THE VALUE OF CUSTOMER PROFITABILITY MODELING By Dennis Falk, SVP & Regional Manager, PCBB 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 nondeposit 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 non-interest bearing or low-yielding transaction accounts,” noted a recent bank deposit commentary from Morningstar. The tides are slowly beginning to turn back toward profitability, however, and maintaining that momentum is key. As banks seek to hold onto existing customers and attract new ones by inching up deposit rates, it is important to do so strategically. The Stakes Failing to offer competitive deposit rates could further erode existing deposit bases as customers seeking higher rates route their money to other institutions. On the other hand, banks engaging in deposit rate increases need to be careful with their approach. Many of the industry’s largest banks have been offering higher rates solely to new customers and even limiting the geographic region that new account holders must reside in. This “new money only” approach can increase the risk that existing customers will feel slighted and may spur them to move their business elsewhere. Another way that banks have dealt with deposit rate competition is by taking a passive approach, hoping that the number of customers who depart in search of higher rates is minimal. In some cases, banks wait to offer higher rates to customers in search of greener 19 The CommunityBanker
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