Deposits 101: The Three Stages of Effective Deposit Management
- Daniel Farmer
- Jun 30
- 5 min read
While it’s no major revelation that the world has changed dramatically since the onset of COVID-19, few sectors have felt the shift more acutely than the banking industry – particularly when it comes to balance sheet and deposit dynamics.
The industry first saw an influx of stimulus-related deposit inflows in 2020 and then grappled with a meteoric rise in interest rates that followed. Over the last two years alone, funding costs increased materially, and deposit mixes shifted notably amid rampant market volatility.
Many deposit management teams scrambled to reactively deal with emergent challenges, often relying on gut instinct to “shoot from the hip” during this period of rapid change.
Fast-forward to today and the tide has (somewhat) turned on interest rates after several Fed rate cuts. Now, the battle to retain and grow deposit balances has intensified, often leaving groups feeling like they are following the leader rather than executing on well-thought-out strategies.
Now for the good news: There is a way to navigate deposit challenges more effectively and ensure the institution isn’t leaving basis points on the table or losing out on valuable customer relationships – and it all starts with data.
While the markets have changed substantially (and frequently) as of late, one constant remains true: harnessing and leveraging data will always lead to greater clarity and more effective strategy for navigating ANY environment.
Where to start? An effective deposit management process consists of three key stages:
1. Analyze
Optimizing a deposit strategy starts with analyzing the institution’s own unique depositor composition, needs, characteristics, and behavior patterns in order to focus efforts where they matter most.
If unsure of how to begin, consider these questions:
What concentrations does your institution have (uninsured, public/commercial, high rate, etc.)?
How are accounts segmented (product, geography, single- vs. multi-source relationship, etc.)?
How sensitive are depositors to changing interest rates (decay, volatility, betas)?
Analysis will yield unique insights on customer segments for every institution, and the strategy for dealing with each deposit and customer segment should not be uniform.
For example, many deposit bases have a larger percentage of CDs than ever before. However, not all CD relationships are created equally, nor should they be treated as such. DCG’s Deposits360°® Cross-Institution Analytics data shows that single-sourced CD relationships are about three times as likely to attrite upon maturity than multi-account relationships. By analyzing CD relationship concentrations, an institution can better target efforts where they will have the greatest impact. This may take the form of differentiated pricing strategies for different customer segments.
2. Monitor
After establishing a foundational understanding of the deposit and customer base, the next step is to actively monitor depositor behavior and the institution’s risk profile. This is crucial as depositor behaviors and balance sheet dynamics can change significantly due to various internal and external factors.
Given your experience over multiple rate cycles, ask yourself:
What can we learn from past depositor behavior to help us navigate the next rate cycle?
What trends are emerging at our institution today that require closer attention?
Are these trends consistent with past rate cycles, or are depositors responding differently this time?
For example, interest rate changes typically cause a shift in deposit mix (as we have seen) with funds moving between non-maturity deposits and time deposits, between products, or even out of the institution. This affects interest rate risk profiles and alters deposit segments and concentrations.
Failing to stay current on developing trends often results in misaligned interest rate risk & liquidity models, missed opportunities, and sub-optimal deposit management, which can be costly.
3. Strategize
A high-performing deposit management strategy should evolve from reactive to proactive. As new trends emerge, institutions must adapt their strategies as well.
While product and pricing decisions should consider factors like deposit composition, behavior trends, and market rates, they must also align with broader financial objectives, including managing interest rate and liquidity risks and maintaining capital goals and limits.
Questions to consider may include:
If interest rates were to move and the institution decides to adjust rates, are the resulting balance trends aligned with strategic goals?
Does the deposit management strategy support loan and asset growth objectives while maintaining a balanced risk and liquidity profile?
If conditions shift or trends become unfavorable, how should strategy adjust?
When teams make decisions in a follow-the-leader approach and are heavily influenced by what the competition is doing down the road, there will very likely be a misalignment between strategy and the institution’s actual needs. To put it another way, if the competition’s balance sheet, growth goals, and risks do not match your own institution’s, should your deposit pricing and management strategy match theirs?
For example, a competitor down the road may have a much more robust loan pipeline and more aggressive growth goals. If so, they may also have a more aggressive deposit pricing strategy to try and attract funding to fuel that growth (which also may be at higher yields). Following their lead on deposit pricing may be more costly than prudent for an institution with lower growth expectations or risk appetites. Having ‘competitive’ pricing at your institution does not necessarily mean having rate offerings equal to the highest rates available in your market.
What Next? Repeat and Refresh!
The three stages of deposit management should be a frequently recurring exercise. An institution’s goal should be to build a process to analyze deposit and customer trends in an ongoing manner, and vet strategic decisions with a continuously refreshed understanding of the balance sheet and its unique goals, risks, and opportunities.
There is no single "silver bullet" strategy or one-size-fits-all approach to deposit management. However, a repeatable process rooted in data can help ensure an effective data management strategy for any environment.
Contact DCG to discuss deposit strategy further or to explore ways to better harness your institution's data.
ABOUT THE AUTHOR
Daniel Farmer is a Senior Consultant at Darling Consulting Group. In his role, he assists financial institution executives in strengthening their asset liability management (ALM) process. He provides custom solutions for managing interest rate risk, liquidity risk, and capital while maintaining a focus on strategy and optimizing earnings. Daniel also works closely with financial institution executives and teams to harness the power of data analytics to distill actionable insights and enhance strategic decisions using DCG’s Deposits360°®, Loans360°®, and Liquidity360°® platforms.
Daniel began his career at DCG in 2016 as a financial analyst and holds a B.S. in Economics & Finance from Bentley University.
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