Winning in corporate deposits through transaction banking

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Banks face a tough task: attracting and keeping corporate deposits, an important part of their balance sheets, as relatively high interest rates prompt customers to move their money elsewhere or pay off debt.

One way for banks to bring in more corporate deposits is to provide an excellent proposition in transaction banking: improving payment collection and reconciliation, linking companies’ systems with the bank’s systems, and optimizing corporate clients’ daily cash flows and forecasting. A workhorse of the banking sector, transaction banking brings in steady revenue. Banks can consider key strategies to differentiate their transaction banking offerings to help them retain existing depositors and attract new ones, from smaller enterprises to large corporations.

A large bank with stagnant deposits growth tackled the problem by setting up a deposit desk, a small team with a bird’s-eye view of deposit inflows and outflows, and by using technology to identify deposits at risk and develop client-level commercial strategies. Within six months, deposits grew by 12 percent for small and medium-size enterprises and by 7 percent for larger corporate clients.

Net interest income and fee income are the two main revenue streams in transaction banking. In the low-interest-rate environment of much of the past decade, growth in fees had outpaced growth in net interest income, but this changed when rates began rising in 2022. Combined net interest income for banks worldwide, excluding China, grew to an estimated $286.1 billion in 2023, up roughly 20.0 percent from 2022, compared with an estimated 7.2 percent increase in banks’ fee income over the same period (Exhibit 1).1 As interest rates eventually fall, net interest income is expected to decline.

Growth in net interest income is outpacing growth in fee income.

Corporate-bank deposits in 2022 totaled an estimated $54.6 trillion worldwide, roughly doubling from an estimated $26.8 trillion in 2010 and accounting for 46 percent of overall deposits.2 However, customers started withdrawing deposits in 2023 amid increasing market volatility due to rising interest rates, credit restrictions, and liquidity gaps at several financial institutions. For example, after turmoil hit banks in the United States and Switzerland in March 2023, many customers moved their money to banks they perceived as more stable. Deposits at smaller US banks dropped by $120 billion in the week ended March 15, while the largest banks gained $67 billion in deposits, according to the Federal Reserve.3

Outflows have reignited a debate over how banks can maximize deposit profitability. This article brings a perspective on how banks can use their transaction banking capabilities to boost their corporate deposits. We outline strategies that could apply to banks of any size, anywhere in the world.

A brief history of corporate deposit growth

Let’s examine trends in deposit growth over the past decade and a half, taking banking in the European Union as an example. Since 2010, according to McKinsey analysis, corporate deposits in the European Union have risen 6.6 percent a year on average, outpacing the 3.9 percent growth in retail deposits (see first part of Exhibit 2). Corporate deposit growth started the decade at a growth rate of about 3 to 4 percent a year, then accelerated to about 6 to 8 percent a year. During the COVID-19 pandemic, annual growth in corporate deposits surged to around 20 percent due to lower spending and investment.

As economic activity rebounded after the pandemic and central banks raised rates to tackle high inflation, growth in corporate deposits tapered off to about 3 percent, below its long-term average (see second part of Exhibit 2). Now that interest rates are high (see third part of Exhibit 2), the battle for deposits is intensifying.

Corporate deposits in the European Union have outpaced retail deposits in terms of growth, but rising interest rates have decelerated that growth.

Becoming a key revenue source

For years, banks had little incentive to boost their deposit bases, as very low interest rates prompted depositors to keep their money parked where it was. The eurozone and Japan, among others, went a step further and took interest rates negative, requiring banks to pay their central banks for the privilege of storing money with them. As a result, banks were forced to use excess cash to lend more, which in turn helped boost the economy.

Negative rates resulted in the unusual situation of banks choosing to reject some deposits or charge heftier fees for accepting them. Banks concentrated on generating revenues from other areas of cash management, such as payments or trade finance. Deposits got short shrift, with banks using only basic tools to manage their fund base and rarely bringing in AI.

Since interest rates began climbing in 2022, banks have responded by becoming more active in deposit management while turning to new tools and processes to boost this important revenue source.

Building a robust system for deposit growth

Although analysts predict a gradual decline in interest rates, for now their relatively high levels are affecting how banks approach deposits, including paying higher rates to attract and retain depositors’ money. Beyond increasing rates, banks can aim to differentiate themselves among peers by anticipating clients’ needs, among other things. The following seven strategies could help banks boost their deposit pools.

  1. Increase visibility into deposit pools, inflows, and outflows.
  2. Set up a deposit command center.
  3. Design an optimal pricing strategy.
  4. Revamp sales strategies.
  5. Attract deposits from cash-rich sectors.
  6. Use AI.
  7. Reinvigorate transaction products linked to deposits.

The success of a deposit growth push will depend on thoroughly understanding the nuances of these strategies and tailoring them to each bank. Let’s examine each strategy in detail.

1. Increase visibility into deposit pools, inflows, and outflows

Corporate clients demand visibility on their liquidity position from banks. Likewise, banks need good visibility into their deposit pools, inflows, and outflows, ideally in real time. A bank’s deposit data trove should include information about deposits across all corporate client segments—historical and current—and the institution’s full range of deposit products, currencies, and geographies.

Another important component of visibility is dashboards—windows into the bank’s data trove that are customized for different stakeholders, from the executive board on down (Exhibit 3). The dashboard should contain information such as overall deposit positions across the bank’s commercial segments, along with past data and estimates for the year-end. It should incorporate major initiatives to cover expected deposit budget gaps.

Dashboards can help banks spot patterns in deposit levels and identify ways to increase inflows and minimize outflows.

Studying the data could reveal upward and downward patterns and potentially identify clients that are about to pull their money out of the bank. The dashboard could help the bank analyze historical deposit data for each client for the past several years and do a regression analysis to extract the core operating balance throughout this period. Finally, the dashboard could be used to monitor the progress of each initiative at the client level.

2. Set up a deposit desk

Once a bank has the necessary data in hand, it needs to create a team to make sense of it all. The deposit command center, also known as a deposit desk or control tower, is a relatively small team serving as a nerve center to develop and deploy deposit strategy.

The deposit desk monitors deposit pools across the organization as well as inflow and outflow trends, gathers market intelligence, and works with people from other parts of the bank—including product, sales, relationship management, technology, operations, compliance, and marketing—to boost deposits.

The deposit desk’s full-time members might include a team leader, one or two product specialists who gather market intelligence and coordinate with stakeholders, and one or two analysts who parse deposit data and share their insights. Part-time members, who get involved as needed, might include relationship managers who can launch action plans for identified target clients, provide input on communication plans, and give a frontline perspective on potential moves concerning clients or target clients. Other bank employees can help the deposit desk with defining development plans, coming up with training programs, and providing expertise on various products and client segments.

One key task for the deposit desk is filtering and prioritizing initiatives targeted to client segments or specific clients. For example, one initiative might be to observe the operating accounts of the bank’s top 100 corporate clients, with bank employees able to identify corporate clients whose deposits are declining and analyze whether seasonality or other factors are influencing the trend. Another initiative might be to review outflow payments to other banks where beneficiary companies also have accounts at the payment-originating bank. If companies choose to perform more transactions with the same bank, funds remain within that institution, transactions are faster, and clients can save money on fees.

3. Design an optimal pricing strategy

With higher interest rates, banks will benefit from adopting a deposits pricing strategy that helps them retain existing clients and attract new ones while minimizing costs. To achieve this, banks can consider three actions:

  • Identify deposits that are at risk. Every corporation requires a certain amount of liquidity to pay suppliers and employees and cover other expenses. Any liquidity beyond that can be used to pay down debt or can be invested in higher-yield instruments. Banks can use transaction analytics, comparisons with relevant benchmarks, and macroeconomic analysis to estimate the liquidity at risk for each client.
  • Understand clients’ price sensitivity. Different clients react differently to deposit rate changes. Banks can use AI models to understand the drivers of client behaviors and gauge the price sensitivity of each client. Price-sensitive clients tend to move money around from bank to bank, seeking the best yields, whereas less-price-sensitive clients tend to have more stable deposit balances.
  • Tailor commercial strategies for each client based on the client’s liquidity at risk and price sensitivity. For example, a price-sensitive client with a high amount of deposits at risk might require more aggressive pricing to keep deposits with the bank.

Pricing optimization for deposit rates can boost a bank’s revenue by roughly 3 to 12 percent. The corporate and commercial division of a top ten global bank underwent a pricing process redesign—building a snapshot of customer profitability, creating transparency on each customer’s potential to contribute to the bank’s corporate portfolio, developing an internal benchmarking tool and another tool to help relationship managers, and organizing training for these managers. Revenue in the targeted portfolio rose 12 percent.

4. Revamp sales strategies

Relationship managers, product specialists, and sales professionals all play a critical role in the effort to increase deposits. Crucial areas to work on include refocusing relationship managers on priority clients and supporting those efforts with data analytics and client management tools, as well as making sure all sales professionals are well versed in all the bank’s deposit products.

The bank should consider setting rigorous deposit growth targets and tracking progress on those goals, creating a communication channel between relationship managers and the deposit desk to parse the success of various deposit growth initiatives, and encouraging the sales team to increase deposits.

A midsize bank focused on small business and commercial banking was looking for a way to boost sales, make the most of data and analytics, and craft a new way of attracting and keeping deposits. The solution was to set up a way to drive sales to a targeted vertical, using third-party data and analytics, setting up a centralized sales team within the bank to call potential clients and generate leads, and training and coaching relationship managers to bring in more deposits. Within three months, the targeted vertical experienced deposit growth of more than 50 percent.

The data used included a list of potential clients organized by industry and by region, along with their sales figures, market share, and banking balances, when available. The bank further customized its transaction banking services to offer a single package covering payments, receivables, financing, and the client’s operating account. The package came with simplified pricing and easy digital onboarding.

5. Attract deposits from cash-rich sectors

Some businesses are sitting on cushions of excess cash that banks would love to attract as deposits. Relationship managers who are well versed in a specific industry can help the bank identify pockets of excess liquidity, and the bank can then offer a wider range of deposits and investment alternatives to try to bring in some of this funding.

In addition, banks can do a deep dive on different industries and identify the average pricing offered by competitors, then use data analytics to identify clients’ sensitivity to price changes for each category.

This strategy focuses on clients with a positive cash flow whose deposits make up an important share of the bank’s portfolio. These clients usually don’t require revolving credit facilities, so the bank’s return for these clients—measured by risk-weighted assets—would be among the highest in the banking industry.

Cash-rich sectors vary based on economic conditions, market dynamics, and individual company performance. Industries that historically have a higher likelihood of generating positive cash flow include those with high margins, stable and recurring revenue, or both—for instance, technology, healthcare, utilities, real estate, and luxury goods.

6. Use AI

AI can enable banks to examine reams of data and glean insights that can help them win deposits. Banks can also use the technology to more effectively target cash-rich segments, suggest new product solutions, identify clients at risk of churning, and optimize deposits pricing. For example, an analysis of the top clients at a bank showed the correlation between average deposits and credit lines used in one quarter (Exhibit 4).

Banks can use artificial intelligence to help identify clients’ liquidity patterns and to take actions to optimize banks’ deposit levels.

Using this type of analysis, banks would be able to identify clients that make extensive use of credit lines but have low average deposits (for example, those in the upper-left quadrant of Exhibit 4). With more information from relationship and product managers, banks can discuss ways for clients to make more extensive use of payment and receivables flows through the bank, leading to higher daily deposit balances. In addition, as described in the last section of this report, banks can provide an ample range of liquidity tools (such as notional or physical pooling, netting, and forecasting) and investment services (such as money market funds or fixed-term deposits) so clients can do more with the new funds they bring to the bank. And for clients with high average monthly deposits and low use of credit lines (represented by the lower-right quadrant of Exhibit 4), the aim is to maintain or increase the bank’s participation in their liquidity pool while keeping an eye on potential early signs of clients moving deposits out of the bank. Similarly, banks could explore correlations between deposits and other variables, such as trade finance activity—for example, instruments such as letters of credit, which companies use to provide assurance to suppliers while goods are in transit—or payables finance, where the lender provides businesses with short-term financing based on the value of outstanding invoices.

AI can also allow banks to better understand their customers’ deposit price elasticity (that is, their sensitivity to price changes) and tailor interest rates to specific clients or segments of clients. Another potential technique is to conduct a regression analysis for the past three years of client balances to separate operational balances, which businesses use to manage their daily finances, from nonoperational balances, or cash for everything else. This can help the bank understand the patterns of stable balances and establish the right strategy for each client segment.

7. Reinvigorate transaction products linked to deposits

One of the main objectives of any corporate bank is to attract operating accounts, which businesses use to manage their daily operations, such as paying vendors and receiving payments from customers. Two subsets of transactional-banking products, payments and liquidity, are particularly important to this effort.

The wider a bank’s offering in liquidity management, the better. Improving liquidity essentially helps clients maximize the interest earned for positive balances while minimizing the interest paid for negative balances. Banks often offer liquidity products such as sweeping, which ensures that all the money held in a client’s selected accounts with the bank is periodically transferred to one centralized bank account, and notional pooling, in which a client’s cash remains dispersed across accounts but the total is recorded as though the cash has been centralized. Any liquidity product—including sweeping, pooling, forecasting, and short-term investments—will be critical to attracting a company’s main operating account and, as a result, its deposits.

Banks hoping to attract operating accounts can consider rolling out the following products and strategies related to payments and liquidity:

  • Deposit as a service (DaaS). A full suite of deposit offerings is embedded at client sites, while the bank continues to hold the relevant deposits. A typical example in this category is client escrow accounts at real estate developers.
  • Multicurrency virtual account. A bank can offer clients one account that is combined with sub-accounts or sub-ledgers in the most popular global currencies and that receives deposits without requiring cross-border transactions.
  • Environmental, social, and governance (ESG) deposits. Beyond traditional green-deposit offerings, which let clients invest cash in interest-bearing products that fund projects benefiting the environment, new offerings can extend into the social and governance portions of ESG. It is important for banks to be transparent about their ESG products, making sure they stand up to regulatory scrutiny and avoid “greenwashing.”
  • Third-party money market funds. A bank might choose to offer a client access to a money market fund at a different institution to help that client get a higher yield or diversify risk. Such a defensive approach could enable the bank to hang on to deposits that might otherwise be transferred to a rival bank.
  • AI as a liquidity optimizer. Banks can use AI to help clients optimize their liquidity by monitoring liquidity structures such as sweeps, notional pooling, and cash forecasting so clients can avoid balances that are sitting idle or unnecessary overdraft fees.

Deposit outflows are affecting all corners of the banking industry, including transaction banking, as interest rates remain relatively high and depositors hunt for a better deal. The seven steps outlined in this article—including devising an optimal pricing strategy on deposit rates, building a trove of data on deposit inflows and outflows, and creating a deposit desk to make sense of it all—can help banks of any size or geography retain existing deposits and attract new ones.

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