Banks Hike Rates as Deposits See Historic Drop

Banks are raising their deposit rates to woo back consumers from higher-yield alternatives.

A move to things like Treasury bills and money market funds has seen commercial bank deposits fall for the first time since 1948, Bloomberg News reported Monday (March 6), citing data from the Federal Deposit Insurance Corp. (FDIC).

This has led banks to begin lifting their own rates, especially on certificates of deposit (CDs), the report says, with Capital One offering an annual percentage yield of 5% on one-year CDs, and Wells Fargo offering 4% for its 11-month CDs.

It’s good news for consumers and bad news for banks, Barclays Plc analyst Jason Goldberg told Bloomberg, which notes that a loss of deposits can be critically damaging for smaller banks and community banks.

“There are challenges ahead for banks,” Goldberg said. “Banks reflect the economy they operate in, and most forecasts call for slowing GDP growth and increasing unemployment.”

As PYMNTS reported last month, the shift away from bigger banks is a relatively new development. Months ago, consumers were reluctant to part ways with traditional financial institutions (FIs), for a number of reasons. These include the convenience offered by physical branches and the time needed to switch banks and bank accounts.

“This overall consumer hesitancy likely played a large role in the slow adoption of digital-first banking in the U.S. market and started leading to sector job cuts,” PYMNTS wrote.

But once the new year arrived and customer savings began shrinking as consumers increasingly lived paycheck to paycheck, the trends began to shift, with many consumers driven by neobanks’ offers of higher interest rates on regular checking and savings accounts.

Other banks are using different tactics to win over customers. As reported here in February, Chase has begun expanding its cashback rewards program in the United Kingdom, something PYMNTS research shows can be a powerful tool in attracting and retaining customers.

For example, when money-storing apps offer rewards, consumer interest in using those apps rises by nearly half. That is true even for consumers who have not previously used money-storing apps — emphasizing the importance of adding such features, according to “Money-Storing Apps Gain Favor with Consumers,” a collaboration between PYMNTS and Treasury Prime.

That report also showed that among consumers who had used the apps in the past, all but 5% said they were interested in continuing their use of the apps if they are offered rewards.