Digital Mobility and Rate Lags are Ending the Era of Cheap Bank Deposits

Depositors moved funds from bank deposits into money market funds as the opportunity cost of holding low-yielding accounts increased. Total US bank deposits decreased by $874.1 billion to $17.2 trillion in the year to June 2023. This decline was driven in part by a lag in deposit rates; from January 2022 to June 2023, the federal funds rate surged by 500 basis points while the cost of deposits increased only 166 basis points.

This shift occurred as central banks raised rates sharply between 2022 and 2024. The resulting increase in funding costs compressed net interest margins and eroded profitability for banks with large retail deposit bases. To replace lost stability, banks increasingly relied on wholesale funding, which is more volatile and sensitive to market conditions.

Banks are now redesigning products and using AI-driven dynamic pricing to prevent balances from leaving. Some institutions are moving away from low-yield current accounts toward tiered interest rates, time-bound promotional rates, and hybrid products like the Barclays Rainy Day Saver. Others are leveraging machine learning to predict customer attrition and proactively adjust rates. Regional and mid-sized banks, such as PNC Financial Services, are introducing high-yield savings accounts and certificates of deposit to defend their deposit bases.