By Tyler Mondres
VSumers benefit from a highly competitive market for deposits. With nearly 10,000 financial institutions offering deposit accounts by the end of 2021, consumers have a wealth of options when it comes to checking and savings accounts. The acceleration of online and mobile banking, which allows customers to bank conveniently and efficiently from the palm of their hand, has opened up opportunities for households to do business with financial institutions without a local presence. Industry competition drives innovation and gives consumers the power to choose the account and features that work best for them.
Deposit markets remain highly competitive
The sheer number of depository institutions – nearly 10,000 at the end of 2021 – is clear evidence that the depository market is highly competitive. However, some observers believe that the presence of a few large depository companies indicates otherwise. To be sure, financial services, like many other sectors of the US economy, has a small number of large companies that serve global markets.
Yet the deposit market is far more competitive than some of the more concentrated industries in the United States. For example, in the search engine, airline, and smartphone sectors, the top four companies account for more than two-thirds of the market. By comparison, the top four depositories in the United States (by dollar volume of deposits held) hold less than one-third of the market for total domestic deposits. (See Figure 1.)
America needs banks of all sizes and business models. Together, these institutions meet the varied and diverse needs of their clients. Small, local community banks are an integral part of their communities and get to know their customers personally, with relationships that sometimes span generations. The major banks provide retail services as well as the specialized financing and services demanded by large US corporations and global markets.
While the big banks have grown over the years in both asset size and deposit share, the real question is how this has affected both the wider industry and customers. To answer this question, we examine how concentration has evolved in the industry, whether it has inhibited the growth of small and medium-sized institutions, and whether institutions have taken advantage of market power. To do this, we examine trends in national deposits in different cohorts of financial institutions. We separate the top 100 depositories (by volume of domestic deposits held in a given year) from all other banks and credit unions. We then divide the top 100 into five sub-groups: 1) top four custodians, 2) top 5-10 custodians, 3) top 11-20 custodians, 4) top 21-50 custodians, and finally 5) top custodians. 51 to 100 first depositors.
Technological and regulatory changes have affected deposit market concentration
We first explore how deposit market concentrations have evolved in these subgroups. A clear delineation can be seen in the concentration levels of the deposit market before and after 2007, the year the financial crisis began and the first iPhone was unveiled to the world. (See Figure 2.) Between 1994 and 2007, the share of domestic filings of the top four depositories increased by 19.3 percentage points. However, this was largely due to the removal of interstate banking branch restrictions, which artificially limited competition. As expected, the removal of these restrictions led to increased competition in the deposit market and a consequent shift in market share.
Since then, concentration trends have changed significantly. (See Figure 3.) The market share of the largest custodians has remained largely stable over the past 15 years. Between 2010 – when the Dodd Frank Act was passed – and 2021, the market share of the top four custodians grew by just 0.8 percentage points.
The release of the iPhone in 2007 also kicked off a major wave of innovation in banking. Nearly all financial institutions, including 95.9% of community banks, currently offer mobile banking, allowing them to reach beyond their immediate market and provide a variety of product offerings and conveniences to their customers. . The pandemic has accelerated this trend. According to a recent study by PwC, “digital banks” now account for 20% of all primary banking relationships in the United States, up from 10% in 2019. The increasing digitization of financial services and the growing role of fintech companies have further fueled competition for deposits. .
The findings of the 2021 Community Banking Report from the Conference of State Banking Supervisors underscore this point. (See Figure 4.) The report found that market competition continues to be the dominant factor in deposit retention. Competition is strongest between community and regional banks in the market. However, as technology removes barriers to competition, community banks increasingly find themselves in competition with non-banks and those outside their geographic market. A significant share of respondents (15.9% and 21.7%, respectively) indicated that they primarily compete with nonbanks for transactional and non-transactional deposits. Similarly, out-of-market competitors were identified by 17.7% to 23.2% of bankers as a dominant secondary source of competition for both categories of deposits.
The deposit base of small and medium depositories continues to grow
We then examine whether these changes in deposit markets have inhibited the growth of depositories outside the top 100. (Note: For simplicity, we have combined the top 5-50 for Figure 5.) Deposit Growth was more variable between cohorts before the Great Recession. However, following significant changes in the regulatory landscape and the growth of non-banks over the past 15 years, deposit growth has been more consistent between large and small depositories. More recently, this includes the pandemic-induced deposit surge that has poured into banks and credit unions of all sizes.
Small and medium-sized depositories have continued to thrive in the face of many challenges: the removal of restrictions on interstate banking branches, the Great Recession, massive changes in the regulatory landscape, significant technological innovation, growing competition from non-state players. traditional and, more recently, a global pandemic. Despite all these challenges, small and medium banks and credit unions have continued to grow their deposit base. (See Figure 6.)
Adjusted for inflation, average deposit account fees remained stable
Finally, we look at deposit account pricing. The cost of deposit accounts has remained largely the same for consumers over the years. The average fees charged for bank accounts, as tracked by BankRate (see Figure 7), have remained stable over the past 23 years after adjusting for inflation. This is consistent with the view that larger institutions do not use their market power to raise fees unreasonably.
Similarly, fee income, which banks began reporting in more detail in 2015, has also remained largely the same over the past seven years. For example, overdraft fees (a common goal of policymakers) remained stable as a share of total retail deposit accounts (excluding pension deposit accounts). Furthermore, even before banks began providing relief to customers due to the pandemic, overdraft fee revenue as a share of operating profit was gradually declining. Banks charge consistent fees and have become less dependent on this revenue over the past seven years. (See Figures 8-9.)
The digitization of financial services has also given customers a wealth of options to find the right bank account for their needs. For example, there are a myriad of price comparison websites to help consumers sift through the nearly 10,000 depositories to find the checking or savings account that’s right for them. Customers have had, and continue to have, a wide variety of depository institutions to choose from when looking for a deposit account.
These results refute the idea that consumers have little choice, relegating them to a small number of custodians who could use their market dominance at the expense of consumers. With increased digitalization, consumers are able to go beyond their local institutions for deposit accounts, leading to increased competition and choice for consumers. Nearly 10,000 traditional depositories now offer checking and savings accounts and a growing number of non-bank challengers are vying for consumer wallet share. Deposit markets remain highly competitive in the United States.