liquidity in the system. That said, financial services analysts expect deposit betas in the 2550% range over the next two to three years. For financial institutions, that means passing 25-50% of these rate increases on to our depositors. That is significant, and the response will not be the same for all institutions. Given this variety of possible responses, we anticipate seeing rate offers from financial institutions —most likely led by online and digital banks, with community-based financial institutions following at a slower pace and on a smaller scale. Assuming the bulk of this effort won’t happen until 2023 and beyond, the question financial institutions must ask themselves is, “What should we do now?” Institutions with low-cost and less rate-sensitive funding are well-positioned for any rate environment, but especially for the one we are about to enter. The chart below illustrates what the deposit cost advantage looks like when a financial institution has a lower cost of funding. The rate environment we are entering is similar to what we saw in 2016-2018. As rates were rising, the deposit cost advantage over peers dramatically changed. In a lowrate environment, it was small but grew to 63bp when rates were at the level we expect to see again in 2023-2024. Strategically growing low-cost funding today is the key to successfully positioning your organization for tomorrow. Even if you have excess liquidity at the moment, there isn’t a better time to grow low-cost funding by growing your customer base and increasing your checking and savings deposits. The majority of these funds will be non-interest bearing, and those that are interest-bearing will be at the lowest rates. To position your financial institution for the coming battle for deposits, it is imperative that you: 1. Offer compelling retail and business deposit products; 2. Remove barriers to growth (e.g., evaluate your Customer Identification Program); 3. Use data-driven targeted marketing to reach high-probability conversion prospects; and 4. Equip your employees with the skills to capitalize on every opportunity every time. If your strategic goals include low-cost funding and a strong position in any rate environment, you have to be intentional about growth. If you focus on growing core relationships, you will not have to follow other institutions up and down the rate cycles. ■ Achim Griesel is president and Dr. Sean Payant serves as the chief strategy officer at Haberfeld, a data-driven consulting firm specializing in core relationships and profitability growth for community-based financial institutions. Achim can be reached at 402.323.3793 or achim@haberfeld.com. Sean can be reached at 402.323.3614 or sean@haberfeld.com. Institutions with lowcost and less ratesensitive funding are well-positioned for any rate environment, but especially for the one we are about to enter. August 2022 | 25
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