In just over a year, banks have gone through a head-snapping change, from being stuffed with cash and worried about having too much liquidity to watching those deposits leave in droves.

Core deposits are on the decline, forcing banks to pay up on CDs and savings to try to stem the outflow. With the Federal Reserve expected to continue raising interest rates to combat inflation, deposit pressure is likely to worsen in the months ahead. According to the results of IntraFi’s most recent quarterly survey, 88% of bank executives think deposit competition tightened over the past 12 months, and 84% expect it to get worse in the coming year.

To better understand how banks should be thinking about funding, IntraFi recently sat down with Neil Stanley, founder and CEO of The CorePoint, to discuss the battle for deposits, strategies to attract and retain customers, what banks should do if the Federal Reserve continues hiking rates, and more. What follows is our conversation, edited for length and clarity.

Are we headed for a recession?

All economies go into a recession at some time or another, and the last two we’ve had have been severe. It’s natural to be cautious after such upheaval, but the fear-mongering has been excessive.

Bankers should take a hard look at employment data, inflation data, GDP history, and interest rates. I highly recommend looking at the Atlanta Fed’s GDPNow, which forecasts GDP based on real-time statistics. Right now, it’s forecasting 2.5% GDP growth for the first quarter. That’s not stunning, but it doesn’t indicate an economic catastrophe either. The U.S. economy has proved more resilient than its critics would have you believe.

How squeezed are banks going to get if the Fed keeps raising rates?

We’ve been through a lot, yet net interest margins have pretty much stabilized. Current data from the Uniform Bank Performance Reports compiled for December 2022 show that margins have actually increased slightly. So, it depends on what you’re looking at and what you’re doing. However, not all the rate hikes have flowed through to income statements yet. That will take a while.

In a recent LinkedIn post, you asked bankers if they’re ready for the deposit battle that’s coming in 2023. Are they?

Some are. Those who’ve been asleep for the last 15 years aren’t, and soon they’re going to wake up and realize this isn’t just a rate game. They may think the highest rate wins, but that’s not true. Of course, the low rate doesn’t win, either. Some bankers are refusing to change rates, and if they don’t find another way to keep their deposits, they’re going to experience some real pain. I just spoke with a banker this morning who’d publicly rolled out 5% CDs and 4% savings accounts without any kind of plan to keep from repricing all those accounts.

How much is the deposit runoff we’re experiencing a natural correction of the deposit glut from the pandemic?

We hit peak core deposits — $17.4 trillion — in the first or second quarter of 2022. By the end of 2022, we were at $16.4 trillion. Yes, money supply can go down, but it doesn’t go down easily. Ultimately, we’re talking about public policy and governmental engagement, and it’s hard to imagine public policy allowing the money supply to go back to 2019 levels.

I also don’t think we’re headed back to the interest rate levels of 2019. As money supply grew, bank deposits moderated, plateaued, and are now dropping a little, but interest rates have to rise because of the inflation the money supply created. They’re going to pretty much do the same thing — plateau and drop slightly, but not to the levels of before all the stimulus.

You were quoted in a recent American Banker article about how several large banks are offering higher rates, but only to consumers outside their branch network. What are your thoughts on that?

It’s basically a bet on apathy. They’re likely betting that local markets won’t think it’s a big deal, but it is. Imagine if your rate was 0.4%, but it would be 4.6% if you lived in another state. On, say, a hundred thousand dollars, that’s a lot of money. As a bank CEO, I would never have supported that kind of strategy because it’s not good service. But if nobody protests, they’ll keep doing it.

What’s the best way for banks to attract new deposits?

One way is to pursue refinancing, which is the same idea as refinancing a mortgage. Many people have CDs with a sub-1% or sub-2% interest rate, and they’re waiting for maturity, kicking themselves because they could get 4.5% today. These are your refi candidates.

Today, early withdrawal penalties tend to be trivial, given that many are based on sub-1% rates. Those amounts can be made up in no time now. Additionally, refi CDs can mature on the exact same day as current certificates using the customized approach I mentioned earlier.

Any bank can run the numbers and show a customer, net of penalty, what they would end up with if they refinanced. By doing so, it can attract people who think they’ve made a mistake and have to wait. When they realize they don’t, they’re ecstatic. This beats the idea of a rate war in every possible way.

In general, banks that pause to assess the situation, those that use better tools and products than the competition, are going to be much better off. IntraFi’s products have helped set institutions apart over the years. CDARS was a huge differentiator for us because we could tell customers we could insure their accounts even if they were five, ten, or even twenty times the size of our FDIC insurance.