The Size Advantage in Deposit Pricing

The notion that only the largest banks pay a lower annual percentage yield (APY) in return for the perceived status of “too-big-to-fail” is not entirely accurate. A more precise generalization of this phenomenon would be: the larger the bank, the lower the APY. These are the findings from a recent analysis by Market Rates Insight showing that the decrease in the APY portion of the cost-of-funds is consistent with the asset size of institutions and not unique only to the largest banks.

In this analysis, we measured the average APY paid on deposits by five groups of institutions based on their asset size: A, under $1 billion; B, $1 billion to $5 billion; C, $5 billion to $10 billion; D, $10 billion to the top five; and E, the five largest banks. The average APY of all deposit products offered by group “A” was the highest among all groups: 0.50%. The next asset-size group, “B,” had an average deposit APY of 0.42%, which is down 8 basis points (bps) from the smaller institutions in group “A.”

Similarly, group “C,” with asset sizes between $5 billion and $10 billion, had an average deposit APY of 0.37%, down 5 bps from group “B.” Group “D” then had an average deposit APY of 0.26%, 11 bps lower than group “C.” And finally group “E,” consisting of the five largest banks, had an APY of 0.19%, 7 bps below group “D” and a full 32 bps below group “A,” which comprised the smallest banks.

The size advantage phenomenon is consistent across all major deposit types such as checking, savings, money market and certificates of deposit (CDs) of various terms. These findings suggest that the size advantage is not unique only to a particular type of deposit product and that the reasons consumers are willing to trade yield for size-of-institution are consistent in all deposit cases.

It appears that several factors are involved in consumers’ willingness to accept lower yields from larger institutions, both practical and perceptional. Chief among the practical reasons is location and convenience. Clearly, the biggest banks have the highest number of branches and greatest market presence, which benefits customers. On the perceptional side, the experience of the last recession with “too-big-to-fail” institutions may have had some lasting impact on consumers, who associate size with safety even though deposits in one FDIC-insured institution are just as safe as in any other insured institution.

The good news is that smaller banks can overcome some of their size disadvantage in regard to APY on both the practical and perceptional levels. With the increasing popularity of mobile banking, for example, smaller banks can compensate for their lack of branch distribution by offering and promoting mobile banking under the banner of a slogan like, “The distance between your smart phone and our bank is exactly the same as to any other bank.” Similarly, to offset some of the “safety-in-size” perception, smaller banks should keep reminding and reinforcing to their customers that no one ever lost a dime on an FDIC-insured deposit, regardless of bank size.

Mr. Geller is the executive vice president of San Anselmo, Calif.-based Market Rates Insight, which provides competitive research and analytics to financial institutions. He can be reached at [email protected]