Banking Leader

Solving the Liquidity Challenge in Community Banks

Fiaz Sindhu | senior vice president and general manager, Core on Demand

August 16, 2019

Pressure on core deposit growth

Recent articles in the banking press indicate the importance of retaining and acquiring core deposits for financial institutions of all sizes. Consider the following:

“How MUFG’s ‘digital hybrid’ bank raised $7B in deposits.”
American Banker July 11, 2019

“This fintech drove billions in deposits to EU banks. Can it work here?”
American Banker May 28, 2019

“Deposit displacement is impacting financial institutions. Growing deposits is at the top of banks’ and credit unions’ growth priorities for the coming year. The effect of deposit displacement—the diversion of funds from checking to alternative accounts—is making deposit retention difficult.”
Cornerstone Advisors February 2019

Community banks in particular are facing liquidity challenges. The Loans and Leases to Total Deposit ratios for the smaller tiers of financial institutions, particularly those between $1 and $10 billion in assets, have trended upward over the past 10 years, according to FDIC data. Additional research from Darling and Associates suggests banks under $10 billion in assets have not grown core deposits sufficiently to fund loans for the past three years.

Opening a new branch, offering new account opening functionality, or operating a 24/7 call center provide short-term tactics to gain deposits. More impactful and sustainable solutions are desirable for executives seeking longer-term solutions, particularly in a digitally enabled world. A direct bank offers such a long-term solution, and retail customers are ready and willing to bank in this fashion.

Consumers desire direct banking

According to recent findings from the FIS Performance Against Consumer Expectations (PACE) survey, 50 percent of respondents say a direct bank offering from their primary bank would make them more likely to use a direct bank. Desirable market segments such as Gen Xers and high-income customers are also more likely to bank with a direct bank.


of survey respondents say a direct bank offering from their primary bank would make them more likely to use a direct bank.

Gen X

are twice as likely as boomers to say they would consider banking with a direct bank


customers are more likely to bank with a direct bank.

Bank customers want:

  • Better banking experiences
  • Access via mobile devices
  • More favorable interest rates

Seeking a new way to stand up a direct bank

Multiple paths are available for community banks to participate in direct banking. Some banks launch direct banks under their current platforms as extensions of their traditional banks. Less expensive to launch on the front end, this option, however, has downsides, including: challenges presented by coordinating changes for two banks on one platform to support two different businesses, and increased pressure on employees to manage both those businesses in parallel. Leveraging the current platform may also hamper the bank’s ability to optimize brand positioning to attract new segments.

Community banks also can engage in partnerships with fintechs to participate in direct banking. In this scenario, the bank loans out its charter to the fintech in order to capture new income streams. This approach avoids disruption to banking operations but can stymie a bank’s ability to extend its own market presence as the customer relationship is typically controlled by the fintech in these types of engagement models.

A third option is to deploy direct banking capability on a different platform – on-demand core solutions that offer turnkey software options enabling the rapid deployment and launch of direct banking on a lightweight platform. When evaluating potential providers of turnkey options, bankers should look for these attributes:

  • An end-to-end integrated solution that is fully SaaS/cloud based
  • An extensible (to all devices and channels) and scalable (addressing volume and complexity) offer
  • A truly digitally oriented environment
  • The ability to deploy and launch quickly
  • A cost-effective solution

Core on demand approach delivers meaningful benefits

This third option, on-demand core, allows for rapid implementation and launch of a direct bank with a different approach to more methodical step-by-step programs, encouraging agility and rapid delivery of banking services. This speed and flexibility enable the capture core deposits more sustainably than traditional methods. The benefits of this approach include:

  • Cost economies – Real-time processing capabilities that deliver true market advantage without the high cost and without compromising on functionality.
  • Increased efficiencies – As a separate core solution, integration and interaction with a bank’s existing core is not a complicating factor.
  • Speed to market – Innovation is not hampered by the limitations of existing legacy systems.
  • Uninterrupted growth – 24/7 capabilities reduce operational risk and create an always-on solution for a community institution and its direct banking customers.
  • Rapid deployment – The core’s cloud-native architecture allows fast deployment of a direct bank – as soon as 90 days.

Rapid execution for deposit growth

Direct banks fuel deposit growth. The potential to rapidly drive deposit growth and support improved deposit/loan ratios for a financial institution is the primary driver behind the surge in direct banks. By leveraging a robust portfolio of services, including a real-time core processing engine, security and fraud prevention systems, it has been shown that institutions can launch direct banks at scale and grow deposits into the billions in a matter of months.

The technology and tools are available today to build a digital-only bank for community banks quickly. The successful launch of a direct bank hinges on the ability to embrace new technology and a willing executive management team at the institution. Executing a sound direct bank plan will meet the business requirements a traditional financial institution, while positioning the bank for a more robust digital banking future.