Unlocking Deposit Insights: A Smarter Approach to Analytics Initiatives

Justin Bakst, Managing Director at Darling Consulting Group

Justin Bakst, Managing Director at Darling Consulting Group

Funding costs have surged by over 350% in the banking industry in 2023, catching numerous institutions off guard. As a result, the near-term horizon promises to be a challenging and expensive liquidity environment. This environment places a premium on a financial institution's ability to safeguard and expand its deposit franchise through cost-effective, reliable deposits. However, too many institutions continue to rely on antiquated analytics, gut instinct, and outdated methodologies to drive deposit pricing decisions—decisions that will substantially impact interest expenses and, consequently, net interest income.

While many institutions were devising last year's budgets, DCG's predictive deposit analytics models accurately forecasted over 5% non-maturity deposit attrition and an increase of at least 80 basis points in funding costs by mid-2023 (industry-wide). Unfortunately, not all institutions took to heart our plea to carefully consider this scenario and its implications for deposit pricing and effective balance sheet management. Clients who proactively monitored deposits at risk, anticipated deposit attrition and migration, and implemented disciplined loan pricing (resulting in widened spreads) fared much better than their counterparts in managing margin compression. While we cannot reverse time, we can maximize the potential of today's challenging landscape by embracing systems and approaches to data and analytics that we can leverage during this cycle and establish as a sustainable long-term core competency.

Charting the Course Ahead

Bank executive teams, including CIOs and technology leaders, are navigating the delicate balancing act of overseeing day-to-day operations while, at the same time, propelling the business forward through innovation and initiatives that yield actionable insights. Complicating this mandate, many institutions have previously embarked on technology and analytical endeavors that have fallen short of promises or exceeded budgets, causing some understandable reluctance to take decisive action today. A roadmap is essential for bank executives seeking to address what we believe aligns with one of today's key business challenges—deposit strategy—while also accommodating the top priorities of technology leaders, including data monetization and generating greater value with fewer resources.

Begin with the End in Mind

Successful analytics initiatives begin with defining business success and outcomes, championed primarily by business leaders and subsequently supported by technology teams and partner vendors. As straightforward as this may seem, many financial institutions falter from the outset due to the lack of clear success metrics, ROI benchmarks, and resource allocation, often stemming from insufficient top-level commitment. This lack of commitment is starting to reverse course. To illustrate, let's delve into a framework for a successful deposit data analytics initiative in the present landscape.

“Advanced data-driven technologies, including predictive analytics, have progressed more rapidly than anticipated by many in the industry, resulting in significant returns on investment.”

Consider the likely scenario where a bank must replace $250 million of attrition in non-maturity deposits at today's rate of 1.00% with wholesale funds or CD specials at 5.5%. This translates to an additional interest expense exceeding $11 million. The problem is unmistakable, and the ROI benchmark is glaring, but the subsequent challenge is to maximize deposit strategy outcomes and determine the role of data analytics as the guiding light.

Leveraging Data and Predictive Analytics for Competitive Edge

In the realm of deposit analytics, accessing competitor deposit rates and historical deposit pricing data is common. Yet, a pivotal question emerges: Can this retrospective analysis alone foster competitive advantage and deliver a substantial ROI? How can data and analytics effectively combat deposit attrition, or is this erosion of deposits an unavoidable pattern? Can deposit product pricing be optimized in a more innovative way? Our experience underscores that successful deposit analytics strategies encompass a robust historical dataset alongside forecasts of future trends with actionable insight.

Data to Support Your Narrative

Over the past year, how much deposit attrition and migration has your institution witnessed? Where did these deposits go? Why did they leave? How will the portfolio evolve going forward? Regrettably, many institutions take the easy route of weaving a qualitative story that implies inflation or disintermediation into higher-yielding Treasuries or money market funds as the sole drivers of deposit attrition. Is this story true? Institutions driven by data acknowledge the necessity of substantiating their storyline with concrete evidence. In fact, the true return on investment may hinge on differentiating between relationships that shifted to Treasuries or money market funds and those relationships can be targeted for meaningful growth opportunities or comeback campaigns.   

Defensible Predictions

Most deposit data analytics concentrate on historical analysis, offering limited foresight into future scenarios. This stems from a mix of factors encompassing resource constraints, data availability, and a prudent skepticism toward anything reminiscent of clairvoyance. Data-centric institutions comprehend that an immaculate prediction is not the ultimate yardstick for success. Instead, the emphasis lies on forming rational and defensible predictions that steer strategic decisions. For instance, institutions might harness predictive analytics to gain deeper insights into specific deposit attributes, optimize pricing efficiency, isolate deposits at risk, and inform the path for new product initiatives. 

Tools in the Toolkit

The upcoming year is positioned to present one of the most demanding environments for deposit acquisition in recent history. Advanced data-driven technologies, including predictive analytics, have progressed more rapidly than anticipated by many in the industry, resulting in significant returns on investment. Institutions that proactively engage in the appropriate data-driven initiatives will unlock a distinct, enduring competitive advantage.

Justin Bakst

Executive Director – Products and Solutions

Darling Consulting Group

Justin leads Darling Consulting Group's data analytics software solutions portfolio, which consists of Deposits360°®, Loans360°®, and Liquidity360°®. He is passionate about providing risk management education and strategic consultation to financial institutions leveraging DCG's analytics solutions. He has been a thought leader in risk management, including interest risk, credit risk, and liquidity risk. Justin has experience driving value in large public organizations and lean startup firms and has over two decades in banking, including extensive work in credit risk as Director of Capital Markets. He is a desired speaker and contributing author for RMA, American Banker, NYTimes, and CIO Magazine.

Justin has over 15 years of experience at DCG and holds an undergraduate degree from Bentley College and an MBA from Babson College.

Justin served on the Board of Directors at Boston Product Management Association as the treasurer and volunteered mentoring youths at Massachusetts Mentoring Program (MMP). He lives in Reading, MA, with his wife and three children and enjoys coaching his children in baseball and basketball and tinkering with historic homes. 

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