The Green Sheet Online Edition

For an informed perspective on your questions, we consulted Ken Musante, President of Eureka Payments LLC. He also has extensive experience in the banking realm, having been a senior executive at Humboldt Bancorp for many years. Here's what Ken had to say:

You have a two-pronged issue. From a bank's perspective, what is the profitability of the deposit account, and how sticky are those same customers? Deposit accounts attached to the merchant's checking account are called core deposits and are among the most valued bank deposits. They are more valuable than other forms of deposits like CDs because banks pay lower (or zero) deposit rates for core deposits than they do for CDs and money market accounts.

Additionally, customers have a greater attachment to their checking account bank than they do to their CD bank. A customer may bank with a cross-country bank to get the best CD rate and then shift banks when that CD matures - but they have a relationship with their checking account bank, which lessens attrition. As New York Times writer Ann Carrns pointed out in her Aug. 20, 2012, article, many customers have to be really hacked off before they will switch banks, "[I]nertia is a powerful force in the absence of an imperative to act. Those may not be compelling reasons to switch to Bank of America if you're in the market for a bank, but the bank has done a good enough job to keep me from bailing."

And, with each new product a bank provides, attrition decreases at an increasing rate.

Unfortunately, the relative profitability of bank deposits, in today's environment is low. Traditionally, banks made money by lending out money at a higher rate than they are paying their depositors for that same money. Now, when our long term rates are only marginally higher than our short term rates, we have a flattened yield curve. Consequently, the interest margin banks are earning (the difference between the loan rate and the deposit rate) is narrow. As interest rates and the perception of future inflation rise, the yield curve will steepen, and there will be a corresponding increase in the profitability of deposit accounts.

Further compounding the issue is that banks are reluctant to lend at all. The Great Recession drained earnings from banks and brought a flood of new regulation and oversight. Bankers are being bashed by politicians on both sides of the aisle and are reluctant to accept new risk or make new loans. Before the recession, loan-to-deposit ratios exceeded 100 percent in many banks. Today, bankers are far more conservative and have much lower loan-to-deposit ratios due to lack of demand for loans and more conservative underwriting guidelines.

Further lessening the desirability of deposits is the strain on capital. Bank capital is required in relation to a bank's assets. Having more deposits equates to greater capital requirements. Since the Great Recession, many banks have seen their capital harmed by catastrophic losses; hundreds of banks have gone under, and banks are continuing to fail, albeit at a lesser rate. Others still in business are impaired by low capital (investor money) and either need to raise capital or run off deposits to attain the ratio of deposits to capital required by law. The least profitable deposits are the first to go, but if a bank is only marginally above "well capitalized," it will not be aggressively pursuing deposits, regardless.

Obviously, a growing bank desires core deposits. In normal times, they are very profitable because banks can lend out those stable, low-cost deposits at higher rates. In today's environment, with a flat yield curve, deposits are not as valued. Bank lending is way down, as are bank profits. With all this said, pursuing bank leads is still a sound strategy, but the incentive for banks to pursue the accounts for you in order to obtain the core deposit account has been lessened.

Thank you, Ken, for giving us this insight into the banking realm. And thank you, Kyle, for sending in your question. It is helping readers like you that keeps us going.