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Advanced Deposit Pricing Is Critical For Smaller Institutions

When it comes to deposits, financial institutions with assets below $20 billion have been a recent bright spot in the industry. These smaller banks and credit unions have enjoyed lower deposit betas and seen fewer balance outflows than larger institutions.

But this isn’t the time for them to rest on their laurels. History tells us that deposit rates and betas are likely to continue rising even as the Fed slows its pace of rate increases. (See “Curinos Perspective: Fed Plateau Possibly On The Horizon — What To Know.”) That means the deposit runoff now being experienced by the larger institutions will likely soon appear among smaller providers as consumer and small-business customers who were slow to chase higher rates last year finally start to do so.

As a result, mid-tier and community institutions need more sophisticated deposit pricing to understand the deposit book and track customer movements as betas rise. Otherwise, they may be forced to reacquire valuable deposits at a higher rate, increasing cost of funds and diluting deposit value in the process.

Rinse, Repeat Won't Work

Deposit pricing at smaller financial institutions typically follows a simple (often reactive) formula: The CFO or treasurer assesses loan demand, deposit levels and competitor rates. If more deposits are needed to fund loans, the bank tosses an attractive CD rate into the market. When the deposit need is met, the attractive rate disappears.

Rinse, repeat.

That strategy has significant risks going forward. At a minimum, the institution may face low efficiency and high betas, with risk to overall deposit and funding objectives. As outflows intensify and rate-seeking customer behavior sinks in, smaller institutions risk finding themselves well behind the eight ball by the time they begin paying more
attention to deposits and rates.

To date, it is the large institutions that are seeing the most dramatic balance outflows as large corporate and wealth customers find yield in other places. Smaller banks have experienced less runoff, leading to a slower increase in rates, according to Curinos data. Across all banks tracked through Curinos standard rate data, community and regional banks trail national banks by 21 basis points (bp) on savings and 42 bp on CDs. Compared with super regional banks, the community/regional group has a 58 bp gap on savings rates. (See Figure 1.)

Figure 1: Rates By Tier

Top Savings Rates by Bank Tier | Jan ’22 – Jan ’23*

Source: Curinos Standard Rate Data as of Jan 4, ’23*. Excludes online banks. National includes national banks over 1T, Super Regional includes banks with 50B-<1T, and Community/Regional includes banks with 20B-<50B.

The differences by segments have allowed many smaller financial providers to dismiss deposit runoff strictly as a “big bank” problem. In reality, Curinos expects outflows to trickle down into the smaller institutions as more consumers wake up and seek higher rates and as inflation continues to erode deposit levels. While it isn’t clear when the Fed will put the brakes on rates, financial institutions will likely follow historical trends and keep raising them even after the Fed plateaus. That will put pressure on smaller providers.

Switching will also intensify. Roughly 25% of consumers shop for higher rates, according to Curinos data. In the three months following the last Fed increase in 2019, 4% of U.S. savings balances and 6% of CD balances switched to higher rates, driving portfolio interest expense an additional 0.15% higher.

Mid-tier and community institutions often believe that customer loyalty will help save the day for them. But even if their customers aren’t actively closing their accounts, it appears that they also aren’t replacing the deposits that have moved out of those accounts.

This is a particular challenge for smaller institutions that historically have a hard time growing checking accounts. In part, that’s because branches historically have been the leading source of checking accounts. When branches were closed during the height of the pandemic, many customers turned to digital channels and discovered that online neobanks offered higher rates and better technology. These checking-anchored customers are stickier and less rate sensitive. Without them, deposit outflow may come faster.

Even for smaller providers with strong checking bases, there is risk as outflows and customer behavior intensify. Those that kept enviable beta positions through the rising part of the cycle will have a larger gap to prevailing market rates. Pricing up with precision for at-risk customers can protect long-term value, but a one-size-fits-all approach risks giving up the beta advantage smaller providers have enjoyed to this point.

Identify Valuable Customers

Smaller institutions can address the issue on two fronts. First, increasing on-sale deposit rates for these players is likely unavoidable, and precision pricing for these headline rates is critical to hitting deposit targets without paying too much.

Second, it is critical to understand the deposit book and track the quality of the deposits that leave. If they are low-balance, single-product, low-value customers, it might be fine for them to run off. On the other hand, it may be worth paying up to retain long-term customers who have large balances and deep relationships. Those deposits will be particularly important when loan demand starts to rise. The adoption of advanced analytics will help smaller institutions to understand the customer base and behavior.

The value of a healthy deposit book can’t be underestimated. Whether those deposits are funding loans or are appealing to a potential buyer, sticky low-cost deposits are the key to navigating economic uncertainty.

  • Authors
    • Agusta Patton
    • Adam Stockton

      Adam is a Managing Director who leads the Retail Deposit & Lending businesses at Curinos. He has spent more than 18 years advising financial services companies on growth and profitability strategies, focused on product management, growth, profitability and pricing. Clients include a majority of the top 25 US banks, a number of the largest banks in Canada and Australia, brokerages, Credit Unions, direct banks and fintechs.​ Adam’s work leads to actionable, sustainable strategies that help clients grow economically through the application of granular analytics, purpose-built tools and proprietary benchmark data. He regularly publishes and speaks, particularly topics relating to product profitability and growth.​ His teams are responsible for Curinos’ Retail Deposit Optimizer product management and price optimization platform; Deposit Analyzer benchmarking products for Consumer, Wealth and Small Business deposits; LendersBenchmark Analyzers for Small Business Unsecured Lending; rate and fee data for Consumer and Small Business; and strategic consulting practices across the Retail areas. ​

      View all posts Managing Director, Retail Deposits and Lending
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