Deposit snapshot: Money-in-motion comes to a rest, but the Fed watch heightens

Key takeaways:

Cautiously optimistic. The BAI State of U.S. Deposits reveals a steady to modestly upbeat landscape, considering that interest rates are still elevated by historical comparisons. The detailed picture is mixed: business deposits in recent months remained higher, while consumer deposits were shy of expectations, in part because bonus payouts were softer.

Money-in-motion settles down. There is deposit improvement from valuable higher wealth accounts. Banks are less worried about money in motion, reporting slower outflows and even some positive performance as more of these yield-chasers of the last handful of years are staying put.

Favoring full-service banking. Data shows stronger signals that once trending gains for direct or alternative banks to establish a primary deposit account may be plateauing at least relative to deposit accounts at full-service traditional banks. This shift emerged across demographic segments, including younger generations, and warrants further tracking.

TRANSCRIPT

Rachel Koning Beals: Quality deposit growth leads as a top business challenge flagged by banks and credit unions this year. With the interest rate picture and business and consumer confidence in flux, it’s vital to check in regularly with the BAI State of U.S. Deposits. I’m Rachel Koning Beals, Senior Editor at BAI, and this is the BAI Banking Strategies podcast.

The BAI Banking Strategies podcast sits down with our research leaders, Isio Nelson and Tom Hoscheidt, fresh off their State of U.S. Deposits webinar, which captured the banking habits of consumers and small businesses early in 2025. They share key trends, banking leader insight and the signals within the data that can help banks and credit unions prepare for the coming months. Welcome Tom and Isio.

Tom, set the scene at a high level, if you can. Since we last checked in on deposits last quarter, that reading was a stable, slightly positive environment, if I’m remembering correctly last time we talked. And now, how would you sum it up?

Tom Hoscheidt: Well, yeah, the last time that we talked, we were on a positive trend. Deposits looked like they were going to pull out of the negative, and we anticipated that we’d be between 1% and 2% by the end of 2024, but what happened was a little bit of a curveball in that the positive trajectory has changed, but we did not get into that positive territory. We’re actually just slightly down 0.1% and the reason for that was we didn’t see the normal December surge that we typically see with deposit growth.

There’s always an uptick as bonuses are paid out at the end of the year. We just didn’t see what we’ve seen in years past. So, we were below that historical performance on the final surge of the year and that left us at slightly negative in terms of deposit growth.

Koning Beals: Any key differences between consumers and small businesses when you’re talking about that landscape?

Hoscheidt: Part of the reason why we think that the consumer side didn’t rise as much is we did not see as big a drop on the business side. So typically, at the end of the year, there’s a drop on the business side [and] a rise on the consumer side, and with a lower drop kind of indicating to us that there might not have been as much cash taken out of the business [deposits] at the end of the year due to rates being higher and businesses needing cash for operations. We think that led to a lower increase on the consumer side.

Koning Beals: What were some of the tendencies across checking, savings, CDs and money markets that stood out this time around?

Hoscheidt: Well, again, I’ll talk about, you know, last year and then kind of where things are going this year. But last year, once the Fed started reducing rates, we saw an almost immediate impact in terms of overall deposit balance growth. So right after that meeting where they lowered rates, we saw upward trends. And the products that we saw the trends on were basically checking, savings and money market. Where we saw a downward trend, though, was on the CD side, because as rates came down, banks were quick to react there. We don’t believe that consumers liked what they were seeing in terms of renewal with their rates … and so a lot of money shifted over into the savings and money market side, which of course, contributed to that increase that we saw there. However, since rates have started to tick down, we’ve seen an overall positive trend line in terms of checking and savings and money market, and then the negative trend line on CD continued. So the markets reacted very quickly to the Fed taking action…

Koning Beals: Isio, let’s dig a little bit deeper into the consumer part. How did 2024 wrap?

Isio Nelson: As Tom mentioned, we kind of ended up at almost flat for the end of the year, but a lot of that was lot better than the year before that, so the consumer had started to rebound when it came to the rate changes that occurred, and then the way that the consumer overall was still keep their deposits within the institutions.

Koning Beals: Importantly, banks and credit unions are already getting some mixed signals on consumer sentiment and the broader surveys out there are mixed. Mixed signals on spending; inflation data is a little mixed. How might this uncertainty impact deposit growth over the next handful of months? Are we already starting to hear some feedback?

Nelson: So we actually, in the State of U.S. Deposits, went through a survey we just fielded in January on consumer sentiment and what the consumer is thinking. And so the good news is we finally got about 50% for consumer sentiment when it came to their financial situation being better in six months. We had always kind of hovered right around 50 before. So it was glass- is-more-than-half-full for the consumer, in January at least. And then we saw two other pretty big upticks. One was [an optimistic outlook for] the new political climate being better for finances over the next six months [and second] inflation being better in the next six months. So, the consumer was getting more positive than they were the year before. Now, the thing I always caution against, [the reading] was still only around the 40% mark for a lot of these indicators. Most consumers are not [outwardly] optimistic, but they’re more optimistic than they were last year.

Koning Beals: Do financial institutions tend to shift or mix up their messaging or their marketing quickly around consumer sentiment changing? Do the institutions tell you  they’re doing that, or is it generally more prudent to wait for clearer signals when it comes to consumer health?

Nelson: They’re constantly looking at what’s going on in the market and what campaigns are going to do, especially as they are looking more to digital and able to shift, you know, marketing digitally. Now they’ll still do some [engagement] on direct mail and things like that, but they’re able to shift a little bit more. We actually saw it in some of the promotional offers, which were primarily online or even in-branch types of offers, but they shifted away from, you know, CD and even money market and more into incentive offers that are based off checking. And that goes all the way back to really trying to get that quality primary customer as far as quality deposit gathering, instead of just any type of deposit gathering. K

Koning Beals: Yeah, I hear you say quality deposits a lot. That really stuck with me. When I asked other people in our industry, I like to put those two words together, because it really matters to say it that way for sure.

We always remind our listeners to revisit the full webinar. There’s great data there. There are great visuals for their fuller picture on this deposit landscape, and we’ll definitely link to that from the podcast page.

But did one or two stats in particular jump out at both of you from these readings? Say, versus last quarter or other recent findings? Tom, I’ll start with you. Any stat jump out in particular for this deposit period?

Hoscheidt: One of the things that jumped out is, is what’s happening with households that are wealthy. During the pandemic, when there was a lot of money being infused into the economy and also uncertainty in the marketplace, there was significant growth with those wealth households. Then post-pandemic, with an increase in rates, deposit growth went negative, because generally speaking, wealth households found new places to earn higher yield in terms of that money, and large banks, generally speaking, lagged in terms of their increase in interest rates.

And so that basically just left other opportunities out there for the wealthy to pursue. But what we’ve seen is since that time is growth from the wealthy households has gotten less and less negative and actually pushed into the positive in the most recent benchmarking study that we’ve done, and that to us is saying that, again, with rates coming down, with money not flowing out of the bank via wealthy households moving for higher yield, we think that a lot of the money that was in motion has slowed down considerably, and that is a good stat for banks as we move into a higher-growth environment.

The other thing that is optimistic is that large banks, since the Fed acted in terms of the Fed Funds rates, lowered them, they’re showing growth in terms of savings and money market, which, again, they represent a high percentage of our overall base that we track. And so, with [these accounts] showing growth, that is also contributing greatly to the overall positive deposit growth trend that we’re on right now.

Koning Beals: Isio, anything jump out at you this time around?

Nelson: Yeah, the one thing that we looked at through the survey data that I thought was interesting is for the first time in a while, we actually saw a retraction of consumers who cited their primary financial institution as direct or alternative banks that had always been growing and that actually retracted for the first time in a while, and it’s something we’ll keep an eye on. And the other most surprising thing was that we saw that [deposit flow] being allocated towards the local bank and credit union across all segments, whether it was Gen Z, or Millennials, or Boomers, but especially in the Gen X side, which we think might be a couple of things. One is, as Tom talked a little bit about, the wealth side in those large banks kind of coming back up to par with where usually direct banks get out a little bit faster start that [higher-balance customers] no longer need to go to direct banks or alternatives for those rates, that they can stick with their primary institution.

The other thing we think may be going on here is, as you look at more of the mass market direct banks and alternatives, they’re starting to hit a plateau as far as their overall growth and acquiring those mass customers and starting to see those customers mature back into a more traditional, full-service bank. So, it might be a couple of those things. It might not be, but as we look at the data, it’s just something to keep an eye on that we have always seen these direct banks and alternatives growing as far as getting market share, and you started to see it sink back a little bit.

Koning Beals: Really interesting. Well, understandably, much of the deposit landscape and bank decisioning will be Fed-dependent. But your thoughts as much as possible, Tom, with that in mind, can we get a sense of deposit health, both for the consumer, for the SMBs into the middle of the year and beyond? Putting you on the spot a little bit here, but as you talk to banks and other institutions, I’m sure they want to know, what can we sort of say at this point?

Hoscheidt: Well, again, with rates still elevated [historically], even though they’re expected to come down this year, we see, of course, deposit growth into the positive but how positive that goes is going to be largely dependent on what the Fed does with rates. If they hold them, we’ll be more in like the 1% to 2% range. As we pointed out during the webinar, if they reduce [the Fed Funds target range] two or three times, that’ll push us closer to 2% to 3% and if they’re more aggressive, then that’s where we get to, more into the 3% to 4% range. So generally speaking, the outlook is good. I just basically would caution banks not to be too overly optimistic about where deposit balances go, because we just see when Fed Funds rates are still above 2%, deposit balance growth is muted.

Koning Beals: Isio, anything to add?

Nelson: There’s a lot of different ingredients that are out there that are going to affect what the Fed is going to do this year and month by month, one indicator would look like there’s a reason to lower it, and then another indicator is going to look like they’re going to maybe increase it. And so to Tom’s point, keeping an eye on what happens there, not that all banks aren’t already doing that, but understand the corollary effect of that with some of these other things that may affect the consumers behaviors when it comes to their deposits. On the small business side, I think too, right now we’re thinking about for this year from a growth perspective, is something to keep an eye on with how small businesses may be impacted by a lot of the geopolitical [uncertainty] and other things that are going on, and how that might impact that deposit growth or not.

Koning Beals: Thank you to Tom Hoscheidt and Isio Nelson for capturing the highlights from the quarterly update. Remember, you can dig deeper into the data and view the charts that capture the U.S. deposit landscape, plus sign up for each of our informative State of U.S. Deposits quarterly webinars. Go to bai.org and under the Banking Strategies dropdown, click on webinars. There you’ll find State of U.S. Deposits among our offerings.

Thanks for tuning in and have a great day.