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The race to appeal to depositors

In the wake of the global financial crisis, bankers in Taiwan have seen increased deposit flows as investors fled equities in the wake of the global financial crisis.

글 Nick Palmer, Sameer Chishty and Johnson Chng

First published on 2월 19, 2009
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If you have to be a banker during the global financial crisis, the best place to be is Asia. The region is home to a thrifty and conservative population that already holds 60 percent to 80 percent of its wealth in bank deposits. And bankers from Taiwan to India to mainland China have seen increased deposit flows as investors fled equities in the wake of the global financial crisis. But can bankers attract and retain more deposits in the flight to safety while still making adequate returns? Like their counterparts in most of Asia, Taiwanese banks are witnessing deposit gains. State-owed Bank of Taiwan (BOT) saw robust 15 percent growth in deposits last year as the country's stock market dropped 45 percent. Taiwan's state-owned or affiliated banks have benefited more than non-government banks because they are seen to be more sound: Deposits in state banks grew an average 8 percent last year against 3 percent for non-state banks. To bolster investor confidence in banks following the financial crisis, Taiwan is guaranteeing deposits until the end of this year, a move that is leveling the playing field for lenders competing for deposits, and is reported to be considering extending the guarantee to the end of next year. But what happens after the guarantee ends or when the market takes a turn for the better? Will Taiwan's banks be able to retain those deposits? The question is particularly important for Taiwanese banks without a strong capability in deposit gathering or those perceived to be less sound. Even as deposits rise, Taiwan's banks need to find new ways to spur investor interest over the long term. Bankers in Taiwan and throughout Asia have grown overly reliant on wealth-management services and consumer lending to fuel revenue and earnings growth. But with skittish customers staying away from investment products, credit cards and loans for now, the best option for reinvigorating their business lies in competing for the unglamorous but deep pools of retail deposits. The battle to win more deposits than rivals will be a zero-sum game with a big prize for the winners. But the passive approach by Taiwan's banks to collecting deposits from customers who are already heavily inclined to save means their business muscles in this area are weak. Accustomed to earning higher returns during a market upswing, bank customers may be unwilling to settle for the low yields currently paid on conventional accounts. The intensifying competition for deposits risks driving down returns as banks, unaccustomed to aggressive moves, may succumb to the pressure to overpay to hold on to skeptical account holders and attract new ones. In Taiwan, where most customers have put their money into time deposits, the pressure could be strong, as the interest rate difference between time and demand deposits is currently narrow. The big question is: When the time deposits expire, will banks in Taiwan be able to hold on to depositors who start looking elsewhere for higher returns? Innovation is, therefore, key for banks to retain and attract customer deposits. But innovation is one area where banks in Taiwan—and throughout Asia—have trailed those in other regions. Basic products that have worked in other markets - low-balance transaction accounts, hybrid interest-bearing checking accounts, flexible savings accounts that combine check-writing privileges with higher-yield term-deposit features, no-frills high-rate savings instruments—are largely unknown in Asia. To avoid overpaying for their depositors, lenders will have to be more sophisticated about pricing products and setting rates dynamically. They will need to tread the line between attracting deposits while not overpaying for them. That entails regularly reviewing each pricing element based on how different depositor segments react to changing yields and account fees. Successful banks aiming to attract more deposits should look at offering greater rewards to employees who bring in new deposits and cross-sell deposit products to existing credit-card and investment-account holders. Customers will see more promotional and merchandising campaigns wherever they come in contact with the bank—from branch windows and service counters to ATM receipts and on statement envelopes. Alert banks will tag such promotions to when customers' deposits mature or following sales of real estate or other investments. They will also need to increasingly match these occasions with attractive offers that help land new deposits or keep funds in the bank. The focus on attracting depositors will have implications for the management and organization of banks as well. As banks increasingly see greater deposit growth as a lucrative new franchise to offset declining business in wealth management and retail lending, they will increasingly value deposit management as a career path to senior positions. Most Asian banks' deposit operations have been starved for professional talent and resources. They will now be more aggressive in recruiting top talent to staff product management, provide marketing and sales support and develop high-powered analytical capabilities to sustain a competitive edge. The stakes couldn't be any higher as financial uncertainty continues. Given the high rate of savings in Taiwan and the rest of Asia, the banks that do the best job of attracting deposits will be the place where much of the region's money is kept, and increasingly, where banking profits are made. Nick Palmer is a partner with Bain & Company based in Hong Kong. Sameer Chishty is a partner based in Sydney and Johnson Chng is a partner in the Beijing office. All three are members of the firm's Asian financial-services practice.

If you have to be a banker during the global financial crisis, the best place to be is Asia. The region is home to a thrifty and conservative population that already holds 60 percent to 80 percent of its wealth in bank deposits. And bankers from Taiwan to India to mainland China have seen increased deposit flows as investors fled equities in the wake of the global financial crisis. But can bankers attract and retain more deposits in the flight to safety while still making adequate returns?

Like their counterparts in most of Asia, Taiwanese banks are witnessing deposit gains. State-owed Bank of Taiwan (BOT) saw robust 15 percent growth in deposits last year as the country's stock market dropped 45 percent. Taiwan's state-owned or affiliated banks have benefited more than non-government banks because they are seen to be more sound: Deposits in state banks grew an average 8 percent last year against 3 percent for non-state banks.

To bolster investor confidence in banks following the financial crisis, Taiwan is guaranteeing deposits until the end of this year, a move that is leveling the playing field for lenders competing for deposits, and is reported to be considering extending the guarantee to the end of next year.

But what happens after the guarantee ends or when the market takes a turn for the better? Will Taiwan's banks be able to retain those deposits? The question is particularly important for Taiwanese banks without a strong capability in deposit gathering or those perceived to be less sound.

Even as deposits rise, Taiwan's banks need to find new ways to spur investor interest over the long term. Bankers in Taiwan and throughout Asia have grown overly reliant on wealth-management services and consumer lending to fuel revenue and earnings growth.

But with skittish customers staying away from investment products, credit cards and loans for now, the best option for reinvigorating their business lies in competing for the unglamorous but deep pools of retail deposits.

The battle to win more deposits than rivals will be a zero-sum game with a big prize for the winners. But the passive approach by Taiwan's banks to collecting deposits from customers who are already heavily inclined to save means their business muscles in this area are weak. Accustomed to earning higher returns during a market upswing, bank customers may be unwilling to settle for the low yields currently paid on conventional accounts.

The intensifying competition for deposits risks driving down returns as banks, unaccustomed to aggressive moves, may succumb to the pressure to overpay to hold on to skeptical account holders and attract new ones. In Taiwan, where most customers have put their money into time deposits, the pressure could be strong, as the interest rate difference between time and demand deposits is currently narrow.

The big question is: When the time deposits expire, will banks in Taiwan be able to hold on to depositors who start looking elsewhere for higher returns?

Innovation is, therefore, key for banks to retain and attract customer deposits. But innovation is one area where banks in Taiwan—and throughout Asia—have trailed those in other regions. Basic products that have worked in other markets - low-balance transaction accounts, hybrid interest-bearing checking accounts, flexible savings accounts that combine check-writing privileges with higher-yield term-deposit features, no-frills high-rate savings instruments—are largely unknown in Asia.

To avoid overpaying for their depositors, lenders will have to be more sophisticated about pricing products and setting rates dynamically. They will need to tread the line between attracting deposits while not overpaying for them. That entails regularly reviewing each pricing element based on how different depositor segments react to changing yields and account fees.

Successful banks aiming to attract more deposits should look at offering greater rewards to employees who bring in new deposits and cross-sell deposit products to existing credit-card and investment-account holders. Customers will see more promotional and merchandising campaigns wherever they come in contact with the bank—from branch windows and service counters to ATM receipts and on statement envelopes. Alert banks will tag such promotions to when customers' deposits mature or following sales of real estate or other investments. They will also need to increasingly match these occasions with attractive offers that help land new deposits or keep funds in the bank.

The focus on attracting depositors will have implications for the management and organization of banks as well. As banks increasingly see greater deposit growth as a lucrative new franchise to offset declining business in wealth management and retail lending, they will increasingly value deposit management as a career path to senior positions. Most Asian banks' deposit operations have been starved for professional talent and resources. They will now be more aggressive in recruiting top talent to staff product management, provide marketing and sales support and develop high-powered analytical capabilities to sustain a competitive edge.

The stakes couldn't be any higher as financial uncertainty continues. Given the high rate of savings in Taiwan and the rest of Asia, the banks that do the best job of attracting deposits will be the place where much of the region's money is kept, and increasingly, where banking profits are made.

Nick Palmer is a partner with Bain & Company based in Hong Kong. Sameer Chishty is a partner based in Sydney and Johnson Chng is a partner in the Beijing office. All three are members of the firm's Asian financial-services practice.