The Price of Everything

Banks across the country are waking up to the importance of deposits and creating a new position: Chief Deposit Officer.

From today’s Wall Street Journal ($): Banks’ Cry: Give Us Your Cash

Total deposits as a percentage of assets on hand at the end of September at the country’s more than 8,700 insured banks and thrifts reached the lowest level since the Federal Deposit Insurance Corp. was established in 1933. At the same time, the banking industry’s net interest margin — the difference between the average rate banks earned on their interest-bearing investments and the rate they paid to fund those investments — dropped to a 17-year low in the third quarter of 2006.

So, in the scramble to sign up new customers for savings, checking and other accounts, the industry has decided it needs a new specialist: the chief deposit officer.

Banks are smart to shift focus to deposits - they are the engine of bank profits. The graph below shows that Wall Street rewards higher deposit banks with a larger price to book.

The takeaway from this graph is to focus more on deposits. But this doesn’t mean banks should avoid wholesale funding. In fact, wholesale funding can protect solid deposit strategies. It allows banks to avoid cannibalizing their current deposit base.

Is the Chief Deposit Officer a smart idea or a fad (like Chief Reengineering Officer or Chief Customer Experience Officer)?

I think this is idea is a keeper. Banks need an executive to focus on the various approaches to deposit pricing. Optimized deposit pricing is coming. Large changes in profitability are coming. Will your bank be ready?

Hat tip: Steve Janaszak

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Bankervision analyzes customer feedback about overall bank satisfaction and comes up with some interesting clues. Of particular interest:

• Customers care most about good rates - People who rate their bank well also rate the prices well.

I think James’ analysis is correct, but I draw different conclusions. In experience with more extensive data, some customers (and deposit products) are more rate-sensitive than others, but many customers barely care about rate. How can the data sets be resolved?

1. Customers may care most about service, but falsely remember a poor rate when surveyed. This may be because interest rates are the most easily quantified component of customer value. I suspect a low correlation between rate satisfaction (and perceived rates) and actual interest rates.
2. Poor rates may be a problem customers live with (much like certain cancers are often discovered after people die of old age). The majority of reviews are from current customers, so they are describing issues they would like changed, but not enough to switch for.
3. Customers lie. They (correctly) view rates as easily modified and service, convenience as nearly immutable. Customers get better service quickly only by switching banks and better rates by convincing bankers to give better rates. Banks can only change service and convenience levels through glacial change.

Bank customers hope that if they say they care most about rate, all banks will give better rates. In reality, customers are best served in the long term by matching prices to true rate sensitivity. This rewards banks which have dropped their depositors’ rate sensitivity (through convenience, service, etc.). Ultimately, customers that care about rates get good rates. But everyone receives maximized value.

No matter what your customers’ price sensitivity, it’s important to correctly measure and then build into correct equations for total long-term profitability. If bank customers are very price-sensitive, your prices should approach the wholesale alternative cost of funds. If customers don’t care, rates should approach the “embarrassment” rate.

Update: Financial services marketing guru Ron Shevlin advances the argument that bank customers are only inadvertently misleading (in comments).

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