By Tyler Mondres
ABA Data Bank
Deposit markets remain highly competitive
Figure 1 (click image to enlarge)
The sheer number of depository institutions—nearly 10,000 at the end of 2021—is clear evidence that the market for deposits is highly competitive. However, some observers believe the presence of a few large depository firms indicates otherwise. To be sure, financial services, like many other parts of the U.S. economy, has a small number of large firms that serve global markets.
Still, the market for deposits is far more competitive than some of the most concentrated sectors in the U.S. For example, in the search engine, airline and smartphone sectors, the top four companies account for more than two-thirds of the market. By comparison, the top four depositories in the U.S. (by dollar volume of deposits held) hold less than a third of the market for total domestic deposits. (See Figure 1.)
America needs banks of all sizes and business models. Together, these institutions serve the varied and diverse needs of their customers. Smaller, local community banks are integral to their communities and get to know their customers personally, with relationships sometimes spanning generations. Larger banks provide retail services and the financing and specialized services that large U.S. corporations and global markets demand.
While large banks have grown over the years in both asset size and share of deposits, the real question is how this has affected both the broader sector and customers. To answer this question, we explore how concentration has evolved in the industry, whether it has inhibited growth for smaller and medium sized institutions, and whether institutions have taken advantage of market power. To do this, we look at trends in domestic deposits across different cohorts of financial institutions. We separate out the top 100 depositories (by volume of domestic deposit liabilities held in a given year) from all other banks and credit unions. We then break out the top 100 into five sub-groups: 1) the top four depositories, 2) the top 5-10 depositories, 3) the top 11-20 depositories, 4) the top 21-50 depositories and finally 5) the top 51-100 depositories.
Technology and regulatory changes have affected deposit market concentration
We first explore how deposit market concentrations have evolved across these sub-groups. A clear delineation can be seen in the levels of deposit market concentration before and after 2007—the year the financial crisis began and the first iPhone was unveiled to the world. (See Figure 2.) Between 1994 and 2007, the top four depositories’ share of domestic deposits increased 19.3 percentage points. However, this was largely due to the removal of interstate bank branching restrictions, which artificially limited competition. As expected, the removal of these restrictions led to an increase in deposit market competition and a resulting shift in market shares.
Since then, the trends in concentration have changed considerably. (See Figure 3.) The market share of the largest depositories has largely remained flat over the past 15 years. Between 2010—when the Dodd Frank Act was passed—and 2021, the market share for the top four depositories increased only 0.8 percentage points.
Figure 4 (click image to enlarge)
The release of the iPhone in 2007 also kicked off a major wave of innovation in the banking sector. Nearly all financial institutions, including 95.9 percent of community banks, currently offer mobile banking—allowing them to reach beyond their immediate market as well as to provide varied product offerings and conveniences to their customers. The pandemic accelerated this trend. According to recent research from PwC, “digital banks” now make up 20 percent of all primary bank relationships in the U.S., up from 10 percent in 2019. Increasing digitization of financial services and the growing role of fintech firms has further stoked competition for deposits.
The findings of the 2021 Community Banking report from the Conference of State Bank Supervisors underscore this point. (See Figure 4.) The report found that market competition continues to be the dominant factor in the retention of deposits. Competition is strongest among in-market community and regional banks. However, as technology breaks down barriers to competition, community banks increasingly find themselves competing with nonbanks and those outside their geographic market. A significant share of respondents—15.9 percent and 21.7 percent, respectively—indicated they primarily compete with nonbanks for transaction and nontransaction deposits. Similarly, out-of-market competitors were identified by between 17.7% to 23.2% of bankers as a dominant secondary source of competition for both deposit categories.
Small and midsize depositories’ deposit base continues to grow
Figure 5 (click image to enlarge)
We next look at whether these changes in deposit markets inhibited growth for depositories outside the top 100. (Note: for simplicity, we combined the top 5-50 for Figure 5.) Domestic deposit growth was more variable between the cohorts prior to the Great Recession. Following significant changes to the regulatory landscape and the growth of nonbanks over the past 15 years, however, deposit growth has been more consistent across larger and smaller depositories. Most recently, this includes the pandemic-induced surge of deposits that flowed into banks and credit unions of all sizes.
Figure 6 (click image to enlarge)
Small and midsize depositories have continued to thrive in the face of numerous challenges: the removal of interstate bank branch restrictions, the Great Recession, wholesale changes to the regulatory landscape, significant technological innovation, growing competition from non-traditional players, and most recently a global pandemic. Despite all these challenges, small and midsize banks and credit unions have continued to grow their deposit base. (See Figure 6.)
Adjusted for inflation, average deposit account fees have remained flat
Finally, we look at deposit account pricing. The cost of deposit accounts has largely stayed the same for consumers over the years. Average fees charged for bank accounts as tracked by BankRate (see Figure 7) have been flat the past 23 years when adjusted for inflation. This is consistent with the view that the largest institutions are not using market power to increase fees unreasonably.
Similarly, the revenue generated by fees, which banks began reporting in greater detail in 2015, has also largely stayed the same the past seven years. For example, overdraft fees (a common focus of policymakers) have held steady as a share of total retail deposit accounts (excluding retirement deposit accounts). Furthermore, even before banks began extending relief to customers due to the pandemic, overdraft fee revenue as a share of operating income was inching down. Banks are charging consistent fees and have become less reliant on this revenue over the past seven years. (See Figures 8-9.)
Figure 8 (click image to enlarge)
The digitization of financial services has also provided customers with a wealth of options for finding the right bank account to meet their needs. For instance, there are myriad price comparison websites available to help consumers filter through the nearly 10,000 depositories to find the right checking or savings account for them. Customers have had, and continue to have, a wide variety of depository institutions to choose from when looking for a deposit account.
Figure 9 (click image to enlarge)
These findings rebut the notion that consumers have little choice, relegating them to a small number of depositories that could use their market dominance at the expense of consumers. With increased digitzation, consumers are able to reach beyond their local institutions for deposit accounts, leading to increased competition and choice for consumers. Nearly 10,000 traditional depositories offer checking and savings accounts today and a growing number of nonbank challengers are vying for consumer wallet share. Deposit markets remain highly competitive in the United States.
