Banks are back in the CD business.
Until 2023, very few board meetings ended with a management directive to “increase term deposits.” The banking industry focused on lending and payment systems to create shareholder value. People tended to handle their own deposits, and term deposits were likened to dinosaurs. But not so much anymore.
The board landscape looks very different in 2024, especially for banks whose interest expenses exceed non-interest expenses. Most financial institutions want to increase non-interest-bearing deposits. Most companies need more robust core deposits to create more shareholder value. Certificates of deposit (CDs) have re-emerged as a significant contributor to banks’ funding mix. However, most executives are unfamiliar with the simple and effective tactics that were once common in the industry and now differentiate financial institutions in the eyes of depositors.
Why were CDs thought to be extinct? What has changed to make them central to deposit strategies and bank profitability? How can financial institutions leverage them in 2025 to Can depositor loyalty be differentiated?
Here are the answers to each question.
Term deposits: Bad product or bad timing?
Historically, term deposits were not a primary focus for community banks because they were considered expensive compared to other accounts. And depositors have been reluctant to put their money to work for months or even years. Term deposits were on their way to extinction because they weren’t worth promoting or integrating into a broader strategic plan.
Imagine if mortgage rates remained at the level available to borrowers in January 2024 for 15 years. Will refinancing of home loans disappear?
Low interest rates are an important part of the story about CDs. Depositors had little incentive to lock up their funds in search of minimal returns. As a result, banks have put fixed deposits on the backburner and focused their funding efforts on liquidity products. If CDs’ low relevance for banks is due to low demand from depositors, what happens when depositor demand reaches an all-time high?
What has changed with CD? It’s demand.
Mortgage companies stand to miss out on significant profits if they ignore refinancing opportunities over the next year. Similarly, banks risk missing out on revenue opportunities if they ignore CDs now.
Dramatic changes in the economic environment for banks have increased the importance of term deposits.
Interest rates matter: Interest rates no longer matter, making CDs more attractive to savers looking for higher returns and committing to a fixed term. This makes them the focus of attention, especially for bankers who want to avoid the costs associated with repricing non-term deposits. Inverted yield curve: An inverted yield curve is increasing demand for short-term CDs. Banks aim to match this trend by offering competitive interest rates on short-term CDs to attract depositors. Strategic alignment: As the banking industry evolves, financial institutions are recognizing the value of incorporating term deposits into their strategic plans. CDs have become a valuable source of funding because they provide a stable source of funding and allow banks to better manage interest rate risk. Record growth in term deposits: FDIC data shows that term deposits have increased significantly in recent years. CDs have soared from a low of just 6.8% of total domestic deposits to nearly $3 trillion, accounting for 17.7% of the industry’s domestic deposits as of June 2024. This unprecedented growth highlights the growing role of CDs in the financial landscape. . However, many institutions have chosen to “outsource” CDs to minimize price changes on their cash books. Banks currently hold $2.9 trillion in CDs and $1.33 trillion in brokered deposits. Currently, not all brokered deposits are necessarily CDs, but most are, meaning approximately 45.8% of a bank’s CDs are brokered. Interest expenses soar: According to FDIC.gov, the banking industry’s quarterly interest expenses jumped from $8 billion to $144 billion. This dramatic increase requires careful management of deposit strategies to ensure profitability. Banks can maintain a balance between attracting depositors and controlling costs by offering competitive interest rates on term deposits while minimizing the need to reprice permanent deposits. Masu.
Build the foundation for a new CD volume
Now, banks have more CDs than ever before and are paying more interest than ever before, so you need a strategy to preserve and grow your deposits. Deposit pricing aside, the best strategy is actually to provide good service.
Traditionally, business owners have relied on a comprehensive list of simple services to build relationships with term depositors. It’s remarkable how little banks need to do today to deliver a better experience compared to their peers.
Here are four specific examples.
Rethinking product offerings: Banks need to focus on the innovations that can be achieved in deposit products. So how can you leverage historic CD volumes to differentiate yourself from your competitors?Banks can introduce CD loan programs that allow depositors to borrow against CDs. Such programs provide depositors with liquidity without early withdrawal penalties, making CDs more attractive and providing depositors with a highly cost-effective source of credit. Clear and transparent policies: Transparency is critical to building trust with depositors. Financial institutions should clarify their policies regarding early withdrawal penalties, unpaid interest, and partial withdrawals. For example, do depositors understand that their accrued interest will never be foreclosed in the event of an early withdrawal? If you need to make a withdrawal, you can remove friction by ensuring your depositor knows: You will pay unpaid interest on early withdrawals. Leveraging technological advances: The digital age presents financial institutions with many opportunities to streamline CD offerings. Removes the requirement for depositors to present physical proof documents when withdrawing funds. Transfer CDs, where documents are managed electronically, are much more efficient and depositor-friendly. Targeted marketing campaigns: Banks need to proactively communicate their focus on long-term savers. Let people know that your financial institution “offers unique benefits not available at any other financial institution.” Then back it up with achievable innovations like those listed here to show savers there is a reward for working with them beyond just interest rates.
These four are just the beginning of a long list of tactics for delivering differentiated CD services.
The role of senior leadership in term deposit strategy
For term deposits to become an integral part of a bank’s successful strategic framework, senior management must proactively develop and execute the bank’s deposit strategy. Executives need to respond to market trends, regulatory changes, and technological innovations, but not necessarily by making major changes to the product.
We create an easy and modern experience for savers to manage their term deposits.
Additionally, it is important to train your staff to understand the nuances of term deposits. Many bankers may be unfamiliar with products such as CD loan programs, and without proper training, they may not be able to communicate the benefits of these programs to customers. A well-informed team serves as a valuable asset in educating depositors and fostering long-term relationships.
Term deposits, once ignored as an important aspect of banking strategy, have now emerged as an important element of the financial environment. The growth of CDs over the past few years proves their increasing relevance in an interest rate environment that cannot be ignored. As banks face the challenge of increasing interest expense and evolving customer expectations, they must adopt differentiation strategies to remain competitive. Today, the bar for differentiation is very low. Your bank can improve your CD experience compared to its competitors by simply providing flexibility that many financial institutions have forgotten.
Neil Stanley is CEO and Founder of The CorePoint.
