Historically core deposits from an institution’s immediate market area provided the funds that enabled an institution to make loans and invest in income generating assets.
Through the 1970s and into the 1980s, banking was almost entirely conducted in local markets. This began to change in the 1980s when barriers to interstate banking, branching and competition fell, opening up a new era of banking and competition.
The advent of online financial institutions, the introduction and nearly universal availability of digital technologies, such as remote deposit capture and mobile banking apps, are making the traditional concept of branch banking obsolete. However, locally based core deposits and the associated customer relationships they carry continue to represent the core economic value of community financial institutions.
These innovations are also reducing the need for traditional brick and mortar offices. They have increased competition in the capture of deposits. Generations of customers now exist that have grown up using technology to conduct personal financial business on a national and even a global basis.
Customers in local communities now enjoy the conveniences and product offerings provided by larger institutions even when the closest physical office location may be hundreds or thousands of miles away.
These “virtual” customers tend to be “rate shoppers” who will readily move their money to another institution offering a higher yield, thereby increasing the volatility of an institution’s deposits.
The 2019 Conference of State Bank Supervisors survey of community bankers showed that competition for core deposits has grown fierce.
“Nearly 92% of respondents said competition was a very important or important factor in their ability to attract and retain core deposits.”