- Since December, hopes of more rate cuts this year and next have been fading, which is making retail deposits considerably more complex to manage.
- Acquisition betas have been steep, but not portfolio betas, as customers continue to become aware of higher rates and move money from checking and savings to CDs.
- FIs that took the lead in rate cuts have either lost deposits faster than average or have trailed significantly in acquisition. It’s been a first-mover disadvantage.
Last year, after several tumultuous years, retail deposits were relatively easy to manage because the universal expectation was that rates would come down after peaking in 2023, and the Fed did indeed provide relief with 100 bp in rate cuts. Deposit growth returned to positive for traditional FIs, albeit still relatively anemic, even as slow asset growth created less demand. At the same time, competitive intensity decreased as most FIs focused on cost.
But since December, hopes of more rate cuts in 2025 and 2026 have been fading, which is making deposits considerably more complex to manage and putting sizable value at risk for FIs. Higher-for-longer Fed rates amid continuing tepid loan growth will allow less opportunity to cut deposit costs and will continue to apply pressure on portfolio margins. Welcome to the “new normal.”
Portfolio Betas Lag Fed Actions
Portfolio rates have not fallen as far as acquisition rates. Money in motion has slowed, which is making retention easier but acquisition harder. CD deposits, meanwhile, have remained steady, because of a focus on rate-sensitive retention and complex maturity schedules. While we continue to project continued deposit growth in 2025, there is substantial uncertainty—with loan growth, commensurate deposit growth and the Fed path all contributing. We believe it will become increasingly difficult for FIs to meet expectations of both ALCO and Wall Street for steeper betas. A common question deposit product managers hear these days is “The Fed dropped rates 100 basis points—why can’t you bring down retail rates further?” Well, there are several reasons, and the answer is nuanced.
Yes, the first two Fed rate cuts led to steep betas for acquisition rates—of 34% and 83% for savings and CDs, respectively—but they translated into portfolio betas of only 12%. Going forward, portfolio rates will be pressured with balances remixing as customers continue to become aware of higher rates and move money from checking and savings to CDs. An FI standing still by, say, only replacing savings attrition with savings acquisition will see their portfolio rates rise. They’ll be losing deposits at low portfolio rates—currently at 1.49%—and acquiring deposits at the prevailing rate of 2.67% (Figure 1).
Figure 1: Acquisition and Portfolio Rate | Savings |
Branch Banks Jan ’22 – Nov ‘24
Source: Curinos Consumer Deposit Analyzer. | Notes: Consumer balances only. Branch banks only. Simple averages displayed.
The easy down-pricing may be behind us, but for additional repricing to maintain portfolio margins, the road forward will be tougher. That’s in part because portfolios have concentrated rate barbells on both ends. About 43% of deposits earn less than 25 bp while more than a third of them earn 200 bp or more (Figure 2). At the lower end, there’s little downward room for FIs to maneuver. The upper end represents depositors who are rate-sensitive and are likely to react to downward moves on rate. Indeed, when banks have priced down, they generally haven’t seen relief to interest expense. From August to September 2024 branch banks needed to reprice 17% of balances by ~40 bp just to keep their portfolio cost flat.
Figure 2:
Source: Curinos Consumer Deposit Analyzer. | Notes: Consumer balances only. Branch banks only. Simple averages displayed.
First-Mover Disadvantage
Further cutting rates to eke out margin comes with a material first-mover disadvantage. Banks that took the lead in rate cuts have either lost deposits faster than average or have trailed significantly in acquisition. Those that have cut too deeply are finding that acquiring new deposits is considerably more expensive than retaining them. As it pertains to CDs, banks in the lowest quartile of rate cuts saw acquisition increase by 54%, while those in the highest quartile saw their acquisition drop 65% (Figure 3).
Figure 3: Industry CD Change in Acquisition | Quartiled by Rate Change | Aug ’24 – Nov ’24
Source: Curinos Consumer Deposit Analyzer. | Notes: Consumer balances only. Branch banks only. Simple averages displayed.
With higher-for-longer rates and less money in motion, deposits will be increasingly more difficult to acquire with rate. As a result, FIs will need to sharpen their focus on lower-cost deposits from sticky relationships. For example, CD clients who also have other products like checking or savings have been shown to renew at a much higher rate, ~88-94%, than those who hold only a CD, at 70-88% (Figure 4).
Figure 4:
Source(s): Curinos Consumer Deposit Optimizer and Analyzer. | Note(s): Customer relationship is defined by >=0 of account balance in specified product | All CD terms included.
The Need for Data-Fueled Analytics
Bank deposit teams tend to be understaffed after decades of cutbacks during low-rate periods, and many are overwhelmed as they’re asked to outperform their competition and slow or reverse portfolio-cost increases. In addition to skilled and experienced talent, deposit managers need access to the right and relevant granular data—or example, at the right product and segment level to determine price sensitivity and reaction to pricing actions—and the analytical tools to continue to manage deposits and optimize strategies for pricing and growth. They also need to develop savings—and CD-acquisition and retention playbooks to guide the development of a slate of strategies to counteract customer churn.
The new normal in the coming year will require a long ground game of surgical pricing management. Significant value will be gained, or lost, depending on how effectively or ineffectively rates are managed through this rate cycle. That makes it imperative for Fis to build or rent capability and act quickly to avoid ceding value that can’t be easily recovered. Every day of insufficient action is lost opportunity. Like flying a plane with empty seats, that revenue will never be recouped, as with any perishable commodity.
