off-balance sheet option can boost return-on-assets and return-on-equity ratios.

When a bank has utilized a network’s off-balance sheet option, if market conditions change such that they have options to deploy more liquidity, that bank can bring the deposits back on balance sheet by switching to the reciprocal function.

Banks can stem deposit outflow during crisis

In an environment characterized by strong deposit competition, regulatory or political turmoil, and with bank failures in recent memory, many bank customers have placed more emphasis on safety, particularly for their operational cash. By participating in a deposit network, a bank can immediately address a new or existing customer’s concerns about protecting their large cash balances.

Anticipating and proactively addressing customers’ desire for safety fits in well with most banks’ commitment to excellent customer service and strengthens relationships that may later offer opportunities for cross-selling. It also allows a bank to capture a greater share of wallet since the bank has a solution for deposits greater than $250,000 at the ready.

Without access to a deposit network, customers are often compelled to go to multiple banks to keep balances under $250,000 (and manage the paperwork, continually monitor balances in relation to the FDIC insurance maximum and manually consolidate statements and interest payments on a recurring basis). Others may require collateralization, which can be burdensome for both the customer and the bank. When a customer has access to millions in aggregate FDIC insurance across network banks, ongoing collateralization needs are eliminated.

Participation in a network helps banks attract and retain large deposits (six, seven, eight, or even nine figures at a time) from loyal, local safety-conscious customers, such as businesses, nonprofits, government entities and high-net-worth individuals. Influential community members, such as CPAs, financial planners and estate lawyers, are also quick to recognize the benefit of deposit safety and may welcome outreach about deposit placement network services.

What to look for in a deposit network

Not every deposit network is created equally. Consider these questions before signing up:

Does the provider have relationships with many banks? Larger networks typically mean higher deposit balances can be placed, providing more flexibility for your bank. For example, consider a deposit placement network that offers high per-depositor and per-bank capacity. A partner of this size ensures peace of mind from large-dollar placements and accessing tens of billions in funding.

Does the provider offer the option to sell deposits to network members? On- and off-balance sheet flexibility is a valuable benefit that can help banks seamlessly manage their balance sheets and capital positions.

Does the provider ever have possession of customer funds? Preferred networks will use highly reputable, established banks for settlement, keeping your depositor’s funds at arm’s length.

Is the bank allowed to set the interest rate? A network that lets your bank set the interest rate enables you to control your profit margin and create customized offerings to retain valued depositors.

Can your deposit network’s services be easily integrated with your bank’s systems and online banking offerings? Some network providers offer integration solutions with all the major core providers and some do not. Some also offer the full gamut of integration possibilities from simple automation to APIs.

A strategic resource for your bank

As their name implies, deposit networks come with a network effect—they can help your bank strengthen connections with depositors and with knowledgeable industry participants. Joining a network can provide access to professionals with deep expertise in banking and banking technology that can smooth your bank’s onboarding process and help maximize its use of network offerings.

In today’s competitive banking landscape, a deposit network can be a powerful tool for banks to retain and grow key depositor relationships while ensuring their customers’ large deposits are protected. By leveraging a deposit network, banks can enhance customer loyalty, optimize their balance sheets and ultimately help drive community growth and economic stability.

Ken Auspaker is Chief Business Officer at IntraFi