The deposit challenges community financial institutions are faced with today are like nothing they’ve seen before. Constant rate increases themselves are tough enough — but then add in increased competition from fintechs and big tech and you’re facing some very difficult deposit hurdles. Apple alone saw $10B in three and half months with the launch of their savings account with Goldman.
This urgent need for liquidity and the fierce competition for it have many in the industry using traditional funding sources like CDs in search of the needed deposits. However, to compete and succeed, finding ways to reduce the costs of deposits is crucial. Using high-yield CDs is only increasing those costs — and they come with other pitfalls such as hidden costs, rate shoppers, high attrition, constant repricing, ongoing liquidity struggles, and more. This is what’s known as phantom growth.
Today’s situation calls for a smarter, proven solution.
To create real growth in this unprecedented funding crisis, institutions can’t just attract any kind of deposits. What they need most right now are low-cost core deposits. High-yield checking accounts can fill that need and offer several advantages that allow institutions to make the most of incoming funds.
5 ways to make the most of incoming funds:
1. Grow core deposits
Bringing in deposits starts with perfecting the offer. High-yield checking accounts typically promote some of the highest deposit rates available to consumers. In the current rate environment, the products appear to pay premium rates — making them very attractive to consumers seeking higher returns as consumer confidence recovers. They’re also priced further out on the yield curve enticing consumers to move their existing checking accounts (along with their non-interest income and longevity) and consolidate their long-term CDs.
Kasasa partner institutions grew deposits 4.11% while controlling Cost Of Funds relative to peers.1
2. Increase engagement
The ideal consumer is one that is actively engaged and wants to stay with you rather than jump to another institution for a shiny rate. CDs can lock a consumer in for two years, but because they are rate-sensitive, they’re also likely to leave after those two years in search of a better rate. Checking account holders tend to be less rate-sensitive and stay longer after they make the switch.
High-yield checking accounts make a significant difference as they incentivize the behaviors that can lead to more loyal primary financial institution relationships and create additional income opportunities:
Kasasa partner institutions saw 6x higher average balances per account1
3. Reduce reliance on expensive CDs
Traditionally, CDs have been a go-to solution for rising rate environments. But with today’s epic funding gap crisis, relying on timed deposits brings hidden costs and risk, including astronomical marginal interest rate expenses. Paying extraordinarily high yields while creating rate-sensitive consumers only leads to reduced NIM, sinking ROAs, and phantom growth.
Kasasa partner institutions saw 2/3 less reliance on expensive CDs.1
4. Leverage built-in COF discount
This is all about changing the math. To demonstrate how high-yield checking has a significantly lower annual expense, let’s look at a cost comparison between a 4.5% CD rate and a 5% high-yield checking account with a $10M deposit goal. A 4.5% rate on a two-year CD gives you an annual cost of $450K.
While the CD’s COF stays at 4.5%, the high-yield checking account's COF drops significantly because not all account holders qualify for the 5% promoted rate. In this example, those that don’t — an annual savings of $188,184 as compared to the 4.5% CD.
Kasasa partner institutions had a 1/3 less increase in Cost Of Funds.1
See for yourself. Calculate the deposit growth and savings you can earn in one year with high-yield checking vs. CDs.
5. Navigate market volatility
Offering a high-yield checking account is only the beginning — you also need to be able to manage the surprises. That comes with expert guidance. Kasasa has access to analytics high-yield checking account holders at more than 600 CFIs. The knowledge and real-world experience gained from over 20 years, 3 million powered accounts, and $20B deposits allow best practices and challenges, in all rate environments to be shared, collectively.
This allows institutions to benefit from proactive performance analysis and product design adjustments. A slight change in product design can easily translate to a 0.5% or more decrease in actual Cost Of Funds for that product. These savings can add up quickly with a product that typically has average balances four to five times greater than free checking. And the versatility makes high-yield checking accounts easily customizable and highly capable of meeting individual institutions’ unique funding needs.
Past strategies aren’t working. New thinking is required to survive.
Mid-term, rate-sensitive instruments such as CDs may have worked in other eras, but today’s unprecedented circumstances call for a very different approach. With an epic funding gap crisis in full force and ROAs continuing to move towards unsustainability, growing low-cost core deposits is a must to survive. Taking a closer look at the advantages of high-yield checking accounts — and their unique COF discount — could be a key strategy to reducing fragility and creating real growth in your deposit portfolio.