Getting the most for your money: Why deposits should be important to your bank
"You don't want my business, I don't borrow enough."
If you get the feeling your deposits do not matter to your bank, then they probably don't. For certain banks, your commercial deposits are an important part of their business plan; for others they are more of an inconvenience. If you are an owner-operator, or if you run a closely held business, the way your bank chooses to make money can have a big impact on whether or not your deposits matter.
From the outside in, most commercial banks look pretty similar. This is because all commercial banks make money the same way - earning interest and charging fees. Within these two areas, however, there is room for a lot of variation, in particular when it comes to earning interest. An important question you should ask when deciding on a bank for your deposits: How do my deposits fit in with the way this bank makes money?
By virtue of FDIC requirements, almost all commercial banks engage in some form of commercial lending. Beyond that minimum standard, however, a bank's lending focus is typically a function of its size and available resources. Loan types can range from unmonitored, unsecured consumer credit cards earning 10 percent to rigorously underwritten and intensely monitored commercial lines of credit earning 2 percent. Why would a loan that requires very little work earn so much more than a loan that requires intensive oversight? The answer lies primarily in scale.
Long story short, if a bank can issue credit cards, it usually does. An easy 10 percent beats a hard 2 percent every day. Unfortunately, in order to have the scale to issue credit cards, a bank typically needs a large retail presence, i.e. a broad geographic footprint and an extensive branch network. Branches are very effective at gathering large numbers of relatively small, retail deposits, but they also lead to a high degree of anonymity within the customer base. From the bank's perspective, this makes good business sense to offer the latest technology, but it also homogenizes the consumer.
On the other hand, a small community bank with limited scale most often does know its customers by name. It lends to local businesses, as well as people and property with whom the bank staff are personally familiar. This type of bank typically offers small ticket consumer loans like auto or home equities, i.e. nothing that requires significant deposits to fund. It substitutes high touch customer service for technology as a more efficient allocation of its resources.
So what's left? Banks that specialize in intensely monitored and stringently underwritten commercial loans, i.e. banks with a heavy dependence on relatively large deposits.
This type of bank typically has the technology and services that businesses need for both borrowers and deposit customers.
They cater to sophisticated clientele who still require personal relationships, and are compelled to provide the appropriate combination of technology and service just to remain competitive. Because of that, they value deposit relationships just as much as they value borrowers.
To identify these banks you can start with size. Not too big, not too small.
The Chicago area is fortunate to have a number of banks that fit this profile. Beyond size, however, you should also consider how a bank advertises. Where banks spend institutional marketing dollars can often be revealing:
• Does the bank tout an extensive branch network?: Banks with a large branch network are generally pursuing a retail strategy, gathering deposits from many small depositors rather than focusing on a limited number of business or commercial depositors.
• Does the bank lead with ATM or credit cards?: If commercials feature ATM capabilities or mortgage loans, there is a good chance that commercial lending is not an area of emphasis. Most banks are required to offer business loans in order to remain in good standing with the regulators, but given a choice, many prefer other less costly and less risky product lines.
• Does the bank advertise wealth management?: What is the core purpose of the bank? If ads focus on wealth management, commercial loans may not be the primary focus.
If you are a borrower, your bank spends a lot of time analyzing how you make money. To level the playing field and get the most out of your banking relationship - whether you are a borrower or a deposit customer - maybe it's time to think about how your bank makes money. Where do your deposits stand in your bank's value chain?
If you feel like your deposits truly matter to your bank, then you're with the right bank.
• Pete Olsen is SVP and division head, commercial banking at Rosemont-based Signature Bank.