More than ever, it's important to understand the pragmatic growth strategies that institutions must activate with the help of the innovative third-party solution providers that are available today. These solutions must be easy to implement and to measure, and to a degree be a handholding experience to make it so you can have growth happen even if you don't get intimately involved along the way. In this compelling interview, Gabe Krajicek answers some important questions about the current situation for community financial institutions — their challenges, the importance of distinguishing between real growth and transient gains, and how strategic products and marketing support can drive long-term relationship-based growth.

Can you explain a little about Kasasa and its mission? 

GK: What we are for community financial institutions is a way to generate strategically significant volumes of deposits. The kind of money that you would think about growing from a CD promotion or even what you'd just go out and buy but being able to generate it from checking accounts and savings accounts, which most people don't think of, is really the source of strategically significant volumes of deposits. And with our experience over the last almost two decades, working with hundreds of institutions, and managing about a $20 billion portfolio of deposits, we can generate those incremental deposits from checking accounts and savings accounts at about half the cost of what it would be if the institution had instead turned to CDs or other methods. 

With rising cost of funds challenging most every institution, what unique pressures do smaller organizations have compared to their larger competitors? 

GK: I think one thing that we're seeing across the board is that the primary financial institution relationship is very difficult to defend. I used to describe the mega banks as the big whales in the ocean, the big killer whales. And now you've also got the piranha of just thousands of fintech companies that provide little niche services that disintermediate little components of what the primary financial institution relationship would otherwise provide. And now with so much demand for liquidity in the market from so many different folks, you see a lot of those fintechs offering really, really high rates. 

What are the biggest opportunities for local banks and credit unions to sustainably grow?  

GK: With increasing deposits being a priority, we saw clients go out with a big CD promotion, and they would grow balances in their CDs — but that strategy was just replacing core deposits that were bleeding off the balance sheet. So, they were repricing their balance sheet from a really low cost of funds, in the 50 basis points (bps) range, up to four or five percent. And so, you saw this huge repricing of big material chunks of balance sheets all across the board. And we saw this in the industry loud and clear, and it speaks to the risk with those high balance CDs — they're not loyal at all. They'll leave for 25 bps…heck, they'll leave for 10 bps. They also are often very large balance holders. 

But checking accounts are fundamentally different. So, what we do with a product like Kasasa Cash is, instead of putting the institution’s highest rate on the CD, which is guaranteed to be a disloyal consumer (somebody who will leave you for 10 basis points at the end of term), instead of giving the highest rate to them, give it to the checking account holder. But only if they meet the monthly qualification criteria that indicate that they're really using you as their primary financial institution. Qualification criteria like use your debit card 10 times, have your direct deposit go there, stuff like that. We've got a suite of things that different institutions do, but it's really easy stuff for consumers to do if they bank there — and it's really annoying for them if they don't. 

And so, we create this scenario where we're paying the best rate at the institution to consumers in checking accounts, but only if they use that checking account — like that's what they use for all their banking. And that attracts these PFI relationships. It also means that some fraction of the consumers fail to qualify. So, let’s say you went out with a 6% free checking account, which may sound crazily high. But what you know is about a third of the people will fail to qualify, which means that 6% becomes about 4% cost of funds — which is already lower than the CD would've been at that same institution. So, it's cheaper money. It's not more expensive, it's cheaper. 

And you also have the fact that, and this gets a little bit technical, but that promoted rate of for example, in this case 6%, it's only paid up to what we call a cap. It's a balance tier. And typically, in today's rate environment, that might be like $50,000. So, you would pay 6% up to $50,000 — and on balances above 50K, you might pay something like 1%. And so, that also blends the cost of funds down another 50 basis points at least. So, you're at like 3.5% in your total cost of funds with a 6% promoted rate. 

And it gets better because they swipe the heck out of their debit cards. When you ask them to swipe it 10 times, they'll actually swipe it 30 because it becomes the top-of-wallet card. And you also have other sources of non-interest income that far exceed the non-interest expense. 

When you put all that in the blender, it comes out to about a hundred basis points of additional cost to subsidization. So, even though you went out with 6%, your cost of funds was 3.5%, your true cost net of subsidization from non-interest expense, non-interest income is about 2.5%.  

So, all day long, this is a cheaper way to get the money. And the better part is when you do it that way, like I said with an example where the promoted rate is paid up to about $50K, the average balance will be about $11,000. That's going to be comprised of a few people with $50K, some people with $25K, a few folks with a hundred, lots of people with $5K, lots of people with $7K. That means a lot less liquidity risk in each individual consumer. The balances that they're bringing in are spread across a lot of consumers. And they basically change the math on the incoming volume of deposits coming into checking accounts. 

What kind of components do you put in place at Kasasa that help your clients succeed from the standpoint of marketing metrics — so they actually have to work to NOT succeed? 

GK: When you think about it from a community financial institution (CFI) standpoint, there's a lot of stuff that can go wrong. It's usually not the ones and zeros stuff, it's the stuff that involves people. It's that the marketing didn't resonate with the people, or the frontline staff didn't have a way to communicate the message clearly so, nobody adopted the product. Or there wasn't any re-engagement campaign to get the consumer to adopt the product over the long run. Maybe there was something wrong with the compliance, maybe there was something wrong in the profitability analytics, the products didn't generate any value. 

We kind of took on each one of those failure points and said, we're going to make that our responsibility. We support them in the way that they want to be supported. But our model is we're going to make sure that if you need marketing materials, you're going to have marketing materials that we've tested with consumers that we know work. When we train your frontline staff, we're going to make sure they say it the way that we've proven it works every single time. When we're doing profitability consultation, we're basing that on the fact that we manage an almost $20 billion portfolio across a whole bunch of institutions, and they all are doing it differently.  

It's this idea that we're going to look at the marketplace, we're going to see what types of products consumers get excited about. We're going to figure out how to match that consumer need with a balance sheet or P&L need that a community CFI has and use a product to glue the consumer's desire and the CFI's desire together in some harmonious way. And then we're going to think about how we launch that product from every aspect from go-to-market to ongoing support.  

You talk about this being a product for smaller community banks and credit unions, why couldn't it work at a mid-tier regional? 

GK: Well, it could, I mean we’re currently talking to a $25 billion institution that's very interested in working with us and  we have clients in the $10 billion range right now. There is a distinct advantage the smaller institutions have because of the Durban amendment and the small financial institution exemption for higher interchange. When we get those consumers swiping their debit card 30 times a month, it generates around 10 bucks or so of interchange. So, that offsets an awful lot of the rewards costs that are going to those consumers. 

Let's say you're a leader of a financial institution, you're really struggling for loyalty and you're having transaction erosion. What's the self-assessment they need to do to realize they have a problem?  

GK: I would look at what was the total CD balances at the end of 2022 and what were the total CD balances at the end of 2023 and how much did the institution actually grow? And what I think most institutions will find when they compare all those numbers is that virtually all of that CD growth went to replace erosions and other lower-cost deposit sources. And that's why their cost of funds has exploded. What if those CDs had instead gone into an account with an all-in cost of 2.5%? And the delta on it is about 2 to 3% for most institutions on that reprice. Then you apply that to $10 million, $20 million, $30 million, you start to talk about huge fractions of these institution’s ROA.  

And going forward next year will be another version of that. Even if rates do come down a little bit, which we all expect them to, the great thing is that with a 6% promoted rate, you're still at an all-in cost of 2.5%. So, a lot of our clients are going to ride it out and just stay top of market, dominate for a lot longer, and suck up more deposits while they can knowing that their cost is tolerable. 

Once they have all the deposits that they want from their competition, they can start to lower the rate accordingly and bleed virtually no deposits. Why? Because people don't change checking accounts to go get three or four bucks more in interest on an $8,000 balance. But they will, when they're thinking about getting a checking account, they'll do their research to get the best one and 6% is the best. And so, you'd go into that, but you wouldn't leave it if it came down to four because you'd be like, "Four is still pretty awesome, and I'm not changing checking accounts.” 

If people want to learn more about how they can optimize growth and get rid of some of that phantom growth, who do they talk to or how they take the next step. 

GK: Go to offer.kasasa.com. You’ll find tons of great content there, including how to contact us for more info or to take the next step. 

Be sure to check out the full interview on the Financial Brand website.