The competition for deposits among banks has heated up over the past couple of months as the Federal Reserve has raised interest rates three times this year.
While the competition for deposits has encouraged banks to competitively price their products at levels unseen for at least a decade, the increased focus on growing deposits could finally be a return to normal after the years-long recovery from recession.
Competitive CD rates
A significant focus of this competition has been on certificate of deposit products, where banks have been posting aggressive interest rates for a relatively short period of time. Howard Bank recently finished a campaign where it offered rates of 3 percent annual percentage yield for 29 months, 2.75 percent for 17 months and 2.5 percent for 9 months.
This campaign raised $110 million, $70 million of which was new to the bank, Drew McKone, the bank’s director of branch distribution, said.
“In order to be attractive to the market, you have to come out with a rate that will stand on its own for a time,” he said. “We were successful with that but we are now starting to see competitor banks now offering similar rates and in some cases even higher rates for similar terms.”
These competitive CD offerings can be a great way for banks to fill their coffers short-term. But then they have to try to convince much of the money they just attracted to stick with the bank.
In a lot of ways, the CD rates have become like a Black Friday doorbuster. A customer comes in for the cheap DVDs and wrapping paper, but the store really wants them walking out with the big screen television.
At banks, that television would be a long-term relationship, keeping primary accounts at the bank and coming to the bank for lending needs, whether that is on the commercial side or the retail side.
The competition just to get customers in the door at a bank has increased because as soon as one bank offers a competitive rate, the bank next door is moving to top it.
“You post a rate today and then six other banks post a rate tomorrow that beats your rate slightly,” David Seyler, senior vice president at Old Line Bank, said. “It goes back and forth. It’s like a ping pong ball.”
The question for the banks at a competitive time like this is how much tolerance do they have for rate shoppers. These are customers who are constantly looking for the best rate on something like a CD and as soon as their term is up they will take their money and look for the best rate they can find again.
“They are very savvy when it comes to the specials that are being offered and they are very aware of what is going on,” Howard’s McKone said. “That is money that is in movement all the time. We just needed at that time to get our fair share of the money that was in movement.”
The bank then hopes that if the customer gets in the door, it can convince them that it can provide a level of customer service as a community bank that will convince the customer to have a relationship longer than just the term of the CD.
“Once they are under our wing, it’s a lot easier to keep them,” Claudia Hosea, assistant vice president and marketing manager at Old Line Bank, said.
A return to normal
While banks have noticed a sudden uptick in competitiveness, attributed mostly to the Fed’s interest rate moves this year, others see a return to normal.
This is what a competitive banking environment should look like, they say, and instead the Fed had kept interest rates artificially low for so long to encourage banks to do more lending to make money, infusing capital into the economy.
“To me, it’s a very natural process,” John Burger, professor of economics in Loyola University Maryland’s Sellinger School of Business, said. “I would think that’s perfectly healthy. Thinking about it from the savers’ perspective, you want the banks to compete for competitive savings products.”
Some of the larger banks see it that way too.
“Back to a sense of normalcy and competition, which is good for the customers,” said Matt Calhoun, senior vice president for retail banking at M&T Bank.
M&T Bank has been the second largest bank in Maryland by deposit share for years, but lost about $1.75 billion in deposits over the last year, according to Federal Deposit Insurance Corporation data.
The bank is seeing increased competition not just on the CD front, but also from banks like Howard and Old Line acquiring other banks and growing their presence in the Baltimore region.
“I think the competition continues to be fierce,” Calhoun said. “We’ve always felt a sense of urgency and this market is extremely competitive across the board with larger banks, smaller banks and everything in between.”
But like Howard and Old Line, M&T also wants to focus on its customer and community relationships. In some ways, it feels like if those come together, everything else will fall in line.
Like the other banks, M&T is also offering competitive rates to try to get customers in the door. It has also offered free checking, gifts when customers sign up for new accounts and more perks. It also has a marketing relationship with the Baltimore Ravens that can get a lot of attraction during the fall.
“Where we focus is certainly we’d love to be at the top and grow our market share,” Calhoun said. “We want to build our customer base and grow strong relationships with them.”