The inverted yield curve is escalating banks’ often technology-driven efforts to gather deposits.
By John HintzeBanks’ deposit challenges started in early 2022 when the Fed began aggressively raising rates, as depositories compete against neobanks and large brokerages offering similar products while banks’ funding costs continue to rise. Institutions are focusing increasingly on providing clients with a mix of products and services, often technology-driven, that persuades clients to keep their money at the bank.
“Banks will need to broaden the conversation beyond rates to ensure depositors stay with the bank, including a focus on holistic solutions, utilizing data and analytics to provide a better customer experience and empowering front-line employees,” says Val Srinivas, research leader for banking and capital markets at Deloitte.
Time will determine the strategy’s success, since consumer and commercial depositors may have attractive alternatives for a while still.
Nevertheless, the strategy has been effective. Michael Bernard, a senior analyst at Celent, says that in Q1 earnings calls, leaders at some of the largest U.S. banks attributed success in retaining deposits, often at lower rates compared to competitors, to the quality of digital banking tools and the investment and wealth-management services they offer customers.
Bank of America’s deposits ended the third quarter at $1.9 trillion, around the same level as a year earlier, and 34 percent above the pre-pandemic level. In the earnings call, CFO Alastair Borthwick attributed much of the success on the consumer side to the bank investing heavily in the client experience. He noted the bank is renovating financial centers, hiring employees to bolster customer service and investing in digital and mobile access, adding that “ours is a relationship value proposition.
Regional banks are finding success in the strategy as well, offering a more integrated mix of traditional bank products and services along with cost benefits. When queried about deposit opportunities, Citizens Financial Group’s head of consumer banking, Brendan Coughlin, pointed to its Citizens Plus program launched in October 2022. It offers up to 50 percent on deposits than standard rates, mortgage rate discounts and lower closing costs, credit card bonuses, and other benefits for checking customers.
In Fifth Third’s 3Q earnings call, President Timothy Spence attributed the bank’s market-share gains in part to “innovative operational deposit-oriented products like Momentum Banking,” a digital bank that resides within the larger bank. Those accounts offer a mix of digital services and benefits, including the ability to set savings goals and schedule money transfers between accounts to meet those goals; low or nonexistent fees; early access to payroll deposits; and additional time to make a deposit to avoid overdraft fees. The bank reported average total deposits increasing 3 percent over the previous quarter, with consumer deposits increasing by 2 percent and commercial deposits by 4 percent.
“In this environment with an inverted yield curve, banks are trying to implement more sophisticated relationship pricing to maintain deposits with customers they really value and have a longer-term view, rather than those just chasing rates,” says Timothy Partridge, head of Deloitte Consulting’s commercial banking practice. “However, this can be quite challenging.”
Integrating services and making them as client-friendly as possible also serves to increase banks’ fee income as lending margins tighten. In its Q3 earnings presentation, Citizens said commercial payment fees increased by 9 percent in 2023 through the third quarter compared to the same period in 2022, through “deepening relationships” stemming from enhanced treasury solutions, global markets capabilities, and integrated payments platforms.
In addition, the bank says, improving client satisfaction and efficiency through digitization has led to 95 percent commercial client satisfaction, an all-time high, and those customers will presumably think twice about shifting deposits away from the bank.
Srivinas says technology is playing an important role in integrating bank services, and it doesn’t have to be the latest, most sophisticated technology. “It’s about managing the data banks already have — getting access to it, synthesizing it, combining it and making sure it doesn’t sit in silos,” Srinivas says. “To do relationship pricing, you have to have a holistic view of customers across product sets.”
Including services such as bill pay in the mix is another way to increase account stickiness, says Adrian Ungureanu, managing principal in banking and payments at management consultancy Capco. “In turn, those clients tend to keep a higher deposit base there, too,” he says. “Banks are bringing us in to figure out how to better use the data they have on customers, so they can better position products and services more relevant to them.”
Ungureanu said he has seen an uptick on the commercial and small-business banking side to differentiate products and services, such as cash- and risk-management tools, and digital payment solutions, to allow businesses to be more efficient and their banks to retain more of their deposits.
Another approach to attracting deposits is to launch a digital bank, often as a subsidiary. In 2018, Citizens launched Citizens Access, an online bank with neither branches nor the related overhead costs, which offers high yields on deposit accounts and no monthly fees. As of September 30, Access represented 6 percent of the bank’s business mix, a 20 percent increase from the end of Q1 2023.
Not all digital banks are successful. Celent notes a case of an Illinois-based bank that launched a digital bank offering focused on couples in January 2022, only to shut it down in July 2023. Nevertheless, the technology to offer an all-digital bank is becoming increasingly available to smaller institutions. Following its 2022 acquisition of cloud-native banking solutions provider Finxact for $650 million, Fiserv now advertises a variety of services to enable its bank clients to “accelerate” their digital transformation. Technology firms including Apiture and Q2 enable smaller banks to build digital platforms that facilitate delivering a mix of products and services, often at a lower cost than their brick-and-mortar parents.
“There are platforms out there that will allow smaller banks to go this route very cost effectively,” Celent’s Bernard says.
For example, Middletown, Connecticut-based Liberty Bank, with $7.4 billion in assets, launched Owners Bank in April 2023, a digital bank brand aimed at small business owners and initially available to clients in Rhode Island, Massachusetts, Connecticut and Pennsylvania, with the intent to serve customers nationally. In a statement, Liberty Bank said that small business owners have not had a banking option that helps them manage invoicing, bill payment, cashflow and other accounting functions. “That’s why we created Owners Bank — to fill a major gap in the banking industry by providing tools designed to help small business owners knock out financial tasks, so they can get back to running their businesses,” says David Mitchell, founder and CEO of Owners Bank.
Even smaller $3.7 billion PeoplesBank, headquartered in Holyoke, Massachusetts, launched its Zynlo Bank digital brand via technology provider Nymbus in October 2020. Zynlo offers fee-free services, including giving consumers access to their direct deposits up to two days in advance. “The strategies vary by bank in terms of why they’re setting up these digital brands,” Bernard says. “One is to expand beyond their current geographical footprint to gather deposits. And another is simply to run a brand from the bank on a more modern technology stack to improve cost effectiveness and reduce legacy operational costs.”
John Hintze frequently writes for the ABA Banking Journal.