Brace for Rising Rates, Loss of Deposits and Inflation with Sticky Deposits and Niche Tools

U.S. banks have seen unprecedented growth in bank deposits in recent years as a result of the COVID-19 outbreak. In fact, the FDIC’s 2021 Summary of Deposits (SOD) Survey reported that total deposits had increased 10.7%, more than twofold that of growth rates prior to the pandemic. Now, for the first time since World War II, deposit rates are forecasted to decrease, according to a Wall Street Journal article by David Benoit on April 10, 2022.

At the same time, signs of inflation are visible amid sharp increases in housing prices with the S&P Corelogic Case-Shiller Index reporting a 19.8% increase in February 2022. And with the Federal Reserve’s recent response of increasing interest rates by 0.75%, many bankers have their eyes fixed on how rates may continue to rise to contest this inflation, and what that could mean for their institutions in the short- and long-term.

This changing market may force institutions to consider if a possible merger, consolidation or acquisition could be in their future. To ensure the decision is their own, banks can prepare now for rising rates by determining how they are to compete when the flood of deposits is no longer present.

Solidify current deposits with niche enhancements

Institutions should determine what areas can be enhanced to stop the outflow of deposits once rates go up. One strategy is to turn focus to “sticky” deposits, or deposits that are likely to last and unlikely to be moved from your institution. Sticky deposits can serve as a set foundation when weathering an impending financial storm, and strengthening these deposits is a formidable tactic when contemplating approaching market changes.

Customer retention is key when seeking sticky deposits. Bankers should consider what niches or commonalities are served within their existing customer base to determine how current deposits can be retained and solidified. For example, a bank may have a large number of property managers, law firms or municipalities in their customer base, which all share a distinct set of needs in their business banking processes. Those account holders and their deposits will be more inclined to remain at an institution if it offers solutions to shared, frequent frustrations that are specific to their line of work.

Invest now in competitive solutions that will retain deposits

Banks then must examine how their customers’ shared problems can be solved and by what means. Differentiated, digital tools are a strong option in enhancing the banking experience for niche markets and can solve for specific pain points.

For instance, business banking clients that manage commercial escrow accounts may be accustomed to making regular, frequent visits to the branch to initiate account opening or closing. This means taking time away from their professional or personal lives to do so.

If an institution introduced a digital tool that provided remote functionality to complete commercial escrow transactions without an additional trip to the branch, those clients could take advantage of saving time and expediting business processes. With this added functionality, they are more likely to keep their deposits at your institution as the remote service has become irreplaceable.

The next step is determining whether a digital tool is available in the market that will meet your unique business needs or if one will need to be developed in-house. For many, partnering with a fintech is a viable option to explore. This would eliminate the need to develop the technology in-house. By combining your institution’s perspective with the specialized technical expertise of a fintech partner, the collaboration can work toward a niche tool that explicitly addresses the identified need.

Start today

With the looming warning of inflation, decrease in deposit growth and rising rates, the time to compete for sticky deposits is now. Banks must act quickly to implement digital tools that will wow their current customers and provide invaluable service, solidifying their ability to compete for these accounts among market shifts.

Nathan Baumeister is the CEO of ZSuite Technologies, a fintech offering its flagship product ZEscrow, a digital escrow and subaccounting solution, to financial institutions.