The migration of deposits from physical locations to digital is accelerating rapidly, thanks to technology, changing consumer preferences and the reemergence of high-rate CDs. Capitalizing on these trends, online banks are expected to see a gain in retail deposits this year of 8% to 10% and another 8% in 2024. At the same time, retail deposits at traditional banking institutions will be down 1% to 3% this year and roughly flat in 2024 (See Figure 1).
Figure 1: Retail Deposit Forecasts
Adding to their advantage, the marginal cost of funds (mCOF) for online banks is whatever premium rate they offer plus (non-physical) marketing expenses. Incumbent banks, on the other hand, need to protect their back book, which can mean a 10 to 12% increase to their mCOF.
More than ever, traditional banks need a deposit playbook, or an update to the one they already have. Without the right playbook, they may be raising rates too broadly and unnecessarily repricing their back book. Here are some strategies that a playbook could reveal:
- Balance-augmentation campaign. Through marketing efforts enabled by personalization engines, banks can target only those customers who are more likely to respond to rate and cash offers.
- New-money promotion in thin markets. Promotional new-money rates in regions where market share is low can effectively garner new deposits. At the same time, maintaining a high-yield savings rate that is “good enough” in denser markets can help retain most of the existing book.
- CD-rollover strategy. Fending off high-rate competitors when CDs are rolling over can get expensive. One component of an integrated strategy could be to offset these losses by offering a high top-rate CD for new money only to put a fence around the offer and limit internal cannibalization.
To stanch the flow, and protect their bottom line, traditional providers will need to put strategies in place that are conceived and guided by an analytically derived deposit playbook – one that’s based on near-real-time data on customer behavior and competitive activity.
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.