Consumers are clearly in the driver’s seat these days as they account for nearly the bulk of all bank deposit dollars.
Ninety cents of every bank deposit dollar now flows from retail consumers, according to research firm Market Rates Insight. Retail deposits increased from 83% of all domestic deposits in 2008 to 90% as of June 2011. Credit union activity was not tracked.
In dollar amounts, retail consumer deposits grew from $5.8 billion in June of 2008 to $7.4 billion in June of this year.
The main reason for the surge in retail deposits is tied to the financial system crisis in 2008, said Dan Geller, executive vice president at MRI. There was a feeling that there would be a runoff on deposits. The analogy was the Great Depression when worried consumers indeed pulled their money out of banks, he explained. The difference now is that federally backed deposit insurance is in place.
“It was a different scenario, but there were still a lot of unknowns,” Geller said, referring to 2008.
The shift toward a higher percentage of retail deposits is by design, Geller noted. Ultimately, he said it lowers liquidity vulnerable by reducing the risk of large withdrawals by businesses or wholesale depositors, and it provides opportunities for closer relationship with individual consumers, which promotes greater loyalty and additional revenue streams.
Meanwhile, as retail deposits have grown over the past few years, business deposits have steadily dropped, MRI found. Business and wholesale deposits decreased from 17% of domestic deposits in June of 2008 to 10% in June of this year. In total, both dove from $1,189 billion in June of 2008 to $819 billion for the same period.
Geller said the amount of retail deposits would have been higher, and wholesale deposits lower but for a change in the FDIC classification of retail deposits in March 2010, which excludes brokered deposits from the retail category.
“Banks and credit unions were basically moving toward developing relationships with retail consumers because they are considered more stable compared to business deposits,” Geller said.
As for the tie to reports of new accounts at credit unions sparked in large part by Bank of America’s attempt to levy a monthly $5 fee for debit card use, Geller said the two aren’t linked because MRI looked at deposit trends over a four-year period. He believes there will continue to be an uptick in retail deposits connected to the BofA backlash, but then the numbers may stabilize.
Still, BofA and other banks could have circumvented the $5 debit-card fee controversy simply by adjusting their deposit rates by 0.01 percentage point and generating nearly twice as much in interest-expense savings as the new fees on debit cards, Geller offered.
“This whole $5 dollar ordeal was unnecessary,” Geller said. “It could have been avoided by doing simple math. I did the analysis for just FDIC-insured banks not credit unions. But, I can do the same analysis for credit unions just with different numbers.”
Geller said “unnecessary” because just by lowering their deposits rates by as little as one hundredth of percentage point per month, banks could have generated nearly double the potentially $875 million in monthly debit card fees.
The $875 million is the total potential for debit-card fees if each of the 175 million U.S. adults with bank account will pay $5 per month, he explained. A decrease of one basis point in the national average deposit interest rate reduces interest expense for banks by about $1.5 billion a month, which impacts the bottom line in the same way as earning this amount through fees, Geller added.
To bring in a bit of perspective, FDIC-insured banks’ interest expense on deposits was $107 billion, according to MRI. That translates to an average of $9.2 billion per month compared with an average monthly interest expense of $7.7 billion as of June of this year. The firm said the national average interest rate for deposits was 0.80% at the end of 2010, and 0.74% in June of this year, a decrease of six basis points in six month or an average decrease of one basis point per month.
Maintaining the normal decrease of 0.01 point per month reduces interest expense nationally by $1.5 billion per month, which is nearly twice as much as the total potential income from the $5 debit card fee if every bank accountholder had to pay it, MRI discovered.
Over the next two to three years, financial institutions can protect maintain a healthy net interest margin and protect their bottom by increasing their level of pricing precision and analytics, Geller suggested.
“The bottom line doesn’t care if money comes from savings or new revenue. It all flows to the bottom line,” Geller said. “Yes, it’s understandable that credit unions and banks have to maintain a healthy net interest margin, but [BofA] could have done it in a more productive way without an uproar.”