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High Deposit Costs Highlight Need To Optimize Pricing

Not long ago, financial institutions overflowed with cheap deposits. The opposite is true today, as community banks and credit unions are competing vigorously not only to grow deposits but to do so at a reasonable price.

The marginal cost of funds for consumer deposits averaged around 10% at the end of 2023, with institutions at the high end paying close to 13%, according to the Curinos Retail Deposit Analyzer. Getting around these lofty prices will be a challenge in 2024, as more customers and members expect their deposit interest rate to at least be close to the prevailing market rate.

Term deposit maturities present another headwind – in the first quarter of 2024 alone, more than 30% of total CD/certificate balances will mature, most of them for the first time. The first renewal is a critical moment where balances are most susceptible to attrition, so institutions need clear strategies if they want to retain those balances. The CD maturation challenge, while most acute in Q1, will continue for the rest of the year.

Figure 1: Maturing CD Balances by Month

Branch bank CD maturities are concentrated in the first half of 2024, with a relatively high concentration of maturities from first-time CD owners

Source: Curinos Optimizer | Note(s): Simple averages displayed | Online banks excluded | 1. Total maturing balances between Dec ‘23 – Dec ’24 | First vs Previous Ownership tagged at customer level; First Ownership indicates first time a customer has a maturing CD at bank | Includes CDs with terms of at least 6 months | Includes CDs on the books as of Nov ’23; Maturity bubble will change as more CDs are added in Dec ’23 – Jan ‘24

And then there’s the growing competition from the digital-only players. Digital banks grew deposits by 14 percentage points in 2023 (traditional banking institutions declined by a few percentage points during the year) and are likely to see another 10 percentage points’ worth of growth this year as rate shoppers keep moving in their direction.

A major positive for branch-based banks is that they’re maintaining core checking accounts, which offer access to the lowest-cost deposits and, over the longer term, form the foundation of an enduring customer relationship.

Bottom line: For banking institutions prepared to spend big, 2024 stands to be a great year to grow deposits. But that’s not the only option available. Community banks and credit unions looking beyond rate to profitably fund their balance sheets can derive important benefits by optimizing their pricing to achieve more efficient marginal funding tradeoffs and increase the value of those deposits.

Introducing Deposit Optimizer Essentials.

Manage your deposits using best-in-class analytics without the expense of a large team. Deposit Optimizer Essentials provides data and executive insights that cut through the noise to offer guidance to achieve your funding goals. 

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