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The Competition for Bank Deposits Requires More Than “Rate Ads”

Recent aggressive interest rate increases by the Federal Reserve, as well as geo-political uncertainties, have combined to create an environment wherein banks will be in high competition to not only gain new customers, but also retain customers -- and, more importantly, their deposits. As we are all aware, deposits are crucial for banks in generating revenue, as the more money a customer deposits, the more money a bank is able to lend and derive interest on those loans.


There are several factors that make the current environment so highly competitive. First, fintechs and neobanks are seemingly popping up overnight as new competition for deposits. Second, the Federal Reserve’s aggressive interest rate increases and its “quantitative tightening” efforts that will reduce the deposits in the banking system.

The Financial Brand notes that simple "rate ads" are no longer enough:

The challenge will likely be different from previous periods when this need arose because the U.S. economy is in a strange place.

“We’re in what’s probably the most complex rising rate cycle ever,” says Peter Serene, Director of Commercial Banking at Curinos.

While many institutions don't perceive an immediate threat, the deposit battle may be about something more complex than simply the actual deposit dollars. This time around, it may be more about retaining relationships than just offering free pens and calendars. Bank customers care about more than interest rates - they want to know that their financial institution is in tune with their needs and financial lifestyles.

Factors Behind Excess of Funds

Lower credit demand and a glut in deposits has combined to push down the loan-to-deposit ratios of many institutions into the range of 60%. Stockton says that for 80%-90% of institutions there have been enough deposits to spare. He says it’s estimated that as of June 2022 the U.S. banking system had a $3.5 trillion excess of funds.

Federal Reserve staff paper indicates four factors leading to this condition, beginning at the onset of the pandemic and official reaction to it:

 Customers still enjoy the human interaction with tellers.
  1. A spike in drawdowns on credit lines to stockpile money for businesses, some of which has dissipated since;
  2. The Fed’s quantitative easing via purchases of financial assets;
  3. Major government stimulus payments to consumers that ended federally but have continued in some states as an aid to coping with inflation and gas prices;
  4. A higher personal savings rate, which has been falling away for multiple reasons, including the need to spend more due to inflation.

The Relationship Factor

Curinos consultants Peter Serene and Adam Stockton say that financial marketers’ depth of understanding of their institutions’ customers will make or break their ability to decide which customers must be held -- even at the cost of a higher deposit rate.

Letting a large CD roll off to a competitor might seem like a savings, says Stockton. However, if that customer also has a primary checking account, credit cards and other business with the bank, letting them take the CD elsewhere invites the competition to snag the rest of the relationship.

“Even if the bank doesn’t need the deposit today, they’ve got to be really careful about not losing that customer completely and putting themselves in a difficult situation over the longer term,” says Stockton.


Gaining and Retaining Customers: Strategic Approach

While a portion of financial institutions do not perceive this as an immediate threat, this is something that cannot be ignored. As noted above, many "tech-savvy" customers have adopted fintech and neobank technologies -- including Chime and Acorn -- that fit their lifestyles and financial needs.

Recently, we've seen major financial institutions make changes in deposit accounts by eliminating overdraft fees in order to attract and keep depositors. This is just the most recent step within a strategic overall strategy to ensure that customer expectations are met. Enabling customers to deposit funds into their accounts -- whether it's through an app or wherever the customer choses to conduct their banking -- and ensuring that the customer experience is consistent across the entire journey is crucial.

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Banks that are investing in not only the UX experience but also ensuring that deposits are accurate will have the competitive edge. This include check deposits, where accuracy has seen a major boost to rates of 99.5% through the utilization of innovative AI and machine learning technologies.

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