Prioritizing deposit growth in inflationary times

After more than a year of deposit outflows as bank customers sought higher yields— and as others drew down their checking or savings accounts in response to inflationary pressures—it’s hardly a surprise that bankers say their top priority in 2024 is deposit growth.

According to BAI Banking Outlook: 2024 Trends, the No. 1 business challenge for bankers will be growing their deposits. BAI’s forecast for financial services organizations’ deposit growth in the year ahead is negative, with a forecasted 2.4% decline in deposits.

In our 2023 survey of bankers, deposit growth did not even crack the list of Top 3 priorities. The leading priority was new customer acquisition, which slipped to the second spot for 2024.

But 2023 was no ordinary year. In the spring, Silicon Valley Bank, First Republic Bank and Signature Bank all failed, triggering a flight to deposit safety. Throughout the year, many banking customers hunted for higher-yielding products like CDs and money market funds. It’s a trend that started in 2022 as the Fed hiked interest rates to cool the economy inflated by the COVID-19 stimulus payments.

When interest rates are low, consumers typically park their money in checking accounts because there are no better alternatives. But when interest rates are higher, as they are now, consumers drain excess amounts from their checking accounts in favor of more lucrative alternatives like CDs offering a higher rate of return.

That’s particularly true for more affluent consumers who can afford to chase higher-yielding products beyond a basic checking or savings account. Lower-income consumers, battered by inflation and higher rents, are forced to draw from their checking or savings accounts to make ends meet. Traditional banks are seeing some of their deposits flow to online and direct banks, which are offering better rates on products like CDs and money market funds. Still other deposits are migrating to investment firms.

The competition for deposits has intensified among banks and credit unions because deposits are the best and the cheapest source of funding. If banks don’t have sufficient deposits, they must seek funding elsewhere. And that is a big challenge and a big risk.

In less-inflationary times, banks drive deposit growth by acquiring new customers who open checking accounts, which usually establishes primacy. But in 2023, as checking accounts became less sticky because of a wealth of higher-yielding alternatives, banks focused intently on retaining existing deposits instead of prioritizing the acquisition of new customers.

New customer growth tends to come from people new to banking. They are often just out of college and starting their first job. They usually have less money and less wealth as compared to older consumers. Generation Z and Millennials are well worth acquiring for their longer-term lifetime value, but their deposits will likely have minimal impact in the near-term.

According to BAI Banking Outlook: 2024 Trends survey of 102 financial services organizations, only about one-quarter (28%) of banks and credit unions said they are offering cash incentives for opening a new checking account. The average incentive is $275. BAI also surveyed 1,000 consumers of all generations to glean their insights.

Confirming what bankers are seeing, all generations of consumers reported in September of 2023 that they had fewer deposits than they did six months earlier. The No. 1 culprit: inflation, followed by higher rent/ housing costs and big-ticket purchases. Consumers are simply having to spend more money on just about everything than they did six months to a year ago. How customers make deposits or open new accounts continues to change as well, according to our survey.

Only a third of Gen Z and Millennials open deposits in a branch versus nearly 60% of Baby Boomers who prefer to do so in a branch.

Younger consumers are far more likely to open a deposit using an app or a desktop computer than their older counterparts. Twenty-eight percent of Gen Z said they prefer to open a deposit account via a bank’s mobile app.

By contrast, only 9% of Boomers said they preferred to open a deposit account on their bank’s mobile app. It all depends on the generation and how people grew up in the banking system. Older consumers are far more likely to walk into a branch in their community and hand over a check to a teller they’ve known for years. Many younger consumers have never stepped foot in a branch, preferring to handle their deposits online via the mobile app. It’s how they shop, hail an Uber or make a dinner reservation.

Nevertheless, the branch is still important, but important in a different way. Consumers of all generations like to know there is a branch within striking distance of their home or office. And even if some consumers rarely visit a branch, they will make appointments to meet with a banker for financial advice or for more complex transactions like a mortgage, an auto loan or borrowing to finance a college education.

Selecting a primary financial services organization often boils down to two factors for the consumer: Which bank has the lowest fees, and which one offers the highest rates. Fees apply to a customer’s checking account, which is usually the only account that will incur fees. The second-leading factor, according to our survey, is the interest rate paid on savings accounts, CDs and money market accounts. Consumers are keeping a close watch on those rates, especially amid inflationary times we’re now experiencing.

These are challenging times, especially for people who didn’t experience the unsettling, high-inflationary period of the late 1970s and early 1980s. Navigating this moment in time is daunting for younger consumers, as well as for younger bankers tasked with accumulating deposits and acquiring new customers. What we can say with certainty is that the inflationary environment of the past six to 12 months has caused a sea change in consumer behavior to which bankers need to respond with a high degree of agility and creativity in 2024.

John Rountree is head of client engagement for BAI.

Explore more data-driven articles exploring this year’s major industry themes in the BAI Executive Report, “2024 Banking Outlook.”