Companies that help banks manage excesses and shortfalls of deposits have had a moment in the sun since the banking crisis this spring. They continue to thrive as depositors, regulators and the general public have been awakened to the reality that if depositors keep more than $250,000 in an account and their bank fails, they may lose that money.
After skyrocketing interest rates tested balance sheets, it became apparent many financial institutions, including Silicon Valley Bank, Signature Bank and First Republic Bank, had high volumes of uninsured deposits. Some banks turned to reciprocal deposit network providers like IntraFi and R&T Deposit Solutions for help. Such companies let banks place deposits exceeding the FDIC limit of $250,000 among other banks on the network that are seeking deposits, perhaps to keep up with growing loan demand. A third company, StoneCastle Cash Management, does not offer reciprocal deposits but does provide institutional clients high levels of deposit insurance through a custodial account.
"The failures at SVB and First Republic and Signature are going to be 'the gift that keeps on giving' for reciprocal deposit networks," said Leo D'Acierno, senior advisor at Simon-Kucher & Partners. "They're riding a strong wave. Businesses with large deposit balances are responding like homeowners do after a hurricane — that's when they start checking their flood insurance policies. Banks will need to show they have ways to protect large deposits or lose them. That's going to sustain demand for the deposit networks."
Regulators are also keeping a closer eye on how banks manage their deposits.
"That's why we're seeing special assessments and increased premiums from the FDIC, stress-testing requirements extended to more banks, [and] broader application of living wills," D'Acierno said. "It's turning into a cycle that feeds on itself. The regulatory attention reinforces the depositor and investor presumption that better deposit management is needed."
At StoneCastle, "the mini banking crisis in March, compounded more recently by major ratings agencies downgrades and warning lists, has kept the threat of 'uninsured deposits' out there and has created a lot of deposit activity for us from our institutional clients that realized they had uncomfortable levels of deposits that were uninsured," said Frank Bonanno, managing director at StoneCastle.
R&T has seen a 78% increase since February in reciprocal deposits it manages, according to Joe Jerkovich, R&T's president and CEO. The company declined to disclose the total number of deposits in its network.
StoneCastle has seen "a nice uptick in the number of banks that are becoming part of the StoneCastle funding network," which already includes 1,000 banks, Bonanno said. IntraFi has also seen growth in its business this year and additions to its network of more than 3,000 banks; the company declined to comment for this article.
Certain bank customers such as municipalities have long asked for extended deposit insurance coverage because they are required by law to fully protect the public funds they hold, Jerkovich said.
"But then many other customers kind of woke up to, hey, wait a second, my money's not all insured," he said. "I think it's been a learning exercise in terms of realizing that products like this even exist."
Banks, for their part, also became more aware of a need to manage deposits more nimbly and provide fuller coverage for large deposits, Jerkovich said.
"Some banks for many years have been using the product that way as a means to take the risk of the bank out of the equation," he said. "But if that was 20% of the banks before the crisis, now 95% of banks view that as a critical portion of their arsenal to not only protect clients, but manage their balance sheets."
The private equity firm GTCR announced Thursday it is taking a large stake in R&T. Financial terms of the deal have not been disclosed, but when it is completed, GTCR will own half the company. The other half will be owned by existing shareholders, which include Estancia Capital Partners and R&T's founding team and employees. R&T also announced Thursday that Susan Cosgrove, president of clearing and securities services at the DTCC, will become executive chairperson Oct.1.
Clearly, GTCR sees opportunity here. The Chicago-based firm, which has invested more than $25 billion in more than 270 companies, said it plans to make "substantial" investments in R&T's technology, infrastructure and personnel. People familiar with the matter pegged the investments at around $500 million.
"If you're sitting in a treasury office in a bank, the more digital your workflows, the better," said Collin Roche, co-CEO of GTCR. "Collateral and liquidity and funding in banks is a pretty complex area. We have experience as financial technology and bank investors to know that there's more value that can be brought to the treasury office of a bank."
More products could be developed for this market, for example, to handle funding and asset-liability management, he said.
Bank treasurers sometimes use deposit networks when they are managing their deposit ratios. If they have too much liquidity, they can move deposits off their balance sheets; and if they're not liquid enough, they can take more on, Jerkovich said.
"What's exciting about the market is that there's still a lot of greenfield opportunities," he said. "There's still thousands of banks that have not yet dipped their toe into this market. I think it's a matter of time."
The investment from GTCR will also be used to develop application programming interfaces and integrations with platforms that banks use, Jerkovich said.
"There are things that exist today that didn't exist 10 years ago, such as APIs and same-day, real-time settlements," he said. "Banks aren't just using one provider anymore, they're using multiple providers. So it's making sure that we're listening to our clients in terms of their needs, what tools they're using. We never like to say, here's our tool, adjust to it. We always want to have a tool that takes into consideration what the customer is using, whether it's FIS or Q2 or whatever digital platform they're on."
R&T is in the process of integrating its technology stack with software developed by Total Bank Solutions, which R&T and Estancia acquired a year ago. This includes a program for managing FDIC-insured accounts.
