In just over a year, banks have gone through a head-snapping change, from being flush with cash (and too much liquidity on hand) to watching those depositors exit in droves.
Core deposits are on the decline, forcing banks to increase the rates they pay on CDs and savings accounts in hopes of stemming the outflow. But, with the Federal Reserve expected to continue raising interest rates, deposit pressure may get even more intense in the months ahead. In fact, according to the results of IntraFi’s most recent Bank Executive Business Outlook Survey, 88% of bank execs report deposit competition tightened during the past 12 months, and 84% percent anticipate things will get more competitive in the coming year.
To better understand how banks should be thinking about funding, Rob Blackwell, IntraFi’s Chief Content Officer, recently sat down with Neil Stanley, founder and CEO of The CorePoint, to discuss the battle for deposits, strategies to attract and retain customers, what banks should do if the Federal Reserve continues hiking rates, and more. What follows is their conversation, edited for length and clarity.
All economies go into a recession at some time or another, and the last two we’ve had have been severe. It’s natural to be cautious after such upheaval, but the fearmongering has been excessive.
Bankers should take a hard look at employment data, inflation data, GDP history, and interest rates. I highly recommend looking at the Atlanta Fed’s GDPNow, which forecasts GDP based on real-time statistics. Right now, it’s forecasting 2.5% GDP growth for the first quarter. That's not stunning, but it doesn't indicate an economic catastrophe, either. The U.S. economy has proved more resilient than its critics would have you believe.
“92% of bank deposits could leave at any moment, and there’s nothing to stop them. Regulations about withdrawal limits have gone away, so the shelf life is this afternoon.”
We've been through a lot, yet net interest margins have stabilized. Current data from the Uniform Bank Performance Reports compiled for Dec. 2022 show that margins have increased slightly. So, it depends on what you're looking at and what you're doing. However, not all the rate hikes have flowed through to income statements yet. That will take a while.
Some are. Those who’ve been asleep for the last 15 years aren’t, and soon they’re going to wake up and realize this isn’t just a rate game. They may think the highest rate wins, but that's not true. Of course, the low rate doesn't win, either.
Some bankers are refusing to change rates, and if they don't find another way to keep their deposits, they’re going to experience some real pain. I just spoke with a banker this morning who’d publicly rolled out 5% CDs and 4% savings accounts without any kind of plan to keep from repricing all those accounts.
We hit peak core deposits—$17.4 trillion—in the first or second quarter of 2022. By the end of 2022, we were at $16.4 trillion. Yes, money supply can go down, but it doesn't go down easily. We’re talking about public policy and governmental engagement, and it's hard to imagine public policy allowing the money supply to go back to 2019 levels.
I also don't think we’re headed back to the interest rate levels of 2019. As money supply grew, bank deposits moderated, plateaued, and are now dropping a little, but interest rates have to rise because of the inflation the money supply created. They’re going to pretty much do the same thing—plateau and drop slightly, but not to the levels of before all the stimulus.
It's basically a bet on apathy. They’re likely betting that local markets won’t think it’s a big deal, but it is. Imagine if your rate was 0.4%, but it would be 4.6% if you lived in another state. On, say, a hundred thousand dollars. That’s a lot of money. As a bank CEO, I would never have supported that kind of strategy because it’s not good service. But if nobody protests, they'll keep doing it.
“Some bankers are refusing to change rates, and if they don't find another way to keep their deposits, they’re going to experience some real pain.”
It's quite simple. If you’re a consumer looking to put money into a CD, wouldn't it be great if your banker gave you the choice of when to get your money back? That’s what a customized CD is—one that matures exactly when you want the money.
Why doesn’t every institution offer them? Many will tell you it’s because they’ve never had one before. But that doesn’t work in this environment. In this environment, category is not key. Personalized, private-banking service is key.
Exactly. Somebody asked me recently about digital banking, which will make banks more efficient and effective. But going completely digital will create a rate war. If savers can easily move money around and all digital offerings are high-quality, why wouldn't they auction off their money to the highest bidder? The world has changed. People are focused on value. They want bankers who understand how to manage money better than anyone else.
One way is to pursue refinancing, which is the same idea as refinancing a mortgage. Many people have CDs with a sub-1% or sub-2% interest rate, and they're waiting to maturity, kicking themselves because they could get 4.5% today. These are your refi candidates.
Today, early withdrawal penalties tend to be trivial, given that many are based on sub-1% rates. Those amounts can be made up in no time now. Additionally, refi CDs can mature on the exact same day as current certificates using the customized approach I mentioned earlier.
Any bank can run the numbers and show a customer, net of penalty, what they would end up with if they refinanced. By doing so, it can attract people who think they’ve made a mistake and have to wait. When they realize they don’t, they’re ecstatic. This beats the idea of a rate war in every possible way.
CD customers want high yield and a short commitment, while a bank’s finance team wants a low yield and a long commitment. With companion accounts, the bank gives the depositor a high-yield savings account, but only if they open up a CD. It's a bundled offer, similar to a barbell strategy in the investment space.
You're setting up a structure where if a depositor is motivated to receive high rates with a short commitment, they will be obligated to do something you like, which is to make some fixed-term commitments. This kind of hybrid approach between CDs and savings is better for both sides. Most people don’t need to access all their savings at one time: they just like the idea of being able to. The key is to avoid repricing all savings accounts. Not everybody's going to be willing to open up a CD, and that keeps them from moving over.
Like commercial relationship managers. Good commercial relationship managers never lead with price. They start by trying to understand your business, industry, cash flow, credit needs, and so on. Only at the end of the conversation will they discuss pricing. Retail bankers are the opposite. They slide the rate sheet in front of people, basically commoditizing what they do.
Sometimes, on LinkedIn, I’ll see people discussing things like open banking, payments, and money management technology, which are great. I’d want my bank to have great technology, too. But if I ask how they think these technologies will affect deposit price sensitivity, I get complete silence—which is scary. If people can frictionlessly move money around, why wouldn't it go to the highest bidder?
Keep in mind that in 1984, 55% of bank deposits were in CDs. People couldn't just pick up and leave the bank; they had to wait until maturity. Today, just 8% of deposits are in CDs. This means 92% of bank deposits could leave at any moment, and there’s nothing to stop them. Regulations about withdrawal limits have gone away, so the shelf life is this afternoon.
One thing would be to recognize that we're not going back to an ultra-low interest rate environment. I’m not saying rates will never fall again, but we're in a new world. Executives need to come to terms with this reality, because those who make decisions based on the idea that we're going to go back to the way things were are going to struggle.
My other suggestion would be for every management team to compare their current product set and process with those from five years ago. Given that the world has changed, banks’ product sets and processes should change with it. Discern what’s new, engaging, and positive that isn’t just about changing the interest rate.