4 Costly Mistakes of Using “Brokered Deposits”

I received a comment from a bank CEO making a case for the “Brokered deposits” vs. running a campaign to increase deposits (DIY deposits).

I felt compelled to write this blog to highlight the top 4 costly mistakes when using brokered deposits.

Here’s the snapshot of his message:

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If you looked at this way, using brokered deposits has the financial advantage because you will be getting the same amount of deposit ($3,000,000) for less money.

However, it’s NOT the entire picture, and that’s precisely this blog is all about.

For some of you who do not know about brokered deposits, according to Investopedia,

A brokered deposit is a deposit made to a bank by a third-party deposit broker. A deposit broker is a person who places other peoples’ deposits with insured institutions.

 

And also according to the FDIC, here’s the current breakdown of institutions using brokered deposits:

As of September 30, 2018, insured depository institutions held $986 billion in brokered deposits, which amounted to 8.0 percent of the $12.3 trillion in industry domestic deposits.

Two thousand two hundred twenty-one insured depository institutions hold these brokered deposits. They are representing 40.6 percent of the 5,477 total number of insured depository institutions.

Moreover, although 2,221 institutions held brokered deposits as of September 30, 2018, a significant portion of these deposits are concentrated in a small number of institutions.

One hundred institutions held 89.4 percent, or $881 billion, of the $986 billion brokered deposits in the banking system, with five institutions accounting for 39.4 percent, or $389 billion, of all brokered deposits.

The remaining 2,121 institutions using brokered deposits account for the remaining $104 billion in brokered deposits.

There are over 70% of institutions with asset size over $50 billion using brokered deposits so you can see its popularity among community banks of all sizes.

Despite the popularity of brokered deposit, I believe the cost of using it is far higher than making your effort to learn how to grow deposits by yourself (DIY deposits).

 

Mistake #1: Failed to maximize the investment

As I mentioned earlier, Dan’s comment doesn’t reveal the entire picture.

DIY Deposits

Brokered Deposits

If a bank spent $60,000 on marketing and developed $3,000,000 in checking account deposits

And earned a 4% net interest margin on those deposits

That would represent a profit of $120,000 which would be an ROI of approx 100%

Expense: $60,000

 

But if a bank-purchased $3,000,000 in deposits with a deposit campaign where they paid 1.5% interest on the cd’s

The interest expense would be $45,000 a year so that would be a better decision than spending $60,000

Expense: $45,000

Advantage: $15,000

On the “Brokered Deposits” side, you will have a slight financial advantage of $15,000.

Once you receive your $3,000,000, the buck stops here, and the vendor who helps you find deposits says “Goodbye and good luck!” because their job is done.

However, for “DIY Deposits,” the journey continues.

Here’s what I meant.

Below is a summary of the deposit campaign I run for our client.

As I am getting into the technicality of online advertising, it helps to understand the definition of impression:

And the breakdown of total impressions. In this case, I am using five different advertising platforms, namely Google, Facebook, Programmatic, Pandora, and OmniMedia, to bring traffic and attention to the offer.

To put 3,060,924 impressions into perspective, I did a quick search on the top 10 largest US cities by population.

As you discover, having 3,060,924 impressions is like having the entire city of Chicago look at your ads, brand, and your bank.

So, that leads to 2 questions:

  1. What does “having the entire city of Chicago look at your ads” mean to your brand?
  2. What would be the price tag on “having the entire city of Chicago look at your ads”?

Let’s dissect each question one at a time.

What does “having the entire city of Chicago look at your ads” mean to your brand?

The big idea is how massive attention means to you, your brand, and your sales, although some of you may not have served the city of Chicago.

Imagine if you had that kind of attention in your neck of the woods, would that help your bank? Your loan officer? Your financial advisors? Your private banker?

What do your shareholders feel about the bank leadership when you can generate massive attention to your bank?

Would that also help you advance your community outreach?

I can have more questions here, but I think you get the point.

What would be the price tag on “having the entire city of Chicago look at your ads”?

As mentioned earlier, the brokered deposit method has a slight financial advantage of $15,000, given the exact total amount of $3,000,000 deposits.

When you discover the impact of having the entire city of Chicago look at your ads to your brand awareness and equity, the next question is if paying extra $15,000 is worthy.

$15,000 for 3,000,000 impressions is $5 per CPM (cost per thousand impressions).

In other words, you are paying an extra $5 to reach 1000 people.

Despite the intangible nature of brand awareness and brand equity, investing $5 to reach 1000, people look like a decent investment.

Moreover, a typical community bank runs four advertising campaigns per year, and the number of impressions will add up pretty quickly, and when you show up consistently to a large cohort of the audience over time, people’s perception about your brand will go up.

In summary, while brokered deposit can have a slight financial advantage over the DIY deposit, you will be coming out way ahead with the DIY deposit than the brokered deposit because in either case, you have to pay anyway.

But why not paying a little extra to not only get the deposit you want but also increase your brand awareness and brand equity as well.

When you are interested in making your advertising money work even harder for you, schedule a 15-min call with me to learn more.

Mistake #2: Missed opportunity to reduce acquisition cost

Pop quiz:

 

Indeed, you hear it right. The exact audience who viewed your website as a result of your ads can be reused to retarget for future up-sell and cross-sell campaign.

Let me explain what I mean.

The technology behind the scene to “save” the audience who viewed your website as a result of your ads is called retargeting.

Here’s how it works.

With Retargeting technology Enabled:

When a user visits your website, the retargeting technique saves your surfing information to a cookie on your browser.

Then when a user leaves your website and visits another website (says ESPN to check out how the Golden State Warriors are doing), the retargeting technology continues to serve your ad right on ESPN website. That’s so cool.

And when that user sees your ad on ESPN, depending on your offer, he will be more likely to click on the advertisement to be redirected back to your website.

The beauty of retargeting is that is is dirt cheap to do retargeting and thus stretch your advertising dollar further.

In other words, in the old days without the retargeting, you may have spent a lot to get people to your website, and when they leave your website, your advertising money is gone.

With the retargeting, you can at least capture that user and continue to serve your ad on a steep discount.

As a result of retargeting, your acquisition cost will be reduced over time.

Like I mentioned earlier, a typical bank runs four advertising campaigns per year and imagines, you can always tap into the existing audiences you have built upon from previous campaigns instead of starting from scratch.

Brokered deposit service won’t have this. Therefore, every single time you want to promote your products/services, you will have to start from square one (paying a premium to have someone find deposits for you).

When you are interested in lowering your customer acquisition cost, even more, schedule a 15-min call with me to learn more.

Mistake #3: Missed the opportunity to build a relationship with your customers

On my previous blog about the marketing stunt of fin-tech, banks are subsidizing WealthFront, a fin-tech company, around 2% APY for deposits.

In several months, WealthFront was able to rack up $1 billion in deposits, and it’s good news for them and for participating banks in their network to receive deposits.

Although participating banks got their deposits as they wish, the biggest mistake they made is the opportunity to build a relationship with customers.

Yes, the sound of money is excellent, but customers are only aware of WealthFront who was offering the enticing rate, and they have absolutely no idea about the participating banks.

Participating banks are paying 2% APY for that.

To make matters worse, because of the lack of relationship, participating banks can’t even send a single letter or any piece of communication to customers.

If you want to build a process to capture more and more lifetime customers, schedule a 15-min call with me to get started.

 

Mistake #4: Become enslaved to brokered deposits service

Brokered deposit service has its place in the overall growth strategy for banks. What I am mostly concerned about is how this type of service creates complacency among bank executives.

Why “complacency”?

Because it’s so easy to get deposits, all they have to do is to pay for it without even doing a single thing.

That’s a problem because when banks are not learning how to find their deposits, they will forever become enslaved to brokered deposit service and when you “outsource” your “bread and butter” work to a 3rd party, you will lose control of your business and ultimately the ownership of the bank.

I believe in the philosophy that when you teach a man to fish, he can feed himself for a lifetime.

Let me share with you how taking control of your campaign will give you the highest competitive advantage.

Here’s a screenshot from the Google Ads Dashboard of a recent campaign resulting in $2.9 million in deposits in 90 days.

  • The blue color means the number of clicks generated from the ads. This is an important metric to measure because of the higher number of clicks, the more effective the ads are.
  • The red color means the number of impressions generated from the ads
  • The orange color means the conversions. When a user is taking action you want them to (whether fill out a form, give you a call, etc.), it would be counted as one conversion. This is also the most important metric because it’ll tell how successful the ads are when more prospects are taking the desired action.
  • The green line is the cost of the campaign.

These three red rectangles illustrate how taking control yields more results for less.

On the first rectangle where it was in the early phase of the campaign, all four lines are spiking up, and the impression line (red) was taking over as Google is doing its work to display the ads to as many people as possible.

On the second rectangle, you can see that all four lines are bouncing up. It’s because Google is adjusting its algorithm to learn more about your ads and your offer so that it can show your ad to more people.

Most banks would waive the white flag because they haven’t seen the results, yet while they are still paying for the media cost.

If you stopped at this phase, you would be wasting your entire effort thus far because, in the next stage, you will see the beauty.

After a messy phase 2, on this final rectangle, you will notice two things:

  1. The two most important metrics of an ad: clicks (blue) and conversions (orange) are dominating and leading. It means that the ad is working effectively and generating profitable results. That explained why the deposit campaign generated a positive $2.9 million.
  2. Moreover, the cost line (green) is descending and trending lower and lower. It is excellent news because you are paying for less while you are getting more results (clicks and conversions). The bigger the gap between the cost line vs. the click (blue) & conversion (orange), the more profitable your campaign is.

 

As a result of having full control of the campaign,  you can achieve the highest competitive advantage. In this case, our client’s ad campaign was blowing giants such as fidelity.com, tdameritrade.com, and merilledge.com out of the water and took a commanding lead.

By the way, my client is just a hard-working, blue-collar community bank in North Texas, and they can beat the giants in the financial industry.

In short, there are four costly mistakes when using brokered deposits you need to know:

  1. Failed to maximize the investment
  2. Missed opportunity to reduce acquisition cost
  3. Missed opportunity to build a relationship with your customers
  4. Become enslaved to brokered deposits service

If you want to take back control and stop being enslaved to brokered deposit service, schedule a 15-min call with me to work on a plan together.

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