Deposit Accounts: Why your customer doesn't want to and why you should

The term banker is synonymous with the term loan officer, because that is often where most of a banker’s attention gets focused: loans.  This is unfortunate because by placing so much attention on loans, we basically skip half of a business’s banking needs.  I have a coffee roasting business, and a bankers focus on loans is similar to if I only focused on sales.  That doesn’t sound like a bad thing, and it isn’t, but by doing this, I may be unintentionally skipping other VERY important aspects of the business, like the cost of the coffee I am selling.  By placing an emphasis on these costs as well as potential sales, I could make more by actually selling less.

Today we are going to cover the Top 3 Reasons a banker should want their loan customer to have their deposit accounts at your bank, the Top 2 Reasons a customer may not want to have their deposits at your bank, and potential ways to attract deposits.

Top 3 Reasons a banker should have their loan customers have their deposit accounts at your bank

Reason #1: Protect the relationship from competition

The first reason a you should want your loan customers to have their deposit accounts at your bank is to protect that relationship from the competition.  Loans are a valuable asset for banks.  Loans are how banks make their revenue (and ultimately profits ;); so banks will eagerly compete for loans.  If your customer has a reason to consistently talk with your competitors, that increases the likelihood that competitor will approach your customer about a loan relationship.  This risk is even higher if your customer deals in cash, and they need to physically go to a competitors physical location, but even if your customer doesn’t deal in cash, any deposit operations person can quickly create a report of deposit customers with loan payments going out to other lenders which can be than be used as a low-hanging fruit sales list for their bankers.  Why exposure yourself to this risk if you don’t need to.  Get those deposit accounts over to your bank.

Reason #2: Ability to “see” how the business is doing at any point

The second reason a banker should want their loan customers to have their deposit accounts at their bank is that it gives the banker the ability to “see” how the business is doing at any point rather than waiting for financial statements to be produced/provided.  A business’s checking account provides the transactions used to produce an income statement.  If a banker understands a customer’s operating cycle, they can piece a pretty good picture of how the business is doing by looking at their checking account activity.  Even simple things like the aggregate deposits can give an indicator of whether things are going well, getting worse or staying the same.  If that deposit account is at another bank, good luck!

Reason #3: Makes loan relationship more profitable

The third reason a banker should want their loan customers to have their deposit accounts at your bank is that it makes the loan relationship more profitable (at no cost to the customer).  Banks fund loans using customer deposits.  All deposit accounts at a bank contribute to the pool of lendable dollars.  Even if a customer is loan heavy and deposit light, those additional deposits contribute toward this pool.  This is especially important for business checking accounts because they are the holy grail of low cost deposits.  These accounts are desirable because they can carry high balances, are low cost accounts, and they can be very sticky (we will talk more about this later).  The presence of deposits can have a huge impact on profitability.  If a customer has a $25,000 deposit relationship along with a $100,000 loan relationship, here is how much of an impact it could have:

Here is the run down of benefits having the deposit relationship has brought: customer profitability increased by 20%, you still have what money you would have lent to this business to lend to someone else (this isn’t even factored into the calculation above), and your customer has no reason to routinely stop into a competitor’s bank; so your risk of losing the relationship to the competition is much lower.

Top 2 Reasons a Loan Customer may not want their deposits at your bank

Reason #1: Inconvenience

The primary reason customer’s don’t want to bring their deposit relationship to your bank is because they already have an established deposit relationship (and more importantly, existing auto payments, payroll, taxes & processes) and it would be inconvenient to move now.  I get this view with my own business.  The more time I spend with things like deposit accounts and loans, the less time I have for other (more fun) areas of my business.  This will be a common reason to resist opening a deposit account, but it is extremely important that you develop ways to overcome this resistance.  

Reason #2:  Trust

The customer will not be so quick to mention this reason for not opening a deposit account, but it does exist: Trust.  The customer doesn’t fully trust you.  By keeping one foot in the relationship and one foot out, the customer retains a level of control over you.  They may do this because they don’t have a firm commitment to working with you or maybe they had a bad experience in the past.  In either case, if a customer resists moving their deposit relationship, you might want to explore if there is a reason they don’t trust you.  

How to Attract Deposit Accounts for Loan Customers

Now that we know a couple reasons why you want to have the deposit relationship, and why a customer may not want a deposit relationship, let’s look at a few ways to make it happen:

Positive Methods

Loan Rate Discount - Having both a loan and deposit relationship increases the profitability of the relationship.  Share in that benefit by passing along a loan interest reduction to the customer.

Trust Appeal - This method is a bit direct and can feel a little awkward when put into practice, but it can pay high dividends, and that is to ask the customer directly why they do not have their deposit accounts at your bank, and indicate that this leads you to believe that they do not trust you.  I am not suggesting you have this conversation from the angle to prompt guilt, but rather to point out the perceived trust gap, and your desire to know how you can bridge that gap to earn their full relationship.  By framing the discussion this way, the desire is shown, but you put the reason purely as something you need to correct.  Likely this will prompt the customer to look ways to get their deposit accounts moved over.

Negative Methods

Loan Approval Requirement - If the customer is applying for a business loan, one option is to flat out require a customer to move their deposit relationship in order to get the loan.  This method is good from a “getting it open” standpoint, but one thing to watch out for is whether or not the customer just opens a “token” deposit account or if they actually bring over there deposit accounts.  Many times a customer will open a deposit account with auto payments for your loan coming out of that account, but instead of being their true operating account, they just monthly drop off a deposit into that account; so the payment goes through (FYI, that isn’t what we are going for). 

Conclusion

The ultimate goal of a banker is to serve your customers through providing the products and services they need to effectively run their business while producing a profit for the bank.  By having the full relationship, customer trust is shown, competitive pressures are eased, asset quality monitoring is heightened, and profitability increases.  Sure sounds like having the full relationship is a good idea to me.