Shifting Depositor Behavior: A Structural Change Historically, deposit rates followed a slow, predictable cycle, with customer movements largely driven by bank-led pricing decisions. However, since 2022, digital tools and fintech’s have accelerated deposit flows, making customer behavior more dynamic and unpredictable. • A growing proportion of deposit outflow events involved instant transfer apps like Zelle or Venmo, enabling same-day transfers. • Deposit beta surged from 0.25 before the 2022 Fed funds rate hikes to 0.5-0.6 in 2023, meaning rate hikes are passed to depositors much faster. This represents a fundamental shift in how depositors behave — community banks must adapt by offering competitive products and leveraging customer relationships for retention. Three Critical Questions Before Raising Deposit Rates While higher rates may seem like the easiest way to compete for deposits, community banks should consider three strategic questions before making pricing decisions: 1. Does your bank need additional deposits? There’s only one fundamental reason to spend money on attracting deposits: because your bank has profitable ways to deploy them. Assess your overall funding strategy, including: • How much funding is needed for loans and other profitable uses? • How much of your current deposit base is at risk of outflow? • What alternative funding sources exist, such as correspondent banking services, liquidity lines or structured funding solutions that may provide flexibility while maintaining deposit pricing discipline? 2. Are you reacting to market data or individual complaints? Some institutions feel pressured to raise rates when a competitor does or when a single high-value customer demands higher returns. However, with today’s digital landscape, high-rate depositors are the most likely to move their money elsewhere at the next opportunity. Instead of chasing rates: • Use data to determine competitive but sustainable pricing. • Explore diversified funding options that align with long-term profitability and risk management strategies. 3. How can you optimize your deposit strategy? Attracting large-balance customers with premium rates is tempting, but these customers are more likely to move their funds quickly when rates shift. A more sustainable strategy is to: • Reward customers who use multiple products, such as treasury management services, commercial loans or wealth planning. • Incentivize relationship-based deposits over rate-driven accounts. • Consider requiring a depository account with every lending relationship. Breaking down silos between different departments can help identify your best customers and create a strategy that looks at the entire customer relationship. • Ensure deposit gatherers are being appropriately incentivized through product pricing and funds transfer pricing. Strategic Takeaways for Community Banks 1. Cost of funds has risen significantly, and depositors are more rate-sensitive than ever. Community banks need a clear funding strategy before aggressively pursuing new deposits. 2. Digital banking and fintech platforms have made deposit flows highly dynamic. Offering niche digital banking solutions and real-time payments may help retain customers. 3. Rather than chasing rate-sensitive funds, community banks should focus on relationship-based deposits. Encouraging client engagement and establishing primacy with them as their main financial institution can increase the client’s net value. By adapting to this new deposit environment, community banks can optimize their balance sheets while maintaining a competitive edge in an increasingly volatile financial landscape. To continue this discussion or for more information, please contact Michael A. Johnson, SVP and southwest regional manager for PCBB, at mjohnson@pcbb.com. Learn more at pcbb.com. Dedicated to serving the needs of community banks, PCBB’s comprehensive and robust set of solutions includes cash management services such as settlement and liquidity for the FedNow Service, international services, lending solutions and risk management advisory services. PCBB was recognized by American Banker as one of the “Best Banks to Work For” in 2024. 21
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