Deposit armageddon or opportunity? How banks can thrive despite the rate war

The deposit rate war is on. There will be those who excel at deepening customer relationships, and there will be those who suffer deposit runoff and precipitous increases in funding costs. Here's how banks and credit unions need to position themselves to thrive at a time when moving money to a competitor with higher rates is so enticing and far less of a hassle than in years past.

For executives in the banking industry, “rates-up” environments are more of a blessing than a curse. In fact, they’ve wanted an upward movement in rates for a long time – about 15 years. It’s easier for banks and credit unions to make money when rates are at historical averages, rather than at historic lows. In a business where profit depends on the margin between the yield on earning assets and the cost of funds, there are more opportunities when you can work on both ends of that margin.

The grave risk facing banking institutions is that their deposit-competition skills have atrophied. That 15 years of no major deposit pressure means there is a new generation of marketers with no experience tackling the deposit-gathering challenge, as several credit union executives pointed out during a roundtable at The Financial Brand Forum in November.

There isn’t a deposit Armageddon caused by external factors, though pressure is certainly mounting. Rather, there’s an internal crisis brought on by years in an artificial reality of funding security. Institutions have had more deposits than they’ve known what to do with.

Relationships are the antidote to price competition. The differentiator, though, will be which banks and credit unions consumers see as truly providing relationship banking. There will be those who excel at deposit relationships, and who are able to drive higher profits by managing cost of funds, and then there will be those who see deposit outflow and precipitous increases in funding costs.


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