From “Deposit Growth & Retention in a Falling Rate Environment,” a webinar presented by Curinos on June 26, 2024, that featured Adam Stockton, head of retail deposits and lending, and Agusta Patton, managing director of Client Solutions.
Just as rapidly rising market rates may have come as a jolt to many institutions endeavoring to manage their deposit costs, so too may falling rates test institutional memory and result in higher interest expenses than may be necessary. The key for many depository institutions will be to be prepared and not assume that rates, if and when they do fall, will not do so as rapidly as they rose. In Curinos’ view, two things are evident: Deposit betas won’t fall as fast as market interest rates, and the near-zero-rate environment of the past several years is unlikely to return.
In these uncharted waters, optimizing deposits through data-fueled analytics, such as those provided by Curinos Deposit Analyzer and Curinos Deposit Optimizer Essentials, will be especially valuable for FIs that are looking to maximize retention and minimize cost. Here are five key takeaways from the webinar:
1. Deposit inflows were always dependable, until they weren’t.
Over the last 15 years, even in an extended period of near-zero rates, deposits grew between 5% and 7% year after year no matter what. As long as the branch was there, customers walked in and made their deposits, and for FIs, how to price wasn’t much of an issue because rates were so low. Then came the COVID-induced surge in deposits thanks to stimulus checks and stay-at-home behavior, followed by an equally abrupt deposit drain because of pent-up demand for spending and inflation. We now find ourselves in a continuing period of significant deposit runoff, which, although showing signs of stabilizing, is a very different from where the industry has been historically.
Retail deposits used to grow no matter what – until 2020!
Total Year/Year Retail Deposit Growth
2. With volume volatility has come unprecedented dispersion.
Until now, the difference in deposit growth by branched institutions has been predictable and reasonably narrow – from 1% to 3% growth on the low end of the spectrum to about 10% at the high end. Today, the dispersion is twice that – almost 15 percentage points between the bottom and top quartiles. Part of the reason for this yawning gap is pricing. The difference between the lowest- and highest-priced quartiles is more than 160 basis points – significantly higher than the norm – which can have a profound effect on profitability. The conversations among bank CFOs revolves around whether they’re willing to withstand, say, a 7% runoff if it means deposit costs can be under 1% or if deposit growth is so important that it’s worth 100 basis points of increased costs. Clearly, this is where optimization fueled by the right data and analytics can make a difference.
Some FIs have grown, but it’s typically taken lots of rate
CONSUMER DEPOSIT GROWTH
All products, Dec ‘22 – Dec ‘23
CONSUMER INTEREST EXPENSE
All products, through the cycle to Feb ‘24
Source: Curinos Consumer Deposit Analyzer
3. Your customers may be more indifferent than you think.
Even as market promotional rates have approached and even exceeded 5%, many FIs have been able to keep their overall deposits costs at half that, or less. That’s because a wide swath of customers and members reside in what Curinos calls the Area of Indifference, where it takes more than marginally more attractive rates to dislodge them from their current savings products. They may value their relationship with their institution enough to overlook the opportunity to receive a higher rate elsewhere, or they simply may not be paying attention. Or perhaps they haven’t been the recipient of an event-driven payment, such as a bonus or tax refund – which would otherwise make them what we refer to as situationally elastic. For depositors in the Area of Indifference, there may be no need to raise their rates by 25 to 50 basis points to keep them happy.
Deposit value has increased largely because elasticity is not linear
Typical Deposit Price Elasticity of Demand
4. A Fed plateau and prospects for lower market rates doesn’t mean we’re out of the woods.
Historically, the direction of interest rates on deposits has lagged Fed rate actions, and this past year has been no exception. Portfolio rates have increased 54 basis points since the Fed stopped raising rates in July ’23. That’s $5.4 million in costs for every billion dollars on the books. The remixing continues because CDs that had looked pretty good to depositors at 3% are renewing in an environment of rates up to 5%. And a sizable portion of checking and savings balances are causing churn within the book by migrating to CDs and money market demand accounts. Finally, attrition – balances that leave need to be replaced. What had been a 1.6% cost of funds may now cost a replacement average of 3% or more. The dynamics are likely to continue even as rates start to come down.
Since the Fed stopped increasing, deposit costs have gone up:
5. Three principles for success for when rates eventually do fall.
Rates are bound to moderate, so the key is to be prepared. First, divide the customer base into segments from less rate-sensitive to more rate-sensitive. Identify different products and balances where you‘re already a little lower than top–of–market rates, and keep in mind that the more that CDs renew, the more likely they’ll be to stick around. Second, go with the flow. In a rising rate environment, moving first was a big advantage. As rates fall, the opposite is true. If you’re lowering your rates aggressively and none of your local competitors are, you’re likely to see a higher degree of outflows. Third, have a backup strategy, because you probably won’t be 100% accurate in your rate segmentation and you’ll want to save some of those rate-sensitive balances. That may be through a retention offer on savings or money market, an odd–term CD that might be advertised or simply a retention offer. It may even come through exception pricing for customers you’re keen on retaining.
When rates do fall, three principles for success:
1. Lower Less Elastic First
2. Go with the Flow
3. Have a Backup Option
Identify less rate sensitive products, tiers, and consumer segments to make lower risk moves first
- Lower balance tiers
- Non-top of market rates
- Multi-renewal CDs
In a rising rate environment, moving up first brings an advantage; as rates fall, the first movers may see outflows.
- Move high visibility rates with the market, not before
- Digital first FIs have disproportionate risk
Rate sensitive consumers are likely to need an option to switch into as rates are lowered.
- Savings retention offer
- Odd-term CD
- Exception pricing
