What Happens When Deposits Never Stop Moving?
The DCG advisory consulting team starts every week with an internal discussion of market trends, regulatory developments, and the real experiences of our bank and credit union clients. Here are the notes from this week’s Monday Morning Meeting.
Check out the meeting notes from previous weeks.
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This morning’s discussion explored a future in which tokenized deposits and stablecoins allow businesses and consumers to move money almost instantaneously between banks, investment products, and payment platforms. This would potentially leave much less money sitting idle in traditional deposit accounts and eventually cause institutions to compete not just for deposit balances, but also for the amount of time those balances remain on their balance sheets.
Today, businesses maintain operating balances to support payroll, payments, and everyday transactions. Those balances provide banks with valuable funding, even when customers are not actively using the money. Emerging technologies could change that relationship.
Imagine a business that automatically transfers excess operating cash into short-term investments at the end of each day, then moves those funds back into its operating account the following morning. The business maintains access to its liquidity while potentially earning additional returns.
As payment systems become faster and financial transactions increasingly automated, the traditional concept of deposit stability may need to be reconsidered. Historically, banks and credit unions have competed for deposits through pricing, convenience, service, and relationships. Those factors will remain important.
However, technology could introduce another competitive dimension: the ability to move funds seamlessly among financial institutions and investment alternatives.
Deposits might become more mobile, excess operating balances could decline, and institutions could experience greater variability in daily liquidity.
Importantly, this is not simply a question of whether stablecoins or tokenized deposits become widely adopted. It is about the broader evolution toward faster, more automated financial transactions.
Questions ALCO should be asking:
How much of our deposit base represents operating balances versus discretionary funds?
How would our liquidity position change if customers could move excess balances almost instantaneously?
Are our assumptions about deposit stability and retention appropriate for a more automated financial system?
Could faster money movement increase our reliance on wholesale funding or other liquidity sources?
The banking industry has spent years studying how deposit rates respond to changes in market interest rates.
The next challenge may be understanding how deposit balances respond to changes in technology.
As financial transactions become faster and more automated, banks may need to reconsider traditional assumptions about funding stability, liquidity management, and the economic value of operating relationships. Ask yourself whether your institution is prepared for a world where money moves continuously.
Go to school (continuously) on technology changes, whether you've gotten started already or not. Blockchain, stablecoins, and tokenized deposits are becoming increasingly relevant to financial services. Bank and credit union leaders should understand their basic mechanics and implications.
Develop the right capabilities. Institutions need people who understand product development, digital technology, and how to translate innovation into practical banking applications.
Adopt a proactive mindset. Questions and/or fear are not reasons to avoid understanding or evaluating new opportunities.
Faster payments, automated cash management, and digital financial platforms could fundamentally change how deposits behave. Don’t wait to understand how this will impact your institution!
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