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Deposits In ’24: It’s Gonna Cost You

It wasn’t that long ago that banking institutions were overflowing with cheap deposits, much of that abundance coming in the form of pandemic-era stimulus checks for consumers and businesses. The opposite is true now – banks and credit unions of almost all sizes are desperate to grow deposits at a reasonable price, but there aren’t enough of them out there to go around.

The typical commercial deposit book ended the year down 4% to 8%, with some experiencing significantly higher outflows. Average betas on commercial money market deposit accounts (MMDA) have passed 70% for the cycle, with interest checking clocking in around 60%. In wealth, the typical book will close down 10% to 12% while the rates on balances remaining on-book have continued to rise. Even in traditional branch-based consumer, the average book is on track to end the year down 2% to 3%, while betas have nearly caught up with the prior cycle.

So, a few important questions: What will it take to grow deposits in 2024? And should deposit growth even be a priority for many banks? Could maintaining current levels be a more sensible and attainable target?

If yours is a banking institution with money to burn, 2024 is shaping up to be a great year to grow deposits, particularly in the consumer line. The marginal cost of funds (mCOF) – the price to attract the incremental dollar of deposits – for consumer deposits is averaging around 10%, with institutions at the high end paying close to 300 basis points more, according to the Curinos Retail Deposit Analyzer (Figure 1).

Figure 1: 12M Portfolio mCOF, Oct. 2022 To Oct. 2023

We expect “higher for longer” on deposits in 2024 for consumer as more account holders come to expect their interest rate to be at or near the Fed Funds rate.
Source: Curinos Retail Deposit Analyzer, Nov ‘23 | Note: 12-month mCOF calculated from deposits acquired from Nov ‘22 – Oct ‘23

And this year there are really no hacks to get around these lofty prices in consumer. Even with fairly effective targeting campaigns and mass personalization, banks will still have a large amount of back-book cannibalization as more consumers develop expectations that their deposit interest rate should at least approximate the Fed Funds rate. In the first quarter of 2024 alone, more than 30% of total CD balances will mature, most of them for the first time. The first renewal is a critical moment where balances are more susceptible to attrition.

The average mCOF for wealth deposits is in a similar ballpark, while commercial and small-business deposits are more attractively priced. For commercial deposits, which are roughly the same scale as consumer and where deposits are priced individually with limited cannibalization, we see mCOFs in the 4% to 6% range.

Small businesses have a relatively low mCOF because a large percentage of their deposits are held in non-interest-bearing accounts and, over time, the balances in those accounts grow to be three times that of consumer accounts. Small businesses have a strong preference for service and “fair” pricing, but they don’t require the best rate. For banks and credit unions that also have lending relationships with their small-business depositors, the deposit account balances double from there.

From a comparative cost standpoint, it makes sense to gather as much deposit volume as possible in commercial, small business and wealth, but to grow at or above market rates, those sources may not be enough to offset greater churn in consumer and commercial (Figure 2). The challenge in focusing on small business or wealth is scale – the deposit pool for both is but a fraction of the size of the other two lines of business. (A more in-depth discussion of deposit challenges facing respective segments is presented in another article in this Curinos Review, “2024: The Year Of The Liquidity Manager”)

Figure 2: Monthly Balance Churn, Oct. 2022 to Oct. 2023

Consumer and commercial have the largest balances and highest levels of churn, suggesting more potential for acquisition than in the smaller wealth and small business LOBs
Source: Curinos Retail Deposit Analyzer, Nov ‘23 | Note(s): Attrition and Acquisition metrics calculated as a proportion of monthly total bank balances across all LOBs including Consumer, Wealth, Small Business, and Commercial portfolios

Curinos analysis indicates that digital banks are positioned to get an outsized share of total deposit growth in 2024. Digital banks grew by double digits in terms of deposits in 2023 and are likely to see similar levels of growth this year as yield-seeking depositors keep moving in their direction.

A major positive for the branch banks is that they’re maintaining core checking accounts, which form the foundation of a high-quality, long-term relationship and also offer access to the lowest-cost deposits. Close to half of all deposits, including a third of savings and money market deposits at branches, are now priced under 10 basis points. Even though that level is down from 85% in mid-2022, these accounts are driving substantial net income for the industry and illustrate what’s at risk in using rate-based strategies.

Bottom line, 2024 will be an expensive year to grow deposits, and for many institutions, just trying to hold on to what they already have will be the right starting point. Retail mCOFs in low double digits means setting rates on loans in the teens – borrowers get sparse at those prices, so an institution needs a well-thought-out reason it’s trying to grow expensive deposits. That said, even staying flat will not necessarily be easy in this competitive environment.

Back to our original question, slightly modified: What are some of the strategies and tactics that institutions can put to work in 2024 to grow the core consumer customer/member base without relying solely on rate, and which will lead to deposits over time? The answer to this question is critical for profitability, as attracting and retaining core customers is how banking institutions grow and make most of their money.

Marketing’s power to drive acquisition: On the core checking side, we’ve seen that marketing and branding is now the largest factor in terms of driving new-customer acquisition. Primary checking customers keep stickier deposits and are less rate sensitive, so targeting primacy in the early days of the relationship is critical.

Primacy provides eight times higher fee revenues, ten times more average deposits, and higher operating deposits compared to non-primary customers. On top of that, close to a third of consumers establishing a primary relationship with a financial institution will seek advice and other products from the same bank, according to the most recent Curinos Annual Shopper Survey.

Smoother and easier customer journeys: A key element in attaining relationship primacy is simplifying customer journeys to make them more intuitive and seamless. For example, look at Apple’s new savings product launched in 2023 that carried an interest rate well below prevailing market levels. It attracted $10 billion in deposits in its first four months.

The product’s low-cost structure – no fees, no minimum deposits, no minimum balances – was a big reason why, but so was its efficient design. An existing Apple Cash customer needed to traverse only four screens to open the account. In addition, more than 95% of those customers opted to have any cashback rewards deposited into their account. Data from our Digital Banking Analyzer show that fewer than 10% of the U.S. institutions that we track have some sort of automated capability that would enable continuous deposit behavior.

Using digital effectively for efficiency: With digital banks and neobanks/fintechs growing in number and in heft and customers expecting seamless mobile and online capabilities, many traditional institutions need to upgrade their digital game to compete. Coming back to the high volume of CD/certificate renewals in 2024, much of the success in securing rollovers will come down to the rate offered, but convenience via digital acquisition and renewal can differentiate performance.

Digital can also help with targeting and personalization. If an institution can figure out who is most likely to renew, including those who don’t need a top-of-market rate in order to do so, it can use its interest-expense dollars in a targeted fashion that gets closer to the best of both worlds – retaining the deposits while saving on costs.

Curinos data show that, for banks whose customers bought CDs over the last 18 months, total relationship balances have increased and relationship-driven retention has increased. Many in the industry think CDs are not a relationship product – CDs can absolutely be a relationship product and part of a long-term valuable deposit franchise.

And long-term success is the ultimate goal here. In 2024, deposit-related challenges will mostly be solved using rate, but this year is also the right time for banks and credit unions to develop or reinforce other strategies to get and keep the all-important relationship primacy. 

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