How to Bring Back $472 Billion in Lost Deposits

Banks are all worried about deposits - the prevailing view is to find ways to attract new customers and have them bring their cash. Here's why it makes more sense to help your current customers save.

This past week at Finovate Fall 2023, one of many financial technology conferences hosted throughout the year, I felt the biggest topic of discussion was deposits: how to get them, and how to retain them.

The Backdrop

This year saw one of the largest decreases in deposits, which has banks scared.

In Q1 of 2023, US banks lost $472bn of deposits, the biggest drop in 39 years.

In fact, if you looked at deposits since 1980, we have not seen ANY sharp drops until now, not even during the Great Recession.

Why now?

Well, for the last 20 years, interest rates were super low. So you kept your money in a savings account, and you didn’t really have incentive to move it because pretty much everywhere else gave you the same, crappy rate. However, with rising interest rates, depositors felt they could get more bang for their buck in higher-yielding accounts. So they moved their money where they could earn more, to money market accounts or US treasuries.

Notice, money market accounts saw a spike of over $400bn between Q4 2022 and Q1 2023. Seems pretty similar to the number above, no?

What’s Happening Now

Well, consumers continue to move their deposits into higher-yielding assets, however, banks are starting to see a new trend emerge: spending outflows.

You see, US consumer spending has continue to increase at an accelerated pace. Consumers are feeling inflation squeezing their wallet, but they have still been spending more. However, a lot of this spending was done on credit, meaning their actual cash deposits haven’t yet felt the burn.

US credit card debt exceeded over $1 trillion for the first time ever in mid 2023

Delinquencies are also rising, though they are still near historic lows - we have not yet hit a tipping point where consumers can’t afford to make their payments, despite having quite high balances.

What’s the Tipping Point

Here’s the tricky part: no one really knows. In fact, there may not even be a tipping point if the government and the Fed continue to use measures to kick the can down the road. Here are all of my potential catalyst conspiracies:

• Student loan debt repayment crushes people’s budgets (though I imagine the government will offer significant grace periods)

• Potential commercial real estate crash having broader impact on financial institutions

• Consumers getting scared that deposits are declining, causing a run on the banks, which would REALLY destroy deposits.

• Everyone finally agreeing that aliens exist and are trying to kill us

What Should Banks and Credit Unions Do?

If you’re a financial institution looking at your deposits base and crying about it, you’ve likely been galvanized by your CEO to go look for new customers and steal them away from other banks. So now your job is to figure out how to do that - but, how expensive is that going to be, and what’s to guarantee those people won’t also spend that money?

Let’s Do the Math

Bringing in New Customers

The average cost of acquiring a new banking customer is around $300.

The median balance for an American household is $5300.

If you’re a medium sized credit union (say 200,000 members) who lost $30m in deposits, it’s going to cost you to replace that:

($30m/$5300)*$300= ~$1.7m

Not sure what your marketing budget looks like, but that seems a bit hefty. Now, you should probably set aside a good amount for new customers, but what about helping out the folks who increased their spending?

Engaging Existing Customers

Prior to the craziness of inflation, the average American’s monthly budget was around $5500. With inflation, that’s probably gone up by about a good $300-$500. If you are able to get folks to reduce their spending, and increase their savings by only $150/month, you will see an increase in deposits of:

$150*200k (members) = $30m

Now, this isn’t as easy as waving a wand. There’s a reason why most Americans don’t have enough saved for an emergency expense, but I can tell you this will be a whole lot cheaper than filling the gap entirely by new customers. So, how do we accomplish this holy grail?

The Good News

How do you get your members and customers to increase their savings, and acquire new customers? Well, offer great products, first and foremost. Secondly, reward them for doing the right thing financially.

Debbie is the first rewards platform for debt payoff and savings, and we’ve seen our users increase their savings by an average of $60-100/mo, just by virtue of getting rewarded for spending more consciously and making a plan with their money. Positive reinforcement has been cited as one of the strongest driver of behavioral change, and we use this to our advantage, rather than incentivizing folks to spend more money (cough cough credit cards)

Not only that, but we’ve been able to help credit unions acquire new members through our Rate Crusher Marketplace, a destination where folks all over the country can find their local credit union and refinance that pesky high-interest credit card debt, or start building an emergency fund.

Takeaways

The solution to this problem will likely be trying to do a bit of both, but either way, why not use this (crisis?) as an opportunity for a good old-fashioned plug.