Deposit Rates and an Easing Fed: A Contrarian View
Banks usually cut deposit rates during Federal Reserve easing cycles, including the one we’ve just entered. When they do, the reductions are often bigger and happen faster than those on lending rates. The benefit accrues to net interest income so long as deposit levels and loan demand hold.
But structural changes in the industry and younger consumers are spurring revisions, by some, to this usual rate script. While most banks are indeed lowering deposit rates, some see opportunities to address market and generational changes, at least partially, with a contrarian approach to deposits during this rate-cut cycle.
“Community banks need to think about the demographics of their existing customer base and start to replace the older generation,” said a senior credit officer at a bank based in the Northeast U.S. “We want to capture the generational shift to younger consumers.” For this banker, that means holding on rates.
Data show that Gen Z is used to shopping around and switching banks. Digital banking, non- and non-traditional banks, and price transparency from rate aggregators have made it easier. And consumers have become savvy investors in other assets, including stocks and cryptocurrencies. Since the last easing cycle in 2015, these forces have radically changed depositor behaviors and options.
Consumers’ move online, for one, is undeniable. In 2023, almost half (48.3%) of banked households used mobile banking as the primary way to access their accounts, according to data from the 2023 FDIC National Survey of Unbanked and Underbanked Households. Three quarters of households aged 25 to 34 and two-thirds of households aged 35-44 chose mobile as their primary method for accessing their bank accounts. Meanwhile, half of all households (49.7%) were using non-bank payment services such as Venmo, the study found.
Without seeing these consumers inside branches, banks must consider tactics other than face-to-face interactions, including deposit pricing incentives, to attract and retain the rate-aware depositor. “We have an aging population that may or may not be rate sensitive, but we know that the next generation definitely is,” the banker said.
And behaviors are hard to change. With savings account interest rates in the 3-5% range lately, many younger customers have come to expect a higher return on their money. If their current bank doesn’t deliver, there are plenty of non-traditional banks and other investments to which customers can move their money in minutes.
By contrast, Generation X and Baby Boomers, having experienced a years-long period of a near-zero Fed Funds rate following the 2008 Great Recession, had grown accustomed to stashing cash with banks for next to nothing. They may not be so ready to swap banks for better rates.
Price, product, and proximity
Industry experts are quick to point out that rates are just one among a host of factors influencing the banking decisions of customers at any age. Older depositors, for example, are more likely to stick with long-standing banking habits built on traditional customer engagement models—just 19% of banked customers aged 65 or older, for example, were mobile first in 2023, the FDIC report showed.
Still, a slice of every age group makes deposit choices almost exclusively based on rates. Rohan Shah, a partner at growth consulting firm Simon-Kucher, estimates that percentage of retail customers at about 20%. “And the banks that will win in their markets are the ones that can correctly identify and serve those customers,” he said.
Differentiating this ”hot money” from the other 80%, who may value product innovation, proximity to a branch, and relationships alongside pricing, is key to understanding where to steer capital.
For community banks, whose customers skew older, the challenge is profitably retaining devoted depositors, who hold more savings, while attracting a new generation with a different set of demands. Banks applying deposit rate policies uniformly may overpay those customer segments whose priority is something other than pricing.
“The strategy of reducing deposit rates quickly and lending rates slowly used to work well. Not now,” said Shah. “You want to capture rate-sensitive flows with tactical rate increases for your price-sensitive customers. It’s last mover advantage—don’t leave money on the table or spend more than you should be spending.”
What’s become clear is that, when it comes to satisfying a range of customer demands, one size fits all is no longer a valid approach, Shah added. “Use a targeted rate strategy as a lever when you need liquidity. Otherwise, you’re going to offer a higher interest rate to people who would have kept their money with you anyway,” he said.
In the hot money” game, community banks can be at a disadvantage. Competing on price can be expensive and cut into net interest income. At the same time, taking on larger rivals with services can also be cost-prohibitive.
Zero-cost deposits, for one, are coveted but typically hard for community banks to source. They usually come in through commercial relationships that include a package of value-add services such as cash management and corporate credit cards. Many smaller banks don’t offer these. “Getting non-interest-bearing deposits is like pulling teeth” for a community bank, the senior credit officer said.
A recipe for success
Instead, personal touch and community support—hallmarks of the local banking model—remain key ingredients for successful customer engagement, bankers say, even if mobile is many consumers’ first choice for account access. Convincing younger, rate-sensitive depositors to come and stay takes a holistic approach to customer satisfaction—hook them with price, keep them with experience.
Together, pricing perks and superior customer experience can be a powerful combination. Taking a high-touch approach to maturing certificates of deposit is one example, the banker said. Instead of rolling a CD automatically into a lower rate, proactive banks can offer renewal loyalty rates and call customers directly. “We want to stay in touch with our client base, not neglect the good, quiet relationships to serve the squeaky wheels,” the banker said.
Research from Santander Bank published in August 2025 found that 58% of Gen Z and 54% of Millennial survey respondents increased their savings since the start of 2025, outpacing older generations. The overwhelming majority of those two cohorts said growing savings was a top priority. Interest in opening a CD before rates come down was highest among Gen Z (74%) for those growing savings; the survey found that just 38% were currently earning a yield on savings of at least 3.00%.
Product innovation is another avenue to retention, but also a way for banks to manage their exposure to interest rates. Accounts such as money markets and high-yield savings offer banks flexibility to bump rates without locking into higher payments longer term, said John Rountree, head of client engagement at ProSight Financial. “This is actively playing out among traditional banks but also some of the direct banks, who are losing more of the ‘hot money’ deposits as rates fall,” he said.
Technology can drive product innovation while helping to maintain the high-touch appeal and service personalization of smaller banks. Platforms such as Interactive Teller Machines advance the ATM interaction, offering access to a live customer representative should customers need it.
Since different customers want different things from their financial services providers, the onus is on banks to profile and segment their client base and channel capital and services to match their distinct needs, regardless of age. “Even with the younger generation, we are seeing differences in elasticity on rates,” Shah said, citing the enduring popularity of branches as evidence of tomorrow’s customers wanting something more.
Improving customer experience and offering an attractive product suite, while staying competitive where rates matter, is a path to growth and retention. “Understand behavior, understand price sensitivities, and understand your customers’ needs and motivations,” Shah said. “Then offer them something that actually satisfies them.”
By: Michael Bender
