Our own Dr. Dan Geller recently contributed this article to BAI Banking Strategies. Much of the content was gleaned from Market Rates Insight’s new “Integrated Study on Service Fees” now being offered in our new Research Store.

When deciding whether to impose service fees, banks need to consider consumer preferences as well as the competitive landscape.

The amount of money banks generate from fees on deposit accounts decreased from $36.2 billion in January of 2011 to $34.1 billion by year end, a drop of $2.1 billion or 5.8%. This is not an isolated incident; rather it is a trend that started five years ago. Income from service fees on deposit accounts fell from $39.2 billion in December of 2007 to $34.1 billion in December of 2011, a fall of $5.1 billion or 13%.

On the surface, it might appear that the decline in service fees on deposit accounts is the result of various regulatory changes governing service fees. However, an examination of the data shows otherwise. The revision of Regulation E, which provides consumers a choice regarding their payment of overdraft fees for ATM and one-time debit card transactions, became mandatory for compliance on July 1, 2010 and the caps on debit card swipe fees took effect in late 2011. While these two major regulatory initiatives might explain a reduction in service fees in the last two years, they can’t explain the decline in service fees that started in 2007.

Interestingly, the fee decline occurred despite an increase in the total amount deposited in banks. Since the beginning of the recession in December 2007, total deposits at FDIC-insured institutions have risen by $1.8 trillion, from $8.4 trillion to $10.2 trillion, a 21% gain. Normally, an increase in total deposits leads to an increase in the service fees associated with deposit accounts due to an increased level of depository activity. However, in the last five years the relationship has inverted: an increase of 21% in total deposits vs. a decrease of 13% in service fees.

If the decrease in service fees started three years prior to any relevant regulatory mandate, and if the decrease in service fees occurred despite a record increase in deposit balances in the past five years, we should look elsewhere for the main cause of the change. The culprit seems to be changing consumer preference.

Traditionally, consumers had little say in what type of products and services banks offered. However, with the advent of social media, mobile connectivity and instant transactions in the past few years, consumer expectations have risen, as demonstrated by last year’s fee protests during the so-called Bank Transfer Day. This means that banks, when considering their strategy around fees, need to research, analyze and implement services that consumers want and are willing to pay for.

It may have sufficed in the past to consider mostly competitor actions before implementing your own fees but no longer. Only a three-dimensional view, which also includes consumers' preference and price sensitivity along with competitor actions, provides relevant information for safer and profitable decisions on service fees. Otherwise, financial institutions expose themselves to the danger of consumer backlash.

A simple comparison of yesterday’s uncertainty associated with service fees to today’s additional uncertainty shows how much riskier and more complex service fee decisions can be:

Yesterday’s uncertainty:

· Will consumers use the service?

· Will consumers pay for the service?

· What are competitors doing?

Today’s uncertainty includes those items but also:

· Will consumers protest?

· Will consumers move their business?

· How will the new Consumer Financial Protection Bureau react?

Using the three dimensional approach, institutions would design their fee strategy by addressing three issues: How likely are consumers to use the proposed service? How much are consumers willing to pay for the proposed service? And what is the competition doing in regards to the proposed service? Using only one or two or these dimensions to make a decision increases the risk of unintended consequences. For example, if your competitive survey shows that none of your competitors is charging a fee on a particular service, does this mean that consumers will accept such a fee? Not necessarily.

Moreover, even if you find out those consumers are very likely to use a particular service, would this information, by itself, be sufficient to introduce such a service? Not really. While consumers may embrace a new service on a theoretical basis, they might not be willing to pay extra for it. Hence the need for an integrated study that brings together information on consumers’ preference, price sensitivity and the competitive landscape.

Mr. Geller is the executive vice president of San Anselmo, Calif.-based Market Rates Insight , where he oversees the research and analytics services of the company. He can be reached at dan.geller@marketratesinsight.com.

By Dr. Dan Geller, Executive Vice President

Every year, Dr. Dan Geller, Market Rates Insight’s chief analyst, provides a prediction of deposit trends for the coming year. We recently posted the second part of this year’s report. What follows is the third and final in a series of articles with this year’s forecast.

HOW LONG WILL “FREE INSURANCE” LAST ?

The announcement by the U.S. Federal Open Market Committee to keep the federal funds rate at a near zero level through mid-2013 supports the possibility that the mounting amount of cash accumulating in US bank deposits is eventually going to cause a cost reversal in interest on deposits because interest income from lending and interest expense from deposits are on a collision course. This means that loan rates
are going to decrease even further to stimulate lending, and deposit balances are going to increase due to economic and market uncertainty.

The first case of cost reversal in U.S. banking industry was amounted in August by the BNY Mellon, which is charging an interest rate of 0.13% on deposits of $50 million and over. However, the underlying reasons for the need to charge a premium for deposits is evident also on the retail side of banking and it won’t be long
before the threshold for “cost reversal” will go down to lower level of account balances.

This transformation is not by design and was not concocted in the boardroom of any bank; rather it was created by market forces responding to economic circumstances. The phenomenon of cost reversal
became evident during the last recession and has intensified ever since, as we warned last October.
Here are some of the factors that are creating the need for cost reversal on the consumer side and the banking side. First, the last U.S. recession and its lingering “recovery” created economic uncertainty among consumers and businesses. Naturally, in times of economic uncertainty, the normal reaction is to seek safety and security of the capital at hand rather than focus on potential returns.

This is exactly what happened with insured bank deposits during and since the last recession. Domestic deposits increased by over a trillion dollars since the official start of the recession in December of 2007 despite the fact that the average interest rate paid on these deposits decreased from 3.82% to 0.82% – a decrease of 300 basis points.

Second, the purpose of capital, mainly in the form of consumer deposits, is to lend. Yet with the soft lending market, the excess deposit capital is becoming very costly because it keeps on generating interest expenses and FDIC insurance expense regardless of the demand for loans. As long as the Net Interest Margin (NIM) can be profitably maintained, banks can sustain the excess expense.

However, at some point, when deposits continue to grow and the lending market remains soft, the burden of the excess expense will pull the NIM to an unprofitable level. Based on the latest FDIC data, the trend is headed in that direction. In the first quarter of 2011, interest income stood at 3.88% of assists compared to
4.20% a year earlier.

At the same time, interest expense in the first quarter of 2011 stood at 0.70% compared to 0.88% as a result of decreasing interest rates on deposits. If interest income will continue to decrease due to soft lending market, interest expense will have to be reduced even further; and with interest rates already exceptionally low, the only way to achieve that is with negative interest rates, which de facto is a cost reversal from the banks to the consumer.

Are U.S. consumers going to “accept” the new reality of paying for the safety and security of their deposits? Chances are they will – not because they want to but due to a lack of alternatives. Most other investment options, such as mutual funds, stocks, bonds and commodities, involve risk to the principle. So the question facing the public becomes: how much is it worth knowing that your principal is safe no matter what? So far the answer is 13 basis points, which is the interest rate the Bank of New York Mellon is charging.

SHRINKING RATE VARIANCE BETWEEN INTERNET & BRANCHES

Deposit-rate variance between Internet banks and brick and mortar banks (aka Branch banks) is shrinking. However, the shrinkage is not uniform across all deposit products, which indicates that there is a difference between the liquidity strategy and risk of Internet vs. Branch banks.

As of December 1st 2011, the national average APY for term accounts of Internet banks is only 4 bps higher than that of Branch banks. The highest variance is in 12-month CD, 16 bps, and the lowest variance is in 5-year CD, where the variance is negative 24 bps (Figure 5).

The national average APY variance of liquid accounts is currently 41 bps, with MM commanding the highest variance at 71 bps, and checking the lowest with 10 bps (Figure 5).

In the last five years, the national average APY variance on term accounts dropped by 20 bps - from 0.24% to 0.04%. For liquid accounts, the national average APY variance dropped from 0.91% to 0.41% (Figures 5 & 6).

Implications:

• Internet banks are more price aggressive in liquid accounts, while branch banks are closing the APY gap of term accounts.
• Internet banks are more price aggressive in short-term CDs, while branch banks are more price aggressive in longer-term CDs.
• Internet banks are becoming more rate aggressive with checking accounts, which was not the case five years ago.

HOW TO PREPARE FOR UNCERTIANTY IN 2012

The only way to combat uncertainty is to be prepared and to increase focus in two main areas:

• Greater control over your interest expense
• Better management of your deposit balances

Control your interest expense:

Higher interest expense is caused primarily by product mispricing due to inability to identify various types of CDs (beyond term and tier) when establishing a rate. Mispricing occurs when a rate is established based on competitive information without the corresponding type of CD next to the APY. The APY variance between regular CD and other CD types, such as callable CD, can be as much as 39 bps. Thus, if a rate is set not knowing the type of the competing CD, an over pricing of up to 39 bps can occur.

Figure 7 is an analysis of APY differences between various types and regular CD.

Manage your deposit balances

Your deposit balances are impacted more by the APY variance between you and your market average than your APY alone. This means that your APY variance controls most of your balance changes. Nationally, 55% of the changes in balances derive from changes in the APY variance (varies by market). Thus, your balances
may change even if you do not change your rates. For example, the APY variance of MM up to $10K impacts 84% of the changes in the balance of this product. You will be able to conduct variance analysis for each of your product and markets and anticipate impact on balance.

Figure 8 is an analysis of the impact of APY variance on balances of different products.

By Dr. Dan Geller, Executive Vice President

Every year, Dr. Dan Geller, Market Rates Insight’s chief analyst, provides a prediction of deposit trends for the coming year. We recently posted the first part of this year’s report. What follows is the second in a series of articles with this year’s forecast.

In 2012, it will take more than just financial skills to understand and manage deposit rates and balances, it will require the use of macro economics, behavioral economics and understanding of risk based decision science.

The underlying reason for this transformation in the approach to deposits is the new economic reality since the beginning of the last recession in December of 2007. The last recession had a drastic impact on consumer behavior as a whole, but even more so on how they perceive and use deposits. In this publication, I will outline some of the major trends that have contributed to the new approach to insured deposits, and how these trends are likely to impact deposit rates and balances in 2012.

TRANSFORMATION OF DEPOSITS

Traditionally, deposits were a vehicle for gaining a steady and risk-free return. Therefore, the main criteria for choosing a deposit type was first and foremost the interest rate paid. However, all this changed since the beginning of the last recession in December of 2007, when the purpose of insured deposits changed from return on the money to return of the money. In other words, the assurance that the money deposited
is safe, and that it will not BE adversely impacted by the volatility of the equity market and the economic uncertainty, became the most attractive proposition for many consumers.

This transformation is evident from the elasticity analysis showing that bank deposits are among the most inelastic commodity, even more than gasoline, which is highly inelastic due to its absolute necessity. The latest figures on deposit balances and APY indicate that long-term elasticity of deposits is 0.22 compared to 0.58 for gasoline. The closer the elasticity figure to 0.00, the less sensitive demand is to changes in price, or
APY in the case of deposits. Short term (1 year or less) elasticity for deposits is at par with gasoline, 0.28 and 0.26 respectively (Figure 3).

The reason deposits are more inelastic in the long term than gasoline is because there is no substitution to insured deposits.

Typically, demand is more sensitive to price changes in the log run because over time consumers change their behavior by either reducing consumption or finding a substitution. When gasoline prices go up and stay high for a long time, consumers tend to buy more fuel efficient cars (hybrid or electric), drive less and/or use more public transportation.

However, in the case of deposits, there is no substitution because there is no other way to ensure that the principle amount is 100% safe. All other options, such as equities, mutual funds, bonds and alike, carry some level of risk to the principle.

CONSUMER DECISION PROCESS

Rather, they will intuitively (intuitive decisions are basically recollection of past experiences from memory) make a decision if an APY is within the range of what they remember to be the “average”. In intuitive decision making, the average is considered the default baseline for evaluation. For example, if all you know is that the average height of people living in New York is 5.7”, and Mary lives in New York, how tall is Mary likely to be? Most people will default to the average – 5.7”.

On the other hand, larger amounts of deposits, such as $100K and over, triggers the help of system two for a more analytical approach because the risk factor is much larger. In such cases, many consumers will take the time to do research and compare APY and other features that are offered. However, the comparison of your APY is not so much to the market average, but more to the highest competitor that they can find in their research. This is the reason the APY variance to the market average on jumbo accounts is less important to the decision making process (Figure 4).

Of course, there are always regional variations due to demographic and psychographic differences in the makeup of the population in each market, which makes it even more critical to monitor your APY variance for each of your product and markets on a regular basis.

Under the umbrella of inelasticity of deposits, there are variations in how consumers choose deposits based on two consumer behavior theories:

1) The Theory of Risk-Based Decision Making.
2) The Theory of Cognitive Decision Making.

Consumer decisions on deposits fall under the risk-based decision theory not because there is a risk of losing the deposit (they know it’s insured), but because there is a risk of not gaining enough. For example, if the same CD is available in two different places at 1% APY and 2% APY, the decision carries a risk of not gaining 1%, which is the difference between the two options.

The theory of cognitive decision making states that people have two cognitive processes for decision making. The first is intuitive (aka system one), which is done fast and most often, and the second is analytical (aka system two), which is much slower and requires mental work. Generally speaking, people use system one for most of their daily and ordinary decisions such as what to have for dinner, and they use system two for decisions that require analytical effort such as which mortgage option to choose.

Overall, the lower the risk of the outcome, the more likely are people to use system one (intuitive process) to make a decision. These two behavioral theories play a major role in deposit decision making in the matter described below. Currently, interest rates on deposits are at record low. The national variance between the average APY and the highest APY of a 12 months CD (non jumbo) is about 81 bps. This means that the “risk” factor here amounts to $81 for $10,000. For many people, such low risk (of not gaining) is considered insignificant, and they are not very likely to conduct an extensive analysis because the time and effort required is greater than the risk.

Rather, they will intuitively (intuitive decisions are basically recollection of past experiences from memory) make a decision if an APY is within the range of what they remember to be the “average”. In intuitive decision making, the average is considered the default baseline for evaluation. For example, if all you know is that the average height of people living in New York is 5.7”, and Mary lives in New York, how tall is Mary likely to be? Most people will default to the average – 5.7”.

On the other hand, larger amounts of deposits, such as $100K and over, triggers the help of system two for a more analytical approach because the risk factor is much larger. In such cases, many consumers will take the time to do research and compare APY and other features that are offered. However, the comparison of your APY is not so much to the market average, but more to the highest competitor that they can find in their research. This is the reason the APY variance to the market average on jumbo accounts is less important to the decision making process (Figure 4).

Of course, there are always regional variations due to demographic and psychographic differences
in the makeup of the population in each market, which makes it even more critical to monitor your
APY variance for each of your product and markets on a regular basis.

To be continued…

The Dodd-Frank Wall Street Reform and Consumer Protection Act goes into effect October 1, and with it a new cap on fees retailers pay for accepting debit cards. According to reports, swipe fees currently average 44 cents per transaction, and the new Fed cap is set at 21 cents. This is a compromise from the originally proposed 12-cent cap, which would have pleased retailers no end, but even a 22-cent cap is putting a squeeze on financial institutions. The result will be new fees imposed for debit cards.

As a result, consumers will start looking to use other types of plastic at their local store. According to a report from SmartCredit.com (reported by CNN Money), debit card swipe fees will drive many consumers back to using their credit cards.

Credit card use is already on the rise. According to the report in CNN Money:

“Americans added $18.4 billion to their debt load in the second quarter, a 66 percent increase from the debt they accumulated in the same quarter last year and 368 percent more than they tacked on in 2009, according to credit card research firm CardHub.com. The last time consumers charged up this much debt during this time period was in 2008, when credit card balances climbed by $25.2 billion. Total outstanding credit card debt as of July was $792 billion, down 18 percent from the September 2008 peak of $972 billion, according to data from the Federal Reserve. CardHub estimates that consumers will run up about $54 billion more in credit card debt by the end of 2011 than they did in 2010.”

The same report indicates that although credit card debt is on the rise, the number of consumers making late payments or defaulting on cards is dropping. Some analysts are concerned that this fiscal responsibility for consumers may be short-lived, and the ease of use offered by credit cards may bring credit card debt to pre-recession levels. We will have to see of consumers have learned from their mistakes of the past.

With the debt ceiling crisis that has been raging in Congress the last few weeks and mounting fear about the European economic crisis, investors are looking for safe harbors for their money, no matter what the yield. The result has been some interesting trends that were reported this week.

In a report today the Wall Street Journal notes that the Bank of New York Mellon is taking the unusual step of charging big depositors a fee to hold their cash, producing what is in effect a negative interest rate. Institutional depositors with more than $50 million on deposit would be charged 13 basis points. Other banks are expected to follow with similar tactics as more depositors convert their deposits to cash as a hedge against risk:

“While some banks are apparently deluged with deposits, they have few attractive uses for them. There also is the fear that the cash could leave their balance sheets almost as fast as it came in if things stabilize, meaning they aren't willing to use extra deposits to invest in instruments that are anything but super-short term in nature.

“Yet such instruments are paying next to nothing. That can make too high a level of deposits unattractive. Yields on one-month U.S. Treasury bills, for example, dipped into negative territory Thursday, while yields on two-year Treasury notes plumbed historical lows below 0.3%.”

At the same time, with the report of low yields on two-year Treasury notes, there has been a burst of activity as depositors turn to Treasuries as a secure investment. A report in today’s New York Times states:

“The low yields reflected a surging demand for Treasuries, which have long been considered almost as secure as cash. The 10-year rates approached depths not seen since October 2010, shortly before the Federal Reserve began to pump hundreds of billions of dollars into the economy amid fears of a slowdown.

“Rates on even shorter-term credit, including six-month Treasury bills and overnight loans in the vast market for repurchase agreements, swung toward zero Thursday. Yields on one-month bills actually fell into negative territory before closing at zero.

“Above all else, cash has become the investments of choice this week as the deepening economic and debt worries in the United States and Europe have made stocks look like a minefield to be avoided.”

The same news report indicates that money market funds are starting to look more appealing with the raising of the debt ceiling and the ongoing decline of stocks. This week, $13.1 million when back into money market funds on Tuesday and Wednesday.

Market Rates Insight has been tracking deposit rates for more than 25 years, and its unusual to see the kind of stagnation in short-term interest rates that we have witnessed in the past year or more. The Fed continues to maintain interest rates at near zero in hopes of stimulating investment and jump-starting economic growth. As was pointed out recently in American Banker:

“Bernanke's rationale, which reflects the prevailing view among economists, policymakers and Fed governors, is that near-zero rates provide economic stimulus because higher asset prices filter down to increased consumption, and therefore investment and job creation.

“But it's not working that way. In fact, the anemic nature of the recovery compared with those following previous recessions demonstrates the need for an urgent re-examination of the Fed's policy.”

According to the argument offered by author John Michaelson, co-founder of Imperium Partners Group LLC, an investment manager in New York, the continued near-zero interest rate damages the economy in a number of ways:

1. The wealthy are getting wealthier, by as much as $600 billion per year. According to Michaelson, the low interest rates are supposed to increase lending and stimulate job growth, but instead the Fed’s wealth transfers are rewarding shareholders and executives in the financial sector.

2. With little or no return on savings, added pressure is being placed on pension plans, retirement accounts, foundations, trusts, and other long-term investments. The result is a slower recovery since it is delaying a restoration of investor confidence.

3. There is no incentive for the job-producing middle-market companies and small businesses since, by producing a steep yield curve on government and high-quality credits, there is no incentive to lend money to smaller businesses. Why risk lending to smaller business when you can earn easy money lending to the bigger guys?

“In human terms, the Fed's policy means dairy farmers in Iowa are forgoing equipment purchases to save for retirement, charities in Manhattan are reducing services as foundations cut grants, and local governments are laying off teachers to cover pension plan deficits.”

Michaelson bases his argument on what happened in Japan in 1990, when the credit bubble burst and the Japanese brought its interest rate down to 0.25 percent. The pundits say the following decade of stagnation is the result of not bringing rates down fast enough. However, Michaelson argues that it promoted the same “anemic private consumption,” which led to failed stimulus programs and government debt.

Raising interest short-term rates will reverse the trend toward wealth accumulation and provide an incentive to start investing again, which will stimulate the economy. Raising interest rates will give banks an incentive to seek out investments closer to home that would create new jobs, and help restore confidence in their depositors. Or so the argument goes.

What’s your opinion?

How is social media having a substantive impact on banking? It provides direct access to customers in a number of ways that can improve customer service, and create a degree of intimacy with customers that they haven’t had before. With customers more reluctant to venture to their local bank branch and instead turning to the web and their smartphone to do their banking, banks are finding social media outlets are a good way to approach customer interaction in a positive way, without relying on the in-branch experience.

Oddly enough, however, most banks are still reluctant to embrace social media. According to a recent report by Ovum, two-thirds of the world’s retail banks have no plans to use social media. Currently only 6 percent of retail banks deal with customer questions, and only 1 percent plan to add social media customer support in the next year. And 14 percent are using social media for marketing, while another 12 percent plan to add a social media marketing plan by the end of 2012.

Those banks not planning to embrace social media will lose competitive ground. According to Ovum analyst Martha Bennett:

“We feel that this attitude from retail banks towards social media is a major issue in an era of aggressive competition. The banks without a social media strategy are being shortsighted and are placing themselves in a dangerous and vulnerable position compared to competitors who have realized that social media can and must play an intrinsic role in their business.”

There are any number of ways that banks can leverage social media to interact directly with customers. Here are four that we are already seeing:

1. Twitter for support. Bank of America (@BofA_Help) and Wells Fargo (@Ask_WellsFargo) are just two of the banks using Twitter to help customers with quick responses to questions. If a customer has a question about checking, savings, or online banking, they can post a tweet and get a quick response. Chase and other banks are tweeting as well, including information about special rates, loans, and other information for customers.
   
2. Market and rate information online. Financial news is everywhere. Twitter feeds are being maintained by the Walls Street Journal (@WSJPersFinance), Yahoo! (@YahooFinance), Associated Press (@APPersonalFin ), and other news organizations. And companies like ours blog about rate information and post insights to Twitter and Facebook. There is a wealth of banking information available if you know where to look.
   
3. Providing a customer face on Facebook. Facebook is a great place to keep customers up to date on community affairs, banking specials, and other activities. It also provides an interesting extension to customer support. Consider what would happen if your banker were reviewing loan options while checking out your Facebook page: “I see you have a child in college. Have you considered…..” or “We have a new credit card that offers travel miles that might be useful for visiting your college student.” (Something to ponder when you check your privacy settings.)

Despite having to navigate new FINRA regulations and other concerns about data leakage and losing control of your online brand (see the Bank of America Sucks page on Facebook), the benefits of joining the social media conversation to connect with customers and build loyalty far outweigh the risks. As  Ovum analyst Bennett says in her report:

“Consumers are not averse to receiving promotional messages via social media, or using it for customer service enquiries so a massive opportunity to rebuild the confidence in the sector that is so desperately needed is being ignored.”

To help you keep track of the latest in banking social media strategies, Market Rates Insight has added a new feature to our Product Builder database in MyRI, our Web rate research portal. We have been tracking various social media campaigns for banks and credit unions as part of ProductBuilder Alert, so MyRI subscribers can search for social media programs to see how their competitors are leveraging Facebook, Twitter, LinkedIn, and YouTube. You also can track trends in social media marketing by signing up for our free ProductBuilder Alert, which is issued at the start of each week.

This week’s Market Rates Insight National Pricing Indicator report reinforces that Americans are in love with bank deposits. Per capita domestic deposits have nearly doubled in the last 20 years. From 1990 to 2010, per capita domestic deposits increased from $13,274 to $25,479 - an increase of $12,205 per capita or 92%. However, most of the growth in per capita domestic deposits occurred in the last decade (Figures 1 & 2).

In 1990, per capita domestic deposits stood at $13,274, and by the end of that decade, domestic deposits increased to $14,975 per capita - an increase of 12.8%. During the same decade (1990s), US population grew by 13.2% – from 246 million to 281 million. During the decade of the 2000s, per capita domestic deposits increased from $14,975 in the beginning of the decade, to $25,479 at the end of the decade - an increase of $10,504 or 70.1%. However, the rate of deposit growth far exceeded the rate of population growth during
the decade. In year 2000, the US population stood at 281 million and by 2010, it grew to 309 million - an increase of 28 million or 9.7%.

It’s impossible to tell from the available data whether the increase in per capita deposits is because more consumers are saving, or some consumers are saving more. The only way to answer this question is by comparing the number of deposit-account holders, which is proprietary information of each financial institution.

According to this week’s National Pricing Indicator report, the trend in retail-consumer behavior we predicted at the end of 2010 has been validated by the FDIC. According their latest reports, retail deposits are growing and are shifting from term to liquid accounts, despite decreasing interest rates.

During the fourth quarter of 2010, total domestic deposits increased by $135 billion, from $7,738 billion on October 1 to $7,873 on December 31, 2010. This reflects only core (retail) deposit accounts, while business
deposits, which are defined as accounts of $100,000 or more, declined by $60 billion during the same period (see Figure 1).

• The increase in deposit balances was only in liquid accounts (checking, savings, and
  money market), while CD balances declined.
• Checking account balances increased by $94 billion, from $947 to $1,041.
• Savings account balances increased by $55 billion, from $1,197 to 1,252, and;
• Money market account balances increased by $100 billion, from $3,501 billion to $3,601 billion.
• Balances of CD accounts declined by $114 billion, from 2,092 to $1,978 billion during
  the same time period (see Figure 2).

With continued economic uncertainty, people gravitate toward the safety of insured deposits. They also prefer liquid accounts because they want the assurance they can access their money in the event of a financial emergency.

According to the latest National Pricing Indicator report, the deposit balance mix has shifted from non-jumbo CDs to liquid accounts. Balance mix is the relative percentage of each product balance out of total deposits (i.e. 100 percent). Note that the combined percentage of the liquid and term accounts in this analysis don’t add up to 100 percent since some deposit products like IRAs are not included.

• In the last two years, 2009 and 2010, savings accounts gained the most in percentage relative to total deposits showing an increase of 1.4 percent.
• Checking accounts gained the least with an increase of 0.5 percent.
• Money market accounts showed an increase of 1.4 percent relative to all other deposit productss over the last two years (see Figure 1).

The findings for term accounts were mixed. In the last two years, balances mix of CDs of up to $100,000 decreased relative to total deposits by 1.6 percent. However, balances mix of jumbo CDs over $100,000 increased by 1.5 percent during the same period (see Figure 2).

These findings reveal that in cases where there is no significant differentiation in yield, such as
between money markets and non-jumbo CDs, consumers will normally opt not to keep their money liquid. Yet, in cases of jumbo CDs that offers higher rates, the incentive to lock money away in favor of a higher yield is greater.