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Funding Shift
Comments from Federal Reserve policymakers have markets baking in higher interest rates by year end — just as banks face stiffer competition for deposits.
“As an industry, we were very happy with depositor inertia,” says Neil Stanley, the CEO of The CorePoint, a firm focused on deposit strategies. “The competition is ramping up.” Bank trade groups have raised alarms about stablecoin issuers, but deposit dollars are going elsewhere, too. Stanley points to riskier competitors such as sports betting and prediction markets. Those include Kalshi, whose users can trade on the outcomes of everyday events — including the movement of the federal funds rate. Kalshi offers 3.25% on account balances.
PayPal Holdings, which owns Venmo, held more than $40 billion in account balances as of the second quarter. PayPal doesn’t pay interest on those funds, but customers can earn 4% for holding the PayPal USD stablecoin, issued by Paxos Trust Co., in the PayPal wallet. The rates banks typically pay on deposits pale in comparison. The average savings account earned 0.38% as of Aug. 17, according to the Federal Deposit Insurance Corp., and a 12-month CD earned 1.71%.
Stanley points out that fewer banks rely on time deposits, which hold funds for a contractual term, as part of their funding structure. In the second quarter, time deposits were 14% of total industry deposits, per the FDIC. Back in 1986 — when the fed funds rate averaged 6.8% — time deposits comprised almost half of bank funding.
That means most customers face no penalty for moving their money. And with artificial intelligence, it’s never been easier to do so at scale. AI agents “can monitor balances in real time, compare returns across institutions, sweep idle cash into higher-yield accounts, and then sweep cash back to a checking account in time for bills,” wrote analysts at McKinsey & Co. last year. “For banks, the threat is clear: loss of low-cost funding and pressure on liquidity assumptions as deposit stickiness erodes.”
When rates were near zero, customers were happy to park their money in the safest place possible — their bank — to the benefit of those institutions. Consumers are less risk averse now and willing to chase yield, says Stanley. And a wider array of competitors is willing to reward them for it.
• Emily McCormick, vice president of editorial & research for Bank Director
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