The real value of bank deposits goes beyond yield

By Yikai Wang and Daniel Brown
ABA DataBank

If banks are concerned about deposit outflows, why don’t they simply offer higher rates? This question has taken on new significance as stablecoin rewards create new competition for deposits and emerging technologies such as AI agents make it easier for customers to compare products and move balances. The question appears to make some intuitive sense: yield matters. But it also rests on an incomplete view of deposits and how they compare to alternatives.

A bank deposit is not merely an investment. It combines interest with payments access, liquidity, federal deposit insurance, fraud protection, customer service and a broader banking relationship. Recognizing the bundled value of a deposit does not mean depositors are indifferent to rates or that bank funding is insulated from higher-yielding alternatives. Both can be true: deposits provide value beyond yield, but they are not immune to yield competition. Suggesting that banks should simply raise rates to attract more deposits means putting stock in three flawed assumptions:

• Bank deposits are pure yield products whose value can be assessed primarily by comparing interest rates.
• Yields offered by crypto platforms and stablecoin issuers are directly comparable to the interest paid on bank deposits.
• Banks could raise deposit rates to compete solely on yield without affecting credit availability, financial stability or the broader economy.

This ABA DataBank essay addresses each of these assumptions.

A bank deposit is a bundled product

The assumption that bank deposits, including checking and basic savings accounts, are purely 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, dispute resolution, branch access, ATM networks and guaranteed par convertibility at all times, as well as 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. These costs are not reflected in a simple comparison of interest rates but materially shape the economics and pricing of deposit accounts.

Customer value and rate sensitivity can coexist

Some observers describe 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 finds that consumers are often willing to accept lower interest rates in exchange for higher service quality, convenience, reliability and safety, particularly for transaction accounts. Deposits may also be one part of a broader banking relationship. For example, depositors that also borrow from their bank often receive more favorable pricing or terms across the relationship.

Customers’ willingness to accept lower deposit rates reflect the value they place on safety, convenience, service, and their broader banking relationship, not indifference to yield. Deposits are not immune to rate competition, however, and customers do not need to make all-or-nothing decisions about their money. As the difference in returns grows and technology lowers switching costs, consumers and businesses may retain their primary bank relationships while allocating some balances to higher-yielding alternatives.

It is possible that digital wallets, automated sweep tools and other emerging financial agents could make that allocation increasingly frictionless. An AI agent optimized primarily for yield may also treat deposits, stablecoins and other cash-like instruments as interchangeable, even though they offer different protections, services and economic functions. By reducing switching costs, these technologies could accelerate the movement of rate-sensitive balances even when customers continue to value and use their banks. Similarly, stablecoins do not need to replace the full banking relationship to compete for the funding value of deposits.

Stablecoin rewards and deposit rates are not directly comparable

Stablecoin products do not provide the same combination of federal deposit insurance, security, bank supervision, customer protection, credit intermediation and relationship services as an insured bank deposit. Their economics and regulatory obligations are also materially different.

Depositors may reasonably accept a lower return in exchange for those benefits, particularly the safety provided by federal deposit insurance. A comparison between a stablecoin reward and a deposit rate therefore isolates only one visible feature — yield — while overlooking substantial differences in the products, protections and functions being offered.

Meanwhile, yields offered by crypto platforms may be funded through one or more models, including revenue-sharing arrangements with stablecoin issuers, re-lending to borrowers, margin pools, arbitrage/derivatives collateral or facilitating customers to participate in lending through decentralized finance protocols. In some cases, the higher rates paid on crypto products reflect the higher risk inherent in them. In other words, higher yields may reflect that the risk of storing money in stablecoins differs materially from that of insured deposits. Consumers may not fully understand the extent of the risk they are assuming.

Yield competition can raise funding costs and constrain credit

When higher-yielding alternatives compete for rate-sensitive balances, banks face a difficult choice: pay more to retain funding or allow some deposits to migrate. Either outcome can affect the cost and availability of credit.

If banks were to raise deposit rates aggressively to compete solely on yield, 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 could 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 could end up facing higher borrowing costs and reduced credit availability as competition narrows.

On the other hand, allowing deposits to migrate means the funds are no longer directly available to support bank lending. For example, deposits that chase yield offered for payment stablecoin holdings will be invested primarily in short-dated assets. These investments in Treasury bills are loans to the U.S. government. While these funds may eventually be spent and redistributed into the banking system, the harm to households and businesses in the form of higher borrowing costs would be consequential. Another possible consequence of systemically 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.

Conclusion

The growing focus on yield — whether it is driven by stablecoins, fintech platforms or agentic AI — obscures a more fundamental point: Bank deposits are not merely investment products. Bank deposits provide easy transactions and support credit availability with consumer-friendly guardrails. Stablecoin rewards can nevertheless attract meaningful balances, even if they cannot replace the entire bank relationship. Moreover, as technology reduces switching friction, consumers and businesses may retain a primary banking relationship but move rate-sensitive funds elsewhere. Even if these outflows are not universal, they will raise bank funding costs and constrain credit.

The benefits of our 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. Placing excessive weight on yield alone could increase borrowing costs, reduce credit availability, push more activity outside the regulated banking sector and weaken the stabilizing role deposits play in the financial system.

Policymakers should look beyond the narrow question of which product offers the highest yield. Instead, they should consider the full suite of features that accompany yield — and the features that are lost when funding moves outside the regulated banking system.

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.