Signs point to encouraging bank deposit growth in second half of 2024

The lingering chase for the hot money, stubborn inflation and the Federal Reserve’s own wobbling on interest-rate policy timing means that banking industry emphasis on deposit growth and retention remains top of mind.

It’s an environment that confirms now more than ever, banks should focus on the quality of deposits their institution attracts and maintains over quantity.

Most economists’ forecasts still expect some lowering of interest rates in 2024. That call holds for now even if recent inflation readings above the Fed’s comfort level and stronger wage growth have pushed back expectations for rate cuts until later in the year and prompted some strategists to rethink how fast the central bank may unwind its cyclical rate-tightening.

Bank of America U.S. economist Michael Gapen, for one, in previewing this week’s Fed meeting, has suggested current higher interest rates may “need more time to work.”

All told, general economic optimism prevails, with the most recent GDP reading a solid result, and both asset gains and housing prices holding up.

Plus, macroeconomics aside, consumer behavior can matter as much as the interest-rate picture. BAI research shows that banks don’t need to be customers’ primary institution to attract quality deposits.

“Positive deposit growth will likely return in the second half of 2024, which now looks like enough to put us back to slightly positive full-year growth for 2024,” says BAI’s Director of Research Intelligence Mark Riddle. “Strong growth should return in 2025 as rates and inflation settle in the year ahead.”

“In the meantime, growing deposits means focusing on quality growth over quantity growth,” Riddle adds.

Leaders at financial institutions largely agree. They say growing quality deposits continues to be the main strategic focus for the year, according to the annual BAI Banking Outlook survey. The report revealed greater weight put on deposit health over customer acquisition in a slight priority shift from recent rankings in the annual release.

What’s particularly interesting is this change in priority comes in reaction to declining deposit levels for all generational cohorts in consumer banking. When asked about their deposits compared to six months earlier, Gen X reported the most challenges, with 41% saying that deposits decreased or that they were facing expenses that exceeded savings. The other cohorts reported similar levels of distress, with 36% of Millennials, 31% of Boomers, and 30% of Gen Z reporting lower deposits or negative cash flow.

Why these declines? Inflation isn’t just impacting Fed timing; consumers say it is impacting their banking.

More than two-thirds of consumers cited inflation as the primary reason for deposit decreases, with rising housing costs, itself a slice of the big inflation picture, coming in second and impacting more than a third of respondents. Millennials also cited higher job loss than other generations, while Gen Z was more likely to be actively paying down loans.

Still, with the Fed’s patience so far pinning interest rates near their highest in a decade, many financial institutions are using high-rate products, such as CDs, to attract more affluent customers. BAI’s research found that a quarter of affluent customers with more than $100,000 in investable assets moved deposits into either CDs or investment accounts. These customers are very focused on rates, and banks have felt compelled to create a competitive rate strategy to stay in the game.

“Rates and pricing tend to be most competitive among the smaller traditional financial services organizations and direct banks,” Riddle says. “BAI’s Consumer Benchmarking also found that alternative and direct banks without branches could grow deposits from a higher mix of competitive CD pricing.”

This also demonstrates that banks do not need to be customers’ primary bank to attract deposits. BAI Banking Outlook found that only 14% of CD accounts are with a consumer’s primary institution.

Banking leadership no doubt faces a two-prong challenge as the industry waits out the Fed’s next cycle. It’s a balance to direct resources toward rate-sensitive products that may attract retirees and others looking to generate return and keep them in house for wider banking needs. But pushing the strategy view beyond the next few Fed meetings and even beyond late-year policy projections will go a long way toward fortifying the quality deposits that banks desire.

Riddle stresses that looking further ahead, as interest rates hold steady or begin to decline, banking leaders may lean on products such as money market accounts to continue attracting quality growth.

Mark Riddle is Director of Research Intelligence at BAI. Rachel Koning Beals is Senior Editor at BAI.