As banks and credit unions grapple with intense competition for deposits in a rising rate environment, many are finding that chasing high-cost CDs leads to unsustainable “phantom growth.” Institutions need a fresh approach to build low-cost, loyal core deposits.
Ryan Walker, SVP of Client Strategy at Kasasa — a financial technology and marketing services company that provides reward checking accounts to community banks and credit unions — has worked with hundreds of community financial institutions to implement reward-checking strategies that drive real growth.
In a recent webinar hosted by David Collins of The Financial Brand, Walker shared his insights on how banks and credit unions can change the math on deposit costs, perfect their go-to-market offers and manage surprises along the way.
Drawing on Kasasa’s 20 years of experience in rewards checking, Walker outlined a proven approach for institutions to thrive in the war for deposits without simply chasing rates. Here are the key takeaways.
The Pitfalls of Phantom Growth
Q: How has the current high-rate environment impacted deposits and costs for financial institutions?
Ryan Walker: We’ve seen some dramatic shifts in the last 18 months. While total deposits are down slightly by 0.5%, the real story is the movement of money. Balances have flooded out of core checking and savings into CDs, with time deposits more than doubling over the last five quarters.
This flight to CDs has driven up the cost of funds across the industry by 200 basis points on average, catching many by surprise. Loan growth is still possible, but it’s become very expensive.
Institutions are grappling with rate shoppers, high attrition, liquidity pressures and constant repricing. That’s the “phantom growth” problem.
Q: What alternatives are some institutions using to avoid this fate?
Walker: Even amid these challenges, we’ve seen a segment of institutions achieve 4% deposit growth over the same period — without relying heavily on CDs. They saw costs rise less and CD growth was two-thirds lower than the industry.
The secret is they’re using an innovative rewards checking product to attract core deposits. It allows them to pay a high rate of around 6% on a portion of balances while managing their overall cost of funds quite effectively. We call this “real growth” — it’s not just deposits but the right kind of low-cost, high-loyalty deposits every institution wants.
The Real Growth Alternative
Q: How does this rewards-checking approach work in practice?
Walker: The basic structure is to offer a free checking account with a very compelling high yield of around 6% on a portion of the balance, let’s say the first $20,000. In exchange, the consumer does a few basic things to show they’re really using the account — like a minimum number of debit card swipes, enrolling in eStatements, logging into online banking, etc.
They simply earn a lower nominal rate if they don’t meet those qualifications in a month.
Balances above that $20,000 tier also earn a lower rate, around 0.5% to 1%. So, you’ve got this combination of a single product with three different rate tiers based on usage and balance.
The magic is when you blend it all together, the overall interest cost averages out to around 3%. Then layer on the non-interest income from debit swipes and such and the all-in cost is under 2% — which most institutions would love.
Yet to the consumer, that headline 6% rate is tremendously appealing compared to the mega banks paying basically nothing.
Q: Beyond the rate structure itself, what else is needed to drive success with this approach?
Walker: Having the right product is step zero, but it’s really about perfecting the go-to-market strategy. You need to surgically identify who the right consumers in your market are that you want to attract with this — the ones who will move their full relationship.
Then, reach them with crystal clear messaging that answers: “What’s in it for me?” We’re talking across all channels — direct mail, digital advertising, in-branch, etc. Make that 6% rate the hero. Give your front line the training and tools to confidently sell it.
You also have to automate ongoing engagement, like using data to identify opportunities for cross-selling. Most institutions have loads of valuable information sitting in their core that they struggle to put to use.
Finally, be ready to monitor results and pivot when the unexpected happens. This is where having an experienced partner like Kasasa who has navigated all kinds of rate cycles can be tremendously valuable to help optimize performance over time.
Managing Surprises Along the Way
Q: Can you share an example of how that ongoing management process has helped an institution?
Walker: One of our most successful clients is a $4 billion credit union. They initially tried to launch a rewards-checking program somewhat on their own, wanting to leverage our capabilities while maintaining control.
After the first year, they opened a lot of new accounts, but their deposit balances were about 15% below their goal. In our regular reviews, we identified a few key issues together:
- The interest rate tiers weren’t optimized to be compelling enough
- Front-line staff were hesitant to lead with the product
- Non-qualifying accounts were being moved to other products, creating churn
- There were opportunities to improve onboarding and ongoing engagement
By implementing a series of adjustments to address these issues, the credit union went from losing $4 million in balances to gaining $71 million. It’s a great example of how proactive, data-driven management can transform results.
The Power of Real Growth
Q: As we wrap up, can you give us a high-level view of the difference this approach has made for institutions?
Walker: Over the same period where the industry saw rising costs and flight to CDs, clients using this rewards checking approach grew deposits by over 4%, with much lower CD growth and managed costs.
But again, it’s not just about raw balances. These are the right kind of core deposits from deeply engaged, multi-product households that drive profitability and loyalty in the long run. For example, these accounts generate:
- 2x higher profit per account
- 6x higher average balances
- 45% more non-interest income
- 38% more ACH activity
- 2x the loan penetration
- 62% more debit swipes
With half the attrition of a typical checking account, these are relationships that pay dividends for years to come. That’s the power of real growth.
Q: How critical is it to get front-line staff on board with this type of program?
Walker: It’s absolutely essential. You can have the best product in the world, but if your team isn’t on board, you’ll struggle to see results if you aren’t bought in and confident in presenting it.
We often see a direct correlation between the success of a rewards-checking program and the level of employee engagement. That’s why we invest heavily in training and providing ongoing support to our clients’ teams.
It’s not just about teaching them the features and benefits but really helping them understand how this product aligns with the institution’s broader mission and values. When they see it as a way to truly help the consumers and businesses in their community, that’s when they see the real magic happen.
The Long-Term Value of Core Relationships
Q: Some institutions may worry that offering such a high rate could attract unprofitable rate chasers. How do you ensure these accounts are actually valuable over time?
Walker: That’s a common concern, but what we’ve seen over 20 years is that the type of consumer attracted to this product is fundamentally different from a typical rate chaser. Because of the qualifications around usage and engagement, you’re appealing to someone who wants a real, long-term relationship with their primary financial institution. They’re not just looking for a place to park some cash for a few months.
In fact, when we look at the data, these reward-checking customers end up being among the most profitable and loyal segments of our clients over the long run. The key is maintaining that engagement and continually finding ways to deepen the relationship over time.
In today’s war for deposits, settling for phantom growth is a losing proposition. As Walker laid out, banks and credit unions need a strategic approach to drive real core relationships, not just hot money.
That means changing the math with innovative products like rewards checking accounts, perfecting go-to-market execution across all stages of the customer journey and leveraging data to proactively optimize over time.
For a longer version of this conversation, listen to “Now’s the Time to Pick Battles with Fintech Challengers” an episode of the Banking Transformed podcast with Jim Marous, available here or wherever you get your podcasts. This Q&A has been edited and condensed for clarity.
Justin Estes is an award-winning writer, strategist, and financial marketing expert with expertise in banking, investments, and fintech. His clients include the NYSE, Franklin Templeton, Credit Karma, Citi and, UBS, and his work has appeared in Forbes, Barrons and ThinkAdvisor as well as The Financial Brand.