Are rates a less powerful force in banking?

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The traditional response to rate changes is outdated

We all know deposit competition is changing in the current rate environment, so the ability to be flexible with marketing, pricing, and product offerings is becoming more and more important. In fact, given that deposit pricing did not necessarily lead to greater deposit growth over the recent 2015-2019 rising rate cycle, strategies for a downward reset may also be called for. Whether rates see a “mid-cycle adjustment” or a series of cuts, banks need options to continue to attract deposits in an environment of declining rates. 

As institutions look for alternative options, it’s worth looking at data from both the consumer and market side to understand how historical factors are changing. US treasury yields, for instance, are at three-year lows, but credit card rates are at all-time cycle highs. This break from historical norms suggests that there are new factors banks should be considering to protect profits in the current rate cycle. 

Moving forward, pricing capabilities will remain critical and will likely be more fragmented. But non-rate factors such as 1) customer-level digital targeting, 2) customer acquisition efficiencies and 3) increasing satisfaction rates from existing customers could ultimately play a larger factor in long term deposit growth.

Figure 1: Deposit costs have lagged

Source: S&P Global

After a stubborn move higher, will deposit pricing hold?

As the federal funds rate increased 225bps over the last five years, deposit costs for the largest US banks (Big Four) increase by 65bps. Top regional banks experienced a 75bps increase. Only more recently have consumers demanded higher rates evident by the mix shift to interest bearing accounts.

Banks delayed paying higher deposit rates as the Fed raised rates.

The ability for banks to use customer analytics for targeted marketing or segment-based repricing (or non-repricing) will be a factor in protecting margins.


Traditional rate logic suggests that because banks were slower to raise rates, they don’t have much room to go down. This might create some margin pressure, but in a traditional rate cycle this should be somewhat manageable pressure.

Other concerns, however, include a competitive deposit environment that did not exist in previous rate cycles. High yield cash platforms such as Betterment and Wealthfront, for example, offer rates in the 2.5% to 3% range, and rates in traditional bank digital-only channels typically hover above 2%. This development brings in a newer competitive dynamics that could limit declines in deposit costs despite any rate cuts.  

Further, loan growth—often the largest factor in deposit competition— has been healthy. Loan-to-deposit ratios have inched higher, especially at regional banks, indicating a greater urgency for regionals to aggressively compete for deposits. As a result, many regionals are exploring alternate approaches to deposit growth, including out-of-footprint deposit acquisition leveraging existing digital channel capabilities or establishing digital carve-outs. Contrary to common belief, “digital deposits” have been stable and provided significant buffer against brokered deposits and wholesale funding.

Regionals have seen a 400bps increase in loan-to-deposit ratios over the last two years.

The asset side is just as important

Part of the reason banks have seen healthy growth is the strength of the US consumer and, in part, higher consumer loan yields. In contrast, commercial loans have already reset in anticipation of rate cuts. The 10-year treasury, which is typically tied to commercial loan rates, began to move lower in early 2019 and now sits at three year lows.

But consumer loans—credit cards in particular—are at a wider than normal spread and have detached from historic correlations. Several banks have been getting more aggressive in leading with credit card as an acquisition engine to drive deposit relationship growth. Given the consumer appetite for switching top-of-wallet cards and the role it can play to establish multi-product relationships, cards likely represent a strong buffer against rate-based pressure.

Figure 2: Non-rate factors such as product type matter

Source: Board of Governors of the Federal Reserve System

Despite a three year low on the 10-year treasury, credit card spreads remain higher than average and have detached from historical norms. Furthermore, spend-engaged card clients drive relationship primacy and fee income growth.

It is just one example that non-rate factors such as product type, brand, convenience, and marketing efficiency are all options to protect profits against falling rates.

What can banks do to responsibly grow deposits?

As the rate environment will continue to be a top agenda item for the foreseeable future, here are some steps to consider to grow deposits with margins protection in mind.

1. Enhance customer analytics and digital targeting.

Because not all customers respond in the same way, segment-of-one targeting and pricing have become significantly more important. Branches and digital channels will need independent approaches to targeting and pricing. Operating model flexibility and proper governance are critical to meet deposit growth needs without drifting into undesired margin situations. As customer-level analytics help guide these decisions, the operational flexibility to deliver is equally important.

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2. Focus on acquisition costs as much as, if not more than, deposit costs.

We’ve found that marketing and customer acquisition costs are tethered to a physical world whereas customer behavior is digital, meaning that efficiency gains can be realized with more effective customer conversion tactics.

For instance, the difference between top tier deposit rates and competitive rates is about 50bps to 75bps. It’s not that much given that rates remain relatively low, but some institutions still have high customer acquisition costs despite the efficiencies presented from a digital channel.  We’ve seen better targeting, alternative marketing, and a wider portfolio of available products leading to materially lower customer acquisition costs — as much as a 600bps reduction in some cases.

While market rates and competition will certainly impact deposit rates, this expense might be relatively small in the full scope of customer and deposit acquisition costs.

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3. Don’t forget about what you have: generate growth from existing clients.

Despite the flexibility from digital channels, it’s still a tedious exercise for customers to leave the bank they’ve had a relationship with for years. As such, existing customers — more affluent customers in particular — can be the most profitable form of deposit growth.

In our experience, we’ve seen non-rate features such as the product portfolio have a greater impact on customer satisfaction than deposit pricing. In fact, customer segments that prioritize non-rate features have increased by 21% since 2015 while rate-focused segments have declined by 34%, according to PwC’s latest deposit pricing survey. To increase value from the installed base, banks can look to customer-level analytics. These tools can help identify individual-level preferences such as price, experience, and product-type. 

In addition to new products, banks that use customer-level data to better deliver specific offers will be more likely to accurately meet existing customer needs. For example, when do customers want to speak with branch personnel and how can this be delivered conveniently? Voice and video-enabled visits can be effective methods to meet customer needs and extend a new product that may lead to sustainable deposit growth over time.

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Pricing will always play a factor in deposit growth. But a focus on customer acquisition efficiencies or redirecting investment to areas such as analytics, marketing, or delivery could produce a more robust customer experience and deeper relationship while facilitating more sustainable long-term deposit growth.

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Julien Courbe

Financial Services Leader, PwC US

Scott Evoy

Financial Services Advisory Digital Leader, PwC US

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