Managing deposits was long an afterthought thanks to years of near-zero interest rates followed by a pandemic-fueled surge in volume. Now it’s front-of-mind as the most impactful strategy for resisting margin compression and preserving profitability. Interest expense now comprises 78% of the cost of acquiring and retaining deposits, significantly dwarfing both marketing and branch operating expense.Â
Many community banks and credit unions lack the institutional memory to optimize the liability side of the balance sheet in a higher-for-longer rate environment. That knowledge gap, along with technology-driven competition for deposits and the need to protect margins, makes a strong argument for the value of near-real-time deposit data and analytics. Â
What is deposit optimization?
Deposit optimization means acquiring and retaining the optimal level of deposits at the lowest possible cost.
This can include identifying customer/member segments willing to accept a below-market rate for a deeper relationship, as well as finding acquisition opportunities via promotions and offers that minimize back-book repricing. It can also involve selectively setting CD/certificate renewal and auto-renewal rates that strike the right balance between retention and interest expense.
Optimizing deposits requires three components that build on one another: intelligent data, comparative analytics and an optimization platform (Figure 1).
Figure 1: Components Of Deposit Optimization
- Intelligent data enables financial institutions to easily compare their deposit rates and offers to their peers across a wide range of products, including checking and savings accounts, money market accounts and CDs. Having access to this critical information allows for more effective and less risky pricing decisions.
- Increasingly powered by artificial intelligence, comparative analytics encompasses the behavioral intelligence and predictive modeling to help community institutions make more informed deposit decisions and maximize opportunity. They can also flag real-time warning signs in a deposit portfolio to expedite corrective action.
- An optimization platform empowers analysts and decision makers to test deposit-pricing assumptions, run what-if scenarios, perform sensitivity analyses and more. Done right, this can help FIs efficiently hit funding targets, sustain peak performance and drive overall profitability.
Deposit optimization’s impact on profits
One of the key strengths of deposit optimization is its relevance regardless of rates: Curinos analysis finds that optimization can outperform the norm in any rate environment, as illustrated by actual results shown below in Figure 2:
- From 2011 to 2015, during a period of flat rates, optimizing clients exhibited 60% higher compounded annual balance growth and 15% better margins (upper left).
- In the previous rising-rate period, from 2016 to 2019, the difference in deposit balance CAGR remained strong while deposit betas were nearly 20% lower (lower left).
- When rates fell during the peak pandemic era, deposit costs for optimizing clients dropped more quickly and settled 10 basis points lower (upper right).
- And when rates rose sharply in 2022 and 2023 to address high inflation, optimizing resulted in 52% less balance shrinkage and a steadily improving cost advantage (lower right).
Figure 2: Optimization Proves Out In A Range Of Rate Environments
Moreover, Curinos analysis shows that banks that didn’t optimize their deposits in the rising-rate environment of 2016-19 but have optimized since have fared much better in this round of rising rates – an improvement of 28 basis points in just over a year.
Curinos has also observed a direct relationship between optimization usage and savings on deposit costs (Figure 3). Looking at the period between early 2021 and late 2023, the most persistent users among FIs engaged optimization 2.5X more often than the lowest users – for those power users, the deposit beta increase over the time period was 4 percentage points lower than for the lowest users.
Figure 3: Higher Optimization Usage, Lower Deposit Costs
For community banks and credit unions, optimization can provide a clearer roadmap to profitability by diagnosing deposit performance, helping to develop the right funding strategies and informing balance sheet management decisions. All FIs want higher deposit growth at lower marginal costs in all rate environments – optimization can help make that desired outcome possible.
