Key points:
Interest rates are on the rise. So what can FIs do about it?
First, a little background: as recently as 2019, many banks and credit unions faced difficulties in raising core deposits. The pandemic changed all that. Almost overnight, loan applications declined precipitously and businesses drew down their credit lines.
At the same time, state and federal stimulus programs boosted deposit and savings rates, causing a severe whipsaw in loan-to-deposit ratios. According to research conducted by the Dallas Fed, the personal savings rate — that is, the household share of unspent personal income — peaked at 34% in April 2020. (To put that in context, the peak savings rate in the 50 years preceding the pandemic was 17.7%.)
With each new round of stimulus payments, these trends became even more pronounced. The Dallas Fed reports that the share of stimulus recipients saving their payments doubled from 12.5% in the first round to 25% in the third round. The rise in consumers using funds to pay down debt was even more drastic, increasing from 14.6% in round one to 52.3% in round three. Meanwhile, as the value of stocks just kept going up in a volatile market, the relative safety of bank deposits became more attractive for many consumers, boosting community FI deposit rates.
Now, of course, it’s changing all over again. “Consumer spending is on the rise, and we’ve seen a decrease in federal stimulus,” observes MANTL CRO Mike Bosserman. “So there’s less cash coming into banks than before. We also expect to see an increase in lending activities, which means that banks will need more deposits to fund those loans. And with interest rates going up, other asset classes will become more interesting. Rising interest rates also tend to have an inverse impact on the value of stocks, which increases the expected return on those investments. So in the next few months, I would expect to see a shift from cash to higher-earning asset classes — and that will significantly impact growth.”
All of these trends are unfolding in a truly unprecedented competitive landscape.
“Community institutions are already facing a serious tech disadvantage in comparison to money-center banks, challenger banks, and fintechs,” says Bosserman. “The number of checking accounts opened by community institutions has been declining for years.”
Indeed, over the past 25 years, money-center banks have increased their market share at the expense of community FIs. Research shows that the top 15 banks control 56.2% of the overall market share, up from 40% roughly 25 years ago.
Additionally, the rise of new players such as fintechs and neobanks has driven competition to never-before-seen levels.
For many community FIs, the threat is existential. “Community banks and credit unions are critical to maintaining competition and equity in the U.S. financial system,” says MANTL Co-Founder and CEO Nathaniel Harley. “But their role can go overlooked in an industry that is constantly evolving and focused on bigger, faster, and shinier. For institutions that have fallen behind the digital transformation curve, the opportunity cost of not modernizing is now a matter of survival.”
According to some experts, the key to survival is changing how you think about technology investments.
“Technology isn’t a cost center,” insists Christian Ruppe, VP of Digital Banking at Horicon Bank. “It’s a profit center. As soon as you start thinking of your digital investments like that — as soon as you change that conversation — then investing a little more in better technology makes a ton of sense.”
Bosserman agrees. “With the right technology in place, you can regain a competitive advantage,” he says. “You can pivot in response to whatever’s going on in the macro environment. You can turn the tap on during a liquidity crunch, then turn it back off when deposits become a lower priority. That kind of agility will be critical to future-proofing your institution.”
But what does that look like in practice?
“Look at a MANTL customer like Quontic Bank,” Bosserman continues. “They went live on our platform in April 2020 and took a digital-first approach to account origination. Customers actively sought them out at a time when in-person banking was widely unavailable. As a result, Quontic increased its net conversion rate by 150%, raising over $5 million in deposits per month with no additional marketing.”
Here’s the bottom line for community institutions: in a rapidly changing landscape, technology is the key to fostering resilience so you can embrace the future with confidence.
“The average American adult prefers to open accounts digitally, period,” says Bosserman. “And if you don’t have the tools to open accounts for them, you’re going to have a very difficult future — no matter what happens at the Fed.”
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