It’s the final call for deposits at more than 4.75%. The Federal Reserve’s 50 basis point rate drop means happy hour on the highest interest rates in more than 15 years is nearly over. Every banking executive should consider now how deposit pricing will affect the organization’s brand.
Pricing is no longer just a financial decision for banks; it now communicates how a brand thought about retail depositors last year and the role it wants in savers’ financial lives in the future.
Here’s why:
When interest rates were trivial, all banks treated all depositors the same—rates were essentially at zero. For depositors, that meant returns came from taking risk in the stock market. They could also protect savings in deposit products but receive a historic low rate. In 2022, bank deposits became a viable third option as rising rates created returns from products providing FDIC-insured safety.
Declining rates will create a rush to that third option in volumes banking has never experienced before. Anyone with savings must now decide if it stays where it is, and they must make that decision before rates decline again. Savers will want to lock in how much their savings will grow and how long savings will stay at an institution. The institutions selected will be – at least as far as 2024 and 2025 are concerned – judged as not worthy of consideration or the best home available for discretionary funds.
Banking executives must decide now: Do we want savers to see us as a serious banking provider for them or not?
The Hard Choices Facing Depositors
Executives should not assume that declining rates will translate to cash-flush banks with historic-low cost of funds. The banking industry faces a truly unique deposit landscape right now that suggests the industry is not returning to 2020.
Earlier this year, The Financial Brand reported that some $2.5 trillion in bank time deposits will mature by March 2025. Based on FDIC data from second quarter, we know a little more than $1 trillion in CDs matured during third quarter 2024. In addition, $1.6 trillion in CDs will mature between now and June 2025.
The Fed’s move will magnify the deposit repricing tsunami because of the anticipated downward direction of interest rates. Money market and savings account holders just learned a lesson about non-maturing deposit products: They reprice as rates decline. They will join those from maturing CDs in looking after their best interests. And if they must move financial providers to find favorable returns, they can and will do it quickly.
The volume of bank CDs is historical, but it is minuscule compared to the volume of deposits that must now decide to stay or go for a higher locked-in rate. Depositors are assessing banks in staggering numbers. The volumes from CDs, money markets, and savings accounts combined equate to many trillions in deposit dollars in play as they rush for today’s rates.
Your Institution’s Pricing Will Send a Message
Banking executives are probably considering their quarterly interest expense of more than $144 billion. It’s a new record after a meteoric rise of 1,700% since the fourth quarter of 2021. Also, for the first time since the Great Recession, interest expense is the industry’s most significant expense.
It might be tempting to “hold the line” on deposit pricing and “hang on” until the Fed lowers its target rate. A healthy number of institutions are doing just that right now. Of the 6,688 financial institutions reporting rates to S&P, over 51% have maximum disclosed rates below 4%. About 33% disclose max rates below 3%. And nearly 20% have max disclosed rates below 2%. These are the rates depositors will see in their CDs to auto-renew letter. They also are the rates in the rate sheet published on a bank’s website.
Granted, disclosed rates are not negotiated or promoted, but what would you do if you received a CD letter saying your auto-renewal rate is 3% or less? What would you do if your money market rate was just reduced?
Most people go to Google or the three other institutions and fintechs they bank with. Any banking player can satisfy savers at a rate equal to U.S. Treasury rates minus a margin for operating costs.
If savers are looking for institutions serious about their financial needs – and they are by the millions – pricing will be their first impression. And some institutions will be hungry to make a good impression because of loan demand.
Read more:
- As the Fed Trims Rates Banks Must Adjust Both Deposit and Credit Strategies
- How U.S. Bank’s ‘Bank Smartly’ Line is Targeting the Young Affluent While Growing Deposits
Lower Rates Create Demand for Deposits
Banks’ loan-to-deposit ratio—up somewhat compared to the pandemic years—has declined significantly during the past 15 years: from 91.6% in the second quarter of 2008 to 64.2% in the second quarter of 2024. Generally speaking, institutions have been more cash-flush because loan growth didn’t keep pace with the easy funding flowing in.
Lower rates from the Federal Reserve will incentivize demand for credit. Ask any bank employee if they know someone waiting to engage a lender about financing because of elevated interest rates; they know many. Potential borrowers ranging from businesses to people with equity to homebuyers will move in greater numbers the further rates fall.
The more banks see demand for new credit – and refinances – the more accommodating they will become with depositors.
Not a Zero-Sum Game
The current trajectory for interest rates offers banking executives an opportunity to assess the experience provided by their product pricing, particularly for retail depositors. The irony right now is that banks tend to want large commercial, municipal, or non-profit funding, yet those customers employ financial professionals with the tools to set up competitive bidding for their money.
On the other hand, retail depositors are not always the sharp-penciled rate hawks as may be imagined. They have a use for their savings. They need to figure out how to assess their options. They also value institutions that provide them access to staff or technology to guide them – so long as a product offering respects the current competitive landscape reported in the news.
Savers’ discretionary funds are for a future vacation, a child’s education, a downpayment on a home, a rainy-day fund, or retirement. How do institutions provide options that serve these needs while respecting the customized nature of savers’ goals? That’s the branding opportunity in deposit products and pricing right now. It’s also a branding opportunity that offers improved deposit profitability.
Banks can help people make – the now urgent – deposit decisions that matter to them. If they provide real solutions, they can control interest expense and become known as a brand that takes savers seriously.
Neil Stanley is chief executive officer and founder of The CorePoint. With over 30 years of experience at three high-performance family-owned banking groups, he has held various roles, including Holding Company Vice President, Chief Liquidity and Investment Officer, Chief Credit Officer, President of Community Banking, and Bank CEO.