The Federal Reserve may be slowing down on rate increases, but the same isn't true for your neighborhood bank.
Almost 20% of U.S. banks offered to pay savings rates of 2% or more in January, up from 15% in December and from just 1% a year ago, according to data from Curinos, a financial services consulting firm.
"There's a number of banks that decreased their marketing budgets significantly over the course of the pandemic, in part because they had more deposits than they needed," said Adam Stockton, director of retail deposits at Curinos. "Some of those banks may need to price up more than they have because customers are looking up, and there are 4% deposit options available to them."
The banking industry's transition from overrun with deposits to hungry for them played out over a short span of months. A year ago, banks were reporting elevated deposit levels, as many consumers and businesses still had leftover funds from pandemic-era stimulus programs.
Last spring, many banks began to note a slightly higher level of deposit runoff, as persistent inflation began to eat away at excess deposits. The trend solidified over the summer and through the fall, when banks began to meaningfully boost rates offered to depositors.
Now, more banks are boosting the rates they're willing to pay depositors, who they fear will flee to depositories offering higher rates.
Columbia Banking System in Tacoma, Washington, is among the banks that are wrestling with the newly competitive market for deposits.
"You're seeing lots of deposit specials, things of that nature," Chief Financial Officer Chris Merrywell said this week on a call with analysts.
Some Columbia depositors have chosen to move a portion of their funds to certificates of deposits or money-market accounts, Merrywell said. Columbia bankers have done a good exercising pricing discipline and maintaining relationships even when customers choose to move funds elsewhere, he said.
Capital One Financial is another bank that's feeling the pinch. The McLean, Virginia-based company
Deposits at Capital One rose 7% to $333 billion in 2022, thanks in part to a high-yield savings account that has attracted new customers. Interest expenses, which include interest paid on deposits, totaled nearly $2 billion in the fourth quarter, up from $381 million a year earlier.
Customers with lots of cash on hand are the most likely to switch banks in search of a higher return rate, Curinos data shows. Customer churn is concentrated among customers with deposit balances of at least $100,000. The Curinos data reflects deposits at 1,349 banks, which do not include online banks.
The banks that are doing the best job of holding onto deposits are likely benefitting from investments they have made in recent years to strengthen their primary relationships with customers, Stockton said. That means they were able to generate plenty of new checking accounts and direct-deposit relationships even when deposits were plentiful.
Other banks faring well in the battle for deposits are likely relying more on sharp rate increases that entice customers to stick around.
In recent months, about 36% of banks increased rates on all deposits, according to a survey of bank executives conducted this month by IntraFi Network.
"When 36% say that they're increasing rates on all deposits, that means the quality of deposits is definitely much less than it has been, and deposits may be disappearing at a quicker rate," said Paul Weinstein Jr., senior policy advisor at IntraFi.
Most banks believe the jostling for deposits will be even more intense a year from now. About 84% of banks expect a "moderate" or "significant" increase in deposit competition 12 months from now, according to IntraFi.
