By Yikai Wang and Daniel Brown
ABA DataBank
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- Bank deposits are pure yield products, where their primary value to a customer is the interest payment.
- There will be no adverse macroeconomic impacts to the U.S. economy if banks are forced to pay higher rates independent of broader monetary and market conditions.
This ABA DataBank addresses each of these assumptions.
A bank deposit is a bundled product
The assumption that bank deposits, including checking and basic savings accounts, are pure yield products ignores the centuries-old business model of banking. Deposits (even basic checking accounts) are bundled service contracts, in which the interest paid is only one component of the total consumer value or benefit. Depositors receive continuous access to the payments system, check clearing, debit and ACH functionality, fraud monitoring, customer service (including access to a human in virtually all circumstances), dispute resolution, branch access, ATM networks and guaranteed par convertibility at all times, as well as receive the protection of federal deposit insurance.
Providing these bundled services entails substantial ongoing noninterest expenses—to manage risk, mitigate cyber threats, operate payment systems and maintain physical infrastructure—that materially shape deposit pricing. These costs scale with the number of accounts rather than account balances, meaning transaction accounts are economically viable only when interest payments are modest.
Depositors are smart, not sleepy
Some observers describe many bank depositors as “sleepy”; as a result, they say, banks can get away with paying them low rates on their deposits. However, consumers may be making an active choice to push snooze on their alarm clocks. Academic research on deposit demand consistently finds that consumers are willing to accept lower interest rates in exchange for higher service quality, convenience, and reliability, particularly for transaction accounts. For business customers, deposits may also be part of a broader banking relationship, with borrowers often receiving more favorable loan terms when they maintain deposits with the bank.
As a result, yield may not be the primary arena in which banks compete, and service differentiation can lead to lower-equilibrium yields on checking and low-balance savings accounts. For similar reasons, concerns that agentic AI could accelerate deposit outflows may be overstated; a well-designed agent would consider the value of bundled banking services, deposit insurance, liquidity and broader banking relationships rather than simply comparing yields.
A crypto account is not a deposit
Stablecoin issuers and crypto platforms, by contrast, typically externalize or avoid many of these costs, either by limiting consumer protections, relying on third-party platforms or operating outside bank-equivalent compliance regimes — all of which allow them to offer higher yields. The comparison between stablecoin rewards and bank deposit interest rates therefore conflates payment stablecoin yields with total value: depositors are paid partly in interest, and partly in the form of financial services, which stablecoins cannot replicate.
For insured bank deposits, depositors also receive the protection of federal deposit insurance, and they may be willing to accept a lower return in exchange for that additional safety, for which there is no equivalent in stablecoins. Lower interest paid on bank deposits thus reflects the pricing of a bundled financial service, protected by deposit insurance, not suppression of depositor returns.
Meanwhile, the yields paid by crypto platforms are generated by revenue sharing by stablecoin issuers, and re-lending to borrowers, margin pools, arbitrage/derivatives collateral or facilitating their use in decentralized finance (DeFi) lending protocols. Ironically, the higher rates paid by crypto products reflect the higher risk inherent in them, which bank depositors generally do not bear, including the absence of deposit insurance and the possibility of loss if a stablecoin loses its peg or its issuer fails. Consumers may not fully understand the extent of the risk they are actually assuming.
Systemic and macroeconomic costs
If banks across the board were to raise deposit rates aggressively to compete with nonbank instruments, the shift could alter the structure of the financial system, raise the cost of credit, and reduce credit supply to the real economy. Higher deposit rates would also reduce the value of deposits, which in turn would weaken banks’ ability to absorb shocks, especially during tightening cycles. Empirical research shows that if deposit pricing were to adjust fully to prevailing yields, default probabilities would rise materially during stress periods, because banks would lose the stabilizing cushion provided by deposits. Higher deposit rates would therefore come at the cost of riskier banks in the financial system.
Higher deposit rates also raise banks’ overall funding costs for lending. Banks may not be able to pass all these higher costs to borrowers due to competitive pressures in loan markets. Consequently, higher deposit rates would drive banks out of certain markets where they cannot generate sufficient returns for shareholders. Households, small businesses and the entire economy may face higher borrowing costs and reduced credit availability.
Payment stablecoin issuers are essentially “narrow banks,” taking customer money and investing it in short-dated assets. They are not able to extend loans to businesses and households. Their investments in Treasury bills are loans to the U.S. government; while these funds may eventually be spent and redistributed in the bank system, the harm to households and businesses in the form of higher borrowing costs would be consequential. Another possible consequence of higher bank lending rates is that certain credit intermediation could be taken over by nonbanks — the less regulated part of the financial system — potentially raising systemic risk.
Banks also carry broader legal and regulatory obligations beyond traditional credit intermediation. Under the Community Reinvestment Act, banks are required to help meet the credit needs of the communities they serve, including low-to-moderate-income neighborhoods. Banks also devote substantial resources to financial crime prevention through customer due diligence, anti-money laundering controls, sanctions screening, transaction monitoring and suspicious activity reporting. These functions benefit bank customers and shareholders, but they also have broader public safety and national security spillover effects that would be eroded if stablecoins replace bank deposits at scale.
Conclusion
Expecting banks to compete with the crypto ecosystem on yield demonstrates a misunderstanding of the broader system. Banks and the crypto ecosystem operate under fundamentally different business models and assume different economic and systemic responsibilities. Banks provide transaction-ready money within the highly regulated financial system, and the value of the services they provide is not fully reflected in the interest rate paid on deposits.
The benefits of the banking system extend well beyond the interest income earned by individual depositors. Banks transform deposits into credit for households, small businesses and communities across the country. They finance home purchases, working capital, payrolls, equipment investment and long-term economic growth.
A financial system designed narrowly around yield competition in transaction money risks undermining the very institutions that channel Americans’ savings into productive investment. Higher rates on transaction balances are not costless from a socioeconomic perspective. They will lead to higher borrowing costs for households and businesses, push certain forms of lending outside the regulated banking system, reduce the banking sector’s capacity to absorb economic shocks, and constrain banks’ ability to fulfill broader economic and social obligations. Policymakers should look beyond the short-term question of which platform offers the highest interest rate to the larger question of how financial products can deliver economic stability, credit creation and growth alongside yield.
Yikai Wang is VP for banking and economic research at ABA. Daniel Brown is an economist and senior director in ABA’s Office of Economics and Research.
