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Deposit Costs: Finding The Right Balance For Small Business Success

This Month In Retail Banking

Last week’s installment of This Month In Retail Banking focused on acquiring the right balance of checking deposits and rate-based products to optimize deposit growth in today’s challenging market. This week we continue the conversation by making a case for focusing on the small business segment.  

Historically, small business deposits have been acquired at about half the cost of those for both the consumer and commercial segments, and they exhibit a significantly lower portfolio cost over time. A primary reason is that the majority of small businesses hold their balances in non-interest-bearing (NIB) checking accounts. And while a portion of these balances have recently converted from NIB checking to rate-based accounts, given the current state of the market, the interest paid was at an average of 2.6%, compared with 6.2% for consumer conversions.  

Within the rate-based product suite, the cost of acquiring deposits in money market demand and money savings accounts (MMDA/savings) for small businesses and consumers are similar: Banks pay more than 400 basis points for about 60% of these deposits from small businesses versus about 55% of their consumer MMDA/savings deposits. And MMDA/savings portfolio costs are higher for small business: 20% of them cost the institution more than 400 basis points versus only 12% for  consumer deposits. 

What tilts the expense scale in favor of small businesses, however, is that most of their current funds remain in NIB accounts, so they display much lower MMDA/savings balances than consumers. (See Figure 1.)   

Figure 1:
Portfolio Composition By Rate | Consumer​

Portfolio Composition By Rate | Small Business​

Source: Curinos Retail and Small Business Deposit Analyzers | Note(s): Consumer NIB includes Non-Interest Checking, Consumer IB includes Interest Checking, Savings/MMDA, and CD | Small Business NIB includes NIB DDA, Small Business IB includes IB DDA, Analyzed DDA, ECR DDA, Hybrid DDA, Savings/MMDA, Term Deposit, and CD​

Across every dimension of deposit expense – acquisition, portfolio cost and conversion from NIB to rate-based – small business outperforms virtually all other segments. Institutions looking to acquire and retain cost-effective deposits would be well advised to make small businesses a primary, if not the primary, area of focus. 

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