Financial institutions and their marketing departments will soon need to promote deposits, after a hiatus of several years. 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.
He ticks off the factors at play, starting with the Federal Reserve’s aggressive interest rate increases and its “quantitative tightening” efforts that will reduce the deposits in the banking system. Then there’s massive geopolitical uncertainty, unexpected inflation and the possibility of a recession. Add to that the continuing overlay of fintech disruption and structural changes to financial services.
“There really are a lot of moving parts to this,” says Serene.
On the whole the banking industry has been flush with deposits in recent years. Many institutions may not see an immediate threat on either the commercial or consumer deposit sides. However, interviews with Serene and his colleague Adam Stockton, Director and Head of Retail Deposits at Curinos, indicate that the battle for retention of existing deposits won’t just be about that. The deposit battle may be more about retaining relationships than just the actual deposit dollars.
“Even if an individual bank doesn’t need deposits, if there are competitors who do and they begin to increase their rates, then there’s the risk that the bank loses a long-term valuable customer,” explains Stockton.
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.
“The trend is clear: Americans are tightening their belts, and they’re willing to reset that ‘Customer Since’ line on their monthly statements to do it…. In fact, 26% of customers moved money to another institution in the past 30 days.”
— J.D. Power research
Customers more likely to change banks, according to J.D. Power, are those under 40 and those in more vulnerable financial circumstances. Overall, people will move for higher rates, better rewards and programs, and lower fees.
Serene says this situation can apply just as readily on the business side, and perhaps even more quickly because businesses tend to be better tuned to interest rate levels.
Both Curinos consultants 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. And institutions hoping to acquire more relationships by paying up for deposits will be working against the institutions that currently hold the business of those business and consumer customers.
In an April 2022 survey, 28% of bank executives responding to a survey by IntraFi Network reported higher funding costs already, compared to the year earlier period.
Assessing the Deposit Rate Landscape and the Outlook
A combination of lower credit demand and a glut in deposits has pushed 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 and 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.
A Federal Reserve staff paper indicates four factors leading to this condition, beginning at the onset of the pandemic and official reaction to it: a spike in drawdowns on credit lines to stockpile money for businesses, some of which has dissipated since; the Fed’s quantitative easing via purchases of financial assets; 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; and a higher personal savings rate, which has been falling away for multiple reasons, including the need to spend more due to inflation.
Not all institutions experienced the same run-up in deposits. Stockton points out that online banks don’t enjoy the same level of excess deposits because they tend not to hold people’s primary checking accounts. And some institutions, experiencing loan growth, have needed to bring additional deposits on board even while others have taken money in and wondered what to do with it.
The Times They Are A-Changin':
Multiple factors point to a very different deposit environment coming.
The timing remains uncertain because even those factors that are within some degree of control are dicey. “There’s a high degree of uncertainty because of what the Fed is talking about doing is considerably faster than the last time it went through quantitative tightening after the Financial Crisis [of 2007-2008],” says Stockton. “But our forecast suggests that the Fed’s moves could begin to have a material effect by the end of 2022.”
Currently many consumers still have strong deposit levels of their own but Stockton says “the money is burning a hole in their pockets after many have not gone on vacation for the last two years.” This and other trends may transfer a greater portion of deposits to the commercial sector, which, as we’ll review, will behave differently in reaction to rising rates.
The consultants say that at the current pace of increases by the Fed, market rates could be up by as much as 300 basis points — three percentage points — by the end of 2022.
The combination of a shrinking national pool of deposits and a significant rising rate environment could change the competitive picture.
In remarks to analysts in June 2022, JPMorgan Chase Chairman and CEO Jamie Dimon predicted a “hurricane” of indeterminate size on the horizon. Ask if there were any bright clouds, he answered this way:
“Jobs are plentiful. Wages are going up. Consumers are spending. The lower income folks not quite as much as before, but everybody else, it looks like they have $2 trillion more. The savings rate dropped — I don’t think they’re going to stop their spending in the next six to nine months. And so, that to me is the bright clouds out there, but it’s different. The Fed has to meet this now with raising rates and QT [quantitative tightening]. And the new part of this isn’t the raising rates. It’s the QT.”
How the Deposit Environment Could Change
Different types of deposits react in different ways and at different paces when market rates go up, the consultants explain.
“The average retail customer, if they’re looking for a zero-risk investment, thinks of insured deposits,” says Stockton. “The larger, more sophisticated clients in the wealth and corporate space have other alternatives.” Notable among those choices are money market mutual funds.
Movement by such depositors into those alternatives may put some banks into the position of having to actively grow deposits again, says Stockton, depending on how heavily they depend on wealth and business clients.
“Money fund yields are already up meaningfully,” says Stockton. And as inflation raises prices, and consumers pay those higher prices to businesses, “there will be a re-mixing of consumer deposits into corporate deposits.”
The impact will differ. Institutions like credit unions will tend to see more outflows because many don’t have business depositors who would be gaining deposits as prices rise, Stockton points out.
The behavior of commercial and consumer depositors in reaction to rising rates will differ, as will the means of handling those behaviors.
At a systemwide level, excess liquidity continues, but “no one is average,” as the saying goes. Serene notes that in the first quarter of 2022 the bottom quartile of banks saw deposit drops.
“If you see banks putting together a couple of consecutive quarters of 5%-10% declines in their deposit books, those banks are going to return to normal liquidity levels more quickly and will be back out competing on price.”
— Peter Serene, Curinos
“And that,” he adds, “will create some upward pressure on deposit rates across the industry.”
Looking at Retail Deposits
Competitors like online banks needing to replenish fuel, and fintechs looking to buy their way into a market in turmoil may take advantage of rising rates. How soon institutions that aren’t desperate for funds to lend will have to match or beat such competitors’ rates will hinge on the risk of losing relationships, at least initially.
For a time, offering higher rates to larger depositors to hold their funds will succeed, the consultants suggest.
“The work will be making sure key customers are engaged, tracking their relationship activity really carefully and seeing what they take with them,” says Stockton.
Inevitably some accounts will go, so having a plan in place to acquire new primary relationships will be critical.
“There are factors beyond rate, but rate is going to be a big one,” says Stockton. “Banks have to be thoughtful in order to spend where it makes the most impact.”
He adds: “Clearly, if your institution needs to grow a billion dollars over the next few months, then your options are fairly limited. You’re going to have to put a really big rate out there and mass market the heck out of it.”
Looking at Commercial Deposits
For the most part marketers won’t be able to monitor ads or digital posts to see how competitors are treating commercial depositors.
“Historically, most of the repricing of commercial deposits has taken place by setting exception rates or individually negotiating rates with clients,” says Peter Serene.
Serene explains that business deposits are typically much larger than consumer deposits. Couple that with CFOs or owners who know well where rates are and what alternatives beckon, they have more leverage to obtain the best rates.
“These deposits tend to reprice faster,” says Serene. Companies frequently have multiple banks, so if one won’t pay up, they’ll move their deposits to another who will. This argues for the institution having a good handle on a business’ importance to the bank overall. Serene advises segmenting the business portfolio into tranches to get a fresh view of who the priority accounts are. Conversely, while that addresses retention, this can also be a good time to snap up new business from sluggish competitors.
Marketing’s data crunchers will be earning their keep.