THE WAY OF THE DEPOSIT WARRIOR

There is an old saying in martial arts that goes, "To strike is to fail." Taken from the code of the samurai, the saying underscores the notion that physical contact is the least desirable outcome in a conflict. Far better to negotiate the situation, or never place yourself in a situation where fighting is required, than to have to resort to contact. While hitting is quick and relatively simple, striking an opponent can be life changing and exposes the fighter to an elevated level of risk. A wise fighter knows that even the most unskilled opponent can get lucky in an attack. Paying a high deposit rate, particularly a long-term one, is a strike to the opponent. Yes, it may solve a problem by increasing funding, but it is a tacit admission of a failure. Not only does a high deposit rate increase the cost of funds, but it makes the bank more interest rate sensitive, thus increasing the risk profile. Moreover, it takes only a day to gain a new customer by paying a higher rate, but it can take years to remove that customer from the balance sheet. A bank with a high cost of funds is less nimble, less liquid, less competitive on loan pricing and less profitable over time. One common refrain we hear is that the bank is forced into paying a higher rate due to competition. A true banker, like a true warrior, loves a challenge because competition gives them a chance to define themselves. A samurai would never fight every bully that rides into town, nor should an experienced banker worry about high-paying competition. The true banking warrior smiles when a rival pays a higher rate, for he or she knows that the competing bank is destroying value with almost every high-paying dollar they gather. You should worry when your competition stops paying high rates, for that might mean they have found a better way. Not competing on rate is never easy. It takes hard work to roll out a new product, research a new customer set, analyze true interest rate sensitivity of the account base, conduct a marketing campaign and build a brand. It takes a dedication to the shareholders to give up growth in exchange for better profitability and it takes discipline to borrow higher rate wholesale funds to protect a core deposit base. Building a better liability structure takes effort, but that is the essence of true banking. Anybody can pay the highest rate, but it takes skill to grow deposits on superior customer service. Paying a higher rate, like striking an opponent, has the positive attribute of rendering immediate feedback. You post a 5.5% 2Y CD rate and money flows in. Rolling out an image capture program to business customers or conducting a targeted direct mail campaign takes a year or more before the results are viewed, but it is the better path. Putting in the time and effort now, will pay off handsomely when times get tough. Interest rates will swing, loan defaults will increase and margins will be squeezed, but the true deposit warrior will be protected by their liability structure. Deposit gathering is the most important function banks undertake, yet in most banks, it is devoted on a fraction of resources that loans are. As Takeda Shingen, the 15th Century Samurai warrior said, "Dedication to your art is the only path to true mastery. Mastery of your art is the only guarantee of victory in battle."