No deposits, no returns: everyone wants to raise core deposits. But don't rely on a strictly financial solution: increasing the rates you pay out. Instead, use a marketing approach--customer service enhancement. That's the cost-effective answer.

• Author: McGuire, William J.

The current low interest-rate environment is opening a window of opportunity for marketers to help their institutions boost their financial performance. How? By attracting more core deposits--that is, direct deposit, NOW, savings and traditional money market accounts, etc.--marketers can improve the balance sheet today and provide a defense against the costs associated with tomorrow's rising interest rates.

Why are core deposits so desirable? These accounts are often both relatively stable and long-term, therefore acting as a buffer against the expense of rising interest rates. And, with today's rates so low, it is only a matter of time before they go up again.

Before marketers can develop a plan for attracting and retaining core deposits, they have to understand three basic issues:

1. What motivates core depositors.

2. What is needed to retain core deposits.

3. What should be done to best profit from core deposits in current and future interest-rate environments.

   Contrary to a widely held belief, core deposits are not usually attracted by rate paid! Recent statistical examinations of many bank deposit histories show that financial motivators for trans action type categories (such as direct deposit and NOW) and traditional savings categories are very limited. Yes, some depositors in these categories will move their funds to gain return in higher-paying alternatives. But most depositors will not. Core deposit balances tend to stay put, come high or low interest rates, despite zero or minimal repricing.

   Nonfinancial "value"

   Then what is it that motivates core depositors? It is the service-related dimensions of their accounts. Value is created by the banking relationship that underpins core deposits, and depositors are willing to accept this value in lieu of financial incentives (at least within certain limits). This "value" is hard to measure scientifically--hence the reference to service-related value as an "ambiguous influence" on depositor behavior. It may be ambiguous, but it is real.

   So there are two drivers of core deposit attraction and retention: finance and service related. How do you gauge the relative importance of each influence and manage them to your bank's best advantage?

   To understand the relative importance of each factor, you need to analyze the historic behaviors of your core deposits by category. Use this method to answer such questions as: Are depositors' behavior sensitive to "rate paid" compared to market interest rates? The answers to such questions...