Why is Bank Loyalty Dying? Listen to the Folks Around My Dinner Table

No one can blame an institution or depositor for guarding their self-interest. Banks’ liabilities are depositors’ assets, and vice versa. Yes, they operate on opposite sides of the desk for deposits. Except they don’t exactly: Most banks want loyal customers, not depositors who act like vendors who sell funding. The banking "relationship" is an art of balancing profit maximization with genuine care for customers’ success.

At dinner last Sunday evening, as the family’s banking journalist, I was asked to defend the latter. If I put it into a single question, my family was asking:

Do the products and pricing offered by banking institutions now and during the past year reflect a real effort to provide relevant deposit options?

Now, granted, different institutions approach deposits in different ways. And a single family doesn’t make a rigorous study. However, trends in banking data support the opinions voiced around the table. They had two candid questions:

Question #1: Why Would Anyone Open a Bank Or Credit Union CD Now?

Measuring popularity by dollar volume, CDs have been the most popular they have ever been. But will that popularity continue, particularly as rates fall?

Typically, depositors want high rates and short commitments, but both depositors and banks wanted CDs – deposits with a commitment – during the past year. U.S. Treasuries offered banking institutions a way to provide historically high CD rates because they could put the funds into treasuries without credit risk. Banks could deliver higher rates in CDs profitably and obtain a commitment from depositors to boot.

But as rates fall, so does the appeal of CDs, particularly versus other investment options. U.S. Treasuries offer more optionality than CDs. That’s why banks don’t buy CDs as assets for their own portfolios.

"Why wouldn’t I just go get a U.S. Treasury?" the family member asked. "If I lock in now, I get a better rate than banks offer. And I can put money there that I might need before maturity. If rates are down, the bond would be worth more and could easily be sold through Charles Schwab or my financial planner."

Data suggests others share this perspective. Total bank deposits now stand at $18.8 trillion, after year-over-year growth– with few interruptions – from $2.9 trillion in 1985 (when the FDIC first began tracking). During that long period, however, even with their recent popularity, time deposits have never cracked $3 trillion in total volume.

Meanwhile, U.S. Treasuries (of a similar term as popular CDs) have risen by more than seven times since 1985, from $3.3 trillion to $27.5 trillion in debt held by the public. Investors are willing to enter fixed-income securities that possess all the features of a CD – but choose treasuries for the better optionality.

Question #2: Did My Bank Plan to Eventually Slash Rates When It Promoted That High-Interest Money Market Account Last Year?

The answer to this question is yes, it probably did. And there is nothing unfair or deceptive about that – it remains the depositor’s responsibility to manage their money. Still, my family is not alone in feeling some chagrin about it.

According to online search intelligence firm Captify, low interest rates on savings accounts have generated significant negative sentiment from depositors. Negative search sentiment accounts for 75% of searches for new investment vehicles, the company reports. "With diminished returns on savings, people are searching for alternative ways to grow their money," Captify observes, "reflecting a shift in financial strategy away from traditional savings vehicles."

No one likes getting paid less. It only makes sense that lower rates would negatively impact sentiment. But what does that sentimental downturn mean? It likely means individuals who had savings in a money market or savings account just learned a lesson: I wish I had locked in the rate on my savings.

Will they neglect repricing risk again when choosing between money markets and other products? Probably not. Then, there’s the second part of Captify’s findings: "A shift in financial strategy away from traditional savings vehicles."

CDs are not alone in the challenges to their relevancy. If I believe rates will go down – as the Federal Reserve now projects – why would I not lock in the rate of return on my savings? And, if I am going to lock in, why would I choose a bank product like a CD? Money markets, savings accounts, and callable CDs have had a fair bit of sting for depositors this month. And they’re learning a lesson.

Earlier this year, I interviewed a source from a financial planning company about rising rates. I asked him: Are you concerned about funds moving out of your industry and back to the banking industry? He laughed and said, "I’ve never felt competitive pressure from banks."

Depositors’ firsthand experience explains his perspective well. If I want relative liquidity, safety, and a locked-in high rate in this declining rate cycle, why enter a bank money market?

The Art of Balancing Profit and Customer Success

One family member quickly grabbed a money market at high rate online from a bank. The process was fast and frictionless. But that didn’t mitigate the sting when the rate tanked last week.

"No one asked me what the money was for," he said. "I would have locked it in at an ok rate over a longer time period [on savings for our son’s education] if it meant I didn’t need to wade through this decision again."

The banking industry is increasingly leaning on technology to solve its differentiation problem. And innovation is important, but it is not sufficient for banks and credit unions to maintain a lasting moat. For deposits, their moat is nearly completely eroded. The line between traditional banks and other financial providers has become increasingly blurred. Companies like Wealthfront, Public, Meow, and others make it easy to use treasuries as a deposit product, and people can access top-of-market returns, liquidity, and government-backed protection without engaging a bank.

Even if institutions were to get ahead of fintech with technology, every innovation eventually becomes available to all providers. So where does lasting differentiation come from?

The family deposit discussion suggests a path less traveled today:

Understand better what people are saving for and build around that – not only price, term, or technology – a focus on customer success is the only way to build lasting differentiation.