Last month, we spoke about the migration of money market savings funds out to products and institutions paying higher returns. This migration is a very tangible example of deposit cannibalization. Hence, it is timely to learn about how our Active Deposit Management Solution (ADM Solution) helps institutions manage cannibalization.

For decades, bankers have struggled to tell the difference between “new” money and money flowing between products because core systems and transactions don’t record data that way. Consequently, most Financial Institutions (FIs) cannot and do not know how much Cannibalization costs them. 

Why does deposit cannibalization matter?

Cannibalization can significantly impact the profitability of the deposit portfolio. When a customer/member moves money out of one deposit product into another deposit product with a higher price, the profitability of those deposit funds decreases. Although financial institutions are experiencing it today in their money market portfolios, cannibalization is a constant occurrence that needs continuous monitoring. For context, consider that approximately 30% of all account-level deposit balance increases and decreases are caused by money moving between a consumer’s/member’s accounts. Managing this cost is a strategic imperative when setting deposit prices.

The DEPOSIT EDGE SaaS Solution for deposit analytics solves that problem

Once you can measure and “see” cannibalization, you can do something about it.

• The first step is understanding the flows between products in fine detail – by product, demographic segment, and location.
• The second step is to determine which customers/members are vulnerable to cannibalization when you change the pricing of products they hold. Then, you understand who is susceptible and how much cannibalization risk you have exposure to.

That said, cannibalization does not always have a negative outcome. For example, you could decide that to support your growth strategy, you need to increase your 2-year CDs. And reducing your Money Market balances will satisfy the risk management priorities of your balance sheet. In that instance, encouraging the Money Market’s cannibalization in favor of your 2-year CD may be a good strategy. But you must understand how it is happening – which balance tiers, what relationship tenor groups, and other demographics of the accounts where it is happening so you can remain in control of the process and deliver value to your members/customers and your bank/credit union.

Focus on mitigating deposit cannibalization.

To be clear, eliminating cannibalization is not possible or desirable. Always bear in mind the primary mission of your Credit Union or Bank is to meet your customer’s needs! Products satisfy specific needs, and people’s preferences and needs change over time, so shifts driven by changing needs should be welcomed.

Mitigating excessive cannibalization, that is, the cannibalization driven primarily by pricing differentials between your products that do not align with your portfolio projections, is what you need to do. Mitigation strategies focus on adjusting product prices relative to each other within your portfolio or using targeted marketing to offer premium pricing to your customers selectively.

Adjusting product prices relative to each other is a preventive step that can and should be managed actively by Deposit Product Managers. Avoiding large differentials between products that have high amounts of cannibalization money flows is easy to implement and highly effective.

The second strategy is to offer premium pricing selectively. Most of your new deposit money (typically 80-90%) will come from existing customers, so you need to market primarily to your current base to meet your goals. But are all your relationships the same? An emphatic No. Some customers/members have deep relationships with you, while some are only there because of a loan, and some are there because they liked a premium deposit rate offer. You must differentiate amongst those depositor behaviors and know which is which. You then may be selective in targeting offers and use the same concepts for managing rewards and renewals.

Mitigating deposit cannibalization matters. It can make the difference between positive and negative ROI (return on investment) on your deposit campaigns.   

Contact us to learn more about how DEPOSIT EDGE insights can fuel your transition to best practices in Active Deposit Management.