In a typical easing cycle, banks cut deposit rates quickly and lending rates more slowly—capturing margin as long as deposits and loan demand hold. But for some banks, this current cycle is different. Structural shifts in depositor behavior, driven largely by younger consumers, digital adoption, and nonbank competition, are prompting some institutions to revisit the playbook.
A senior credit officer at a Northeast community bank put it plainly: “Community banks need to think about the demographics of their existing customer base and start to replace the older generation. We want to capture the generational shift to younger consumers.” For that bank, holding deposit rates—not cutting them—is the tactic.
Here’s what the data and experts say community banks should be thinking about as they recalibrate deposit strategy in an easing cycle:
Younger customers expect yield—and will move for it.
Gen Z shops around, switches banks easily, and increasingly uses non-bank services. With savings accounts recently offering 3–5%, younger customers expect a higher return and can shift money in minutes if they don’t get it. Older consumers behave differently. Years of near-zero rates after the Great Recession left Gen X and Baby Boomers accustomed to earning little on deposits—and less likely to switch for yield alone.
Know who’s rate-sensitive—and who’s not.
Rohan Shah of Simon-Kucher estimates that about 20% of retail customers choose banks primarily on rates. The rest weigh product innovation, proximity, and relationships. “And the banks that will win in their markets are the ones that can correctly identify and serve those [rate-sensitive] customers,” he said.
Segmentation matters. When banks set deposit rates uniformly, they risk overpaying customers who would stay anyway while missing “hot money” flows. “The strategy of reducing deposit rates quickly and lending rates slowly used to work well. Not now,” Shah argued. The goal: “capture rate-sensitive flows with tactical rate increases.… It’s last mover advantage.”
Compete on more than price.
Community banks often lack the high-margin services that bring in zero-cost commercial deposits. “Getting non-interest-bearing deposits is like pulling teeth,” the senior credit officer said. Instead, experience still differentiates—especially for younger savers. Renewing CDs with loyalty rates, calling customers directly, and maintaining high-touch service can strengthen retention.
Product innovation also helps. Money markets and high-yield savings accounts give banks flexibility to move rates without long-term commitments, said ProSight’s John Rountree. Technology—like interactive teller machines—can deliver convenience without losing the bank’s personal edge.
Shah’s bottom line: “Understand behavior, understand price sensitivities, and understand your customers’ needs and motivations. Then offer them something that actually satisfies them.”
