Are rates a less powerful force in banking?

The traditional response to rate changes is outdated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.

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.

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.

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.

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.