What You Need to Know BY DENNIS FALK SVP and Regional Manager, PCBB The rise of digital banking and fintech platforms has transformed depositor behavior, making it increasingly important for community banks to adapt their strategies to manage the cost of funds and remain competitive. This challenge has been a top concern for community banks in recent years, as rising rate sensitivity, digital banking adoption and evolving depositor expectations continue to reshape the industry. To stay ahead, community banks must understand these structural shifts and develop sustainable funding strategies. THE GROWING COST OF FUNDS AND DEPOSIT COMPETITION Nearly 90% of community banks identified the cost of funds as a very or extremely important issue, according to the Conference of State Bank Supervisors’ (CSBS) 2024 community bank survey. This proportion has nearly doubled since the 2022 survey, reflecting both rising funding costs and heightened deposit competition. The cost of funds has more than tripled since 2020, increasing from 0.74% in December 2020 to 2.85% by March 2024. As rates increased, depositors became more rate-sensitive, leading to greater money movement between banks and non-bank financial institutions. 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 federal 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. THE EVOLVING DEPOSIT LANDSCAPE 16 The Community Banker
RkJQdWJsaXNoZXIy MTg3NDExNQ==