Banks have greater CD inventory than ever before, so now what?

Banks are back in the CD business again.

Before 2023, few board meetings ended with a management directive to “get more time deposits.” The banking industry focused on lending and payment systems to generate shareholder value; deposits tended to take care of themselves, and time deposits were compared to dinosaurs. But not so much anymore.

The boardroom sounds very different in 2024, especially for banks with interest expense in excess of non-interest expense. Most institutions wish for more non-interest-bearing deposits; most need more robust core deposits to generate more shareholder value. Certificates of Deposit (CDs) have reemerged as a significant contributor to banks’ funding composition. But most executives have grown unfamiliar with the simple and effective tactics – once common in the industry – that will now differentiate an institution in depositors’ eyes.

Why were CDs thought to be going extinct? What changed to make them central to deposit strategy and banking profitability? How can institutions utilize them to differentiate their institution and depositor loyalty in 2025?

Here are the answers to each of those questions.

Time deposits: Bad product or bad timing? 

Historically, time deposits were not a primary focus for community banks, as they were considered expensive relative to other accounts. And depositors were hesitant to commit their funds for months or years. Time deposits appeared on the road to extinction because they were not worth promoting or integrating into the broader strategic plan.

Imagine that mortgage rates remained at the levels available to borrowers in January 2024 for 15 years. Would mortgage refinancing go extinct?

Low interest rates are a significant part of the story of CD relevance. Depositors had little incentive to lock in their funds for a minimal return. Consequently, banks focused funding efforts on liquid products, leaving time deposits in the background. If a CD’s low relevancy – for banks – was a function of low demand from depositors, what happens when depositor demand climbs to all-time highs?

What’s changed for CDs? It’s demand. 

A mortgage company would miss significant profits if it ignored refinancing opportunities in the year ahead. Similarly, banks risk missing profit opportunities if they ignore CDs now.

The dramatic shift in banks’ economic environment is building a surge in the importance of time deposits:

1. Non-trivial interest rates: With interest rates no longer trivial, CDs have become more attractive to depositors who are willing to commit to fixed terms for higher returns. This has made them a focal point for bankers, especially as they seek to avoid the costs associated with repricing non-maturing deposits.
2. Inverted yield curve: The inverted yield curve has increased demand for shorter-term CDs. Banks, aiming to align with this trend, offer competitive rates on short-term CDs to attract depositors.
3. Strategic alignment: As the banking industry evolves, financial institutions are recognizing the value of incorporating time deposits into their strategic plans. CDs provide a stable funding source and allow banks to better manage their interest rate risk, making them a valuable funding resource.
4. Record growth in time deposits: Data from the FDIC indicates that time deposits have grown significantly in recent years. From a low point where CDs accounted for just 6.8% of total domestic deposits, they have surged to nearly $3 trillion, making up 17.7% of industry domestic deposits as of June 2024. This unprecedented growth highlights the growing role of CDs in the financial landscape. Yet, many institutions chose to “outsource” CDs in efforts to minimize repricing their funding book. Banks now hold $2.9 trillion in CDs and $1.33 trillion in brokered deposits. Now, not all brokered deposits are necessarily CDs, but most are, which means about 45.8% of banks’ CDs are brokered.

5. Surge in interest expense: According to FDIC.gov, quarterly interest expenses for the banking industry have skyrocketed from $8 billion to $144 billion. This dramatic increase calls for careful management of deposit strategies to ensure profitability. Banks can maintain a balance between attracting depositors and controlling costs by offering competitive rates on time deposits while minimizing the need to reprice non-maturing deposits.

Building on the foundation of new CD volumes 

Now that banks have more CDs than ever before, and more interest expense than ever before, they need tactics to retain and grow deposits. Aside from deposit pricing, the best tactics are really just about providing good service.

Traditionally, executives utilized a comprehensive list of simple services to create relationships with time depositors. Today, it’s remarkable how little a bank must do to provide a better experience relative to peers.

Here are four concrete examples:

1. Rethinking product offerings: Banks must focus on attainable innovation in their deposit products. So, how can they use their historic CD volumes to differentiate themselves from competitors? Your bank can introduce a CD loan program that allows depositors to borrow against their CDs. Such programs provide liquidity without forcing depositors to take early withdrawal penalties, making CDs more attractive while giving the depositor a very cost-effective credit source.

2. Clear and transparent policies: Transparency is crucial for building trust with depositors. Financial institutions should ensure that policies regarding early withdrawal penalties, accrued interest, and partial withdrawals are clear. For example, do depositors understand that accrued interest will never be withheld in the event of early withdrawal?  When a depositor needs to withdraw early – perhaps from a CD originated during the high rates of 2024 – you can remove friction by ensuring they know: We pay accrued interest at early withdrawal.
3. Leveraging technological advances: The digital age offers numerous opportunities for financial institutions to streamline their CD offerings. Remove the requirement for depositors to present physical certificate documents to withdraw funds. Book-entry CDs, where documentation is managed electronically, are far more efficient and depositor-friendly.
4. Targeted marketing campaigns: Banks must proactively communicate that they focus on long-term savers. Let people know your institution “offers unique benefits not found at all financial institutions.” Then, back it up with attainable innovations like the ones listed here to show depositors that there is a reward in working with you beyond mere interest rates.

These four are just the beginning of a long list of tactics to provide differentiated CD service.

Role of senior leadership in time deposit strategy

For time deposits to become an integral part of a bank’s successful strategic framework, senior leadership must actively shape and execute the institution’s deposit strategy. Executives must respond to market trends, regulatory changes, and technological innovations, but not always with enormous changes to the offering.

Make it an easy, modern experience for savers to manage their time deposits.

Additionally, training staff to understand the nuances of time deposits is critical. Many bank employees are likely unfamiliar with products like CD loan programs, and without proper training, they may not be able to communicate the benefits of these programs to customers. A well-informed team can serve as a valuable asset in educating depositors and fostering long-term relationships.

Time deposits, once a neglected aspect of banking strategy, have emerged as a critical component of the financial landscape. The growth in CDs over the past couple of years is a testament to their increasing relevance in a non-trivial interest rate environment. As banks face the challenges of higher interest expenses and evolving customer expectations, they must adopt differentiating strategies to remain competitive. Today, the bar for differentiation is very low: Your bank can enhance the CD experience relative to competitors by simply offering the flexibility many institutions have forgotten they had.

Neil Stanley is CEO and Founder of The CorePoint.