Low rates, increased competition and a need to court younger clients are forcing small banks to rethink their approach to gathering deposits.
Several surveys, including a late 2018 polling of 305 senior-level bank and credit union executives by Cornerstone Advisors and a spring assessment of 571 community bankers conducted by the Conference of State Bank Supervisors, found that deposits and liquidity are among the industry's biggest concerns.
Financial institutions are starting to lose more funds to alternative accounts such as Venmo and Square Cash, and savings tools such as Acorns and Stash, said Ron Shevlin, Cornerstone's director of research.
"Checking accounts have become paycheck motels — temporary places for people’s money to stay before it moves on to bigger and better places — making the goal of growing deposits more difficult than it was in the past," Shevlin said.
As a result, community banks are increasingly going digital and changing their views on what constitutes a core deposit relationship.
Live Oak Bancshares in Wilmington, N.C., and nbkc bank in Kansas City, Mo., have broken away from the industry's long-held belief that they must be a client's primary financial services provider.
"We will go after secondary CD accounts," Huntley Garriott, president of the $4.3 billion-asset Live Oak's bank, said during a Wednesday panel discussion hosted by the St. Louis Fed. "It is not a relationship product, but it works" to bring in deposits.
"Millennials and others may have a primary bank and secondary relationships with a high-yield savings account or setting money aside so they don’t spend it," Melissa Eggleston, chief deposit officer at the $801 million-asset nbkc, said during the same panel. "We're comfortable not being their primary bank. ... I think there is a way for some of us to play in that space."
Other community banks are ramping up effort to expand their digital capabilities.
For instance, InsBank in Nashville, Tenn., is developing a digital deposit platform to compete with online banks and fintech providers.
"We see it as an imperative in the years to come," said Jim Rieniets, president and CEO of the $535 million-asset InsBank. "While we aim to develop relationships with this group, the entry point is likely to be virtual."
While millennials garner most of the headlines, Gen Z — a term used to identify people born in the mid-1990s to the early 2000s — makes up the largest U.S. consumer population with 90 million individuals, according to Statista.com.
Gathering deposits from Gen Z is the top priority for Blue Foundry Bank in Rutherford, N.J.
Blue Foundry continues to craft products that are relevant to a younger age groups, said Jim Nesci, the $1.7 billion-asset bank's president and CEO. Those products include AxisChecking, which can be opened with just a dollar and features no monthly maintenance fees and unlimited ATM withdrawals.
"It is our most popular client-based checking account for Gen Z and consumers under the age of 22," Nesci said. "Banks that are able to adapt will win the day."
Cornerstone found that expanding a digital presence is the main objective for 37% of the banks and credit unions that participated in the survey, compared with 18% last year. Many emphasized investing in fintech partnerships and digital account opening.
But Shevlin warns that financial institutions that enter those relationships must be able to identify priorities, vet potential partners and negotiate terms.
"Midsize financial institutions are used to managing vendors, not partners," he said.
Some community banks are already gaining traction.
Mascoma Bank in Lebanon, N.H., made several updates to its branch model in early 2019 when it built a location in the college town of Burlington, Vt., replacing traditional teller lines with couches, consultation pods and tablets. The $1.9 billion-asset bank also worked with the cloud banking provider nCino to create a better digital experience.
Mascoma increased online applications by 400% in only two months and opened more new accounts in the three days after the launch than were opened via the prior online app over a year and a half.
While it might take some work, banks do have an opportunity to turn those deposit relationships into loans and younger clients' needs change.
”We know that Gen Z is much more tech-focused, but also values memorable customer experiences," said Brian Kreps, director of private and retail banking at the $361 million-asset InBank in Raton, N.M. "We believe banks that truly deliver on technology and service, or the combination of a digital and human experience, will succeed in gaining traction with younger clients."
InsBank is focused on the convenience of digital — not specifically for Gen Z or any other younger generation — because all consumer and business preferences are migrating in that direction, Rieniets said. Even older generations are fast adopters of mobile- and app-based systems that provide information and increase the ease of accessing products and services.
Garriott echoed those views at the recent panel discussion.
"The mass marketing of big banks will affect things, but the services you provide and the efficiency of providing them matters," Garriott said.
Paul Davis contributed to this article.
