THE VALUE OF CUSTOMER PROFITABILITY MODELING By Matt Helsing SVP & Northwest Regional Manager for PCBB, ICBC Associate Member As community banks struggle to compete with the industry’s largest banks, as well as an ever-increasing number of fintechs and nontraditional lenders, offering attractive deposit pricing is key. At the end of 2022, banks were competing for $18T in deposits, according to the Federal Reserve Bank of New York. While there have been multiple rate hikes by the Federal Reserve, with July’s rate hike bringing rates to a 22Y high, deposit rates among banks have been slower to increase, although that is changing. In Q4 2022, the average Fed funds rate had climbed to 3.7%, compared with interest-bearing deposit rates of only 1.4%. As of July 17, the FDIC shows deposit rates have increased significantly in 2023. The last few years led to a widespread decrease in both deposit balances and non-deposit borrowing. Customers have also been more cognizant of where they’re putting their money. “Higher interest rates, as well as the banking crisis in March, led to an awakening of customers’ realizations of higher-yielding alternatives for deposits that may have been parked in noninterest bearing or low-yielding transaction accounts,” noted a recent bank deposit commentary from Morningstar. BANKS SHOULD EMPLOY PROFITABILITY MODELS TO HELP IDENTIFY WHEN AND WHERE HIGHER DEPOSIT PRICING CAN REALLY PAY OFF FOR THEIR INSTITUTIONS. 22 | INDEPENDENT REPORT
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