The Opportunity Cost of Bank Deposits: A Comparative Analysis of Large Banks versus Alternative Cash Management Platforms.
In the past quarter, depositors in the US’s five largest banks (JPMorgan Chase, Bank of America, Wells Fargo, Citibank, and U.S. Bank) could have increased their collective earnings by a staggering $75.4 billion. How? By considering high-return cash management solutions such as those provided by Treasure. When we last reviewed this in November of 2022, depositors had lost out on ~34 billion in possible earnings. That number has increased by over 100% in less than a year!
To calculate this, we compared it to the average 0.12% return that the Top 5 banks offer on their customer deposits versus the average return for a Treasure customer during the Q2 time period, which was 40x higher.
The evidence is clear: customers are losing out by storing their cash with banks.
Rising Federal Interest Rates
Let’s break this down a bit. Overall, the primary driver behind this significant potential loss in earnings is the recent rise in Federal interest rates. To understand this, we need to look at how banks have traditionally reacted to such hikes.
Historically, banks use rising interest rates as an opportunity to increase their own profit via the Net Interest Margins (NIM) which is the difference between the interest they receive on loans and the interest they pay on deposits. This time is no different: Banks have greatly increased the yield they ask on loans while maintaining depressingly low deposit rates (as mentioned, the current average is a meager 0.12%).
Source: Bloomberg
Banking Turmoil and Consolidation
Furthermore, the chaos following the banking crises of 2023 has, paradoxically, benefited large banks. Depositors, seeking the perceived safety of large banks during uncertain times, have flooded these institutions with deposits. For instance, Bank of America alone saw a $15Bn increase post the SVB fallout. Of course, as we’ve discussed before, the sense of safety is actually a false perception. But this influx to the Big 5, while seemingly counterintuitive, hints at a broader trend in the banking industry.
In fact, the recent banking turmoil may lead to a large wave of banking consolidation in this country as Treasury Secretary, Janet Yellen, and other prominent figures have voiced that consolidation from the current 4,000+ banks is an acceptable outcome and may even be desirable from a regulatory perspective. A consolidation would likely increase the size and power of these biggest banks, giving them even more ability to require high loan rates and keep rates on deposits insanely low.
A Better Way: The Rise of Alternative Cash Management Platforms
Astute depositors have long known they have other choices on where to hold their funds, and it appears the rest of the country is quickly catching on. Depositors are quickly realizing that the Fed Rate hikes can benefit them too (not just benefit the banks!) A good example of this is the growth of government money market funds.
Source: Bloomberg
Of course, the purchase, management, and optimization of these types of high-return government-backed securities is neither easy nor convenient. At many times, it requires a skill set that most don’t have. This has held back many depositors from putting their money in ultra low-risk, high-return securities like Money market Funds and Treasury Bills.
Cash management platforms (like Treasure!) exist to solve this exact problem. With the Treasure platform and an expert investment team, customers can rest assured that the heavy lifting is done for them – and that their cash is always secure, liquid, and earning even better returns than if they had invested in market government securities themselves.
