Why the Future of Bank Funding Is About More Than Deposit Growth
A Bancly Future Banking Economics publication examining how deposit stability, price sensitivity, transaction primacy, mobility and new forms of money can alter the economics beneath the liability base.
For most banks, the deposit franchise is understood first through the language of funding. Management measures growth, market share, CASA, maturity composition, concentration, deposit beta, liquidity and cost of funds, then incorporates those variables into asset-liability management and financial planning. These measures remain fundamental to banking because the ability to fund assets reliably and at an economically attractive cost sits close to the centre of the commercial banking model. Yet the structural value of a deposit franchise is becoming more complicated than the balance-sheet line through which it is reported.
A deposit is not economically valuable simply because the money remains within the institution. Its value depends on why the money is there, how reliably it remains, how sensitive the customer is to price, what activities continually regenerate the balance, how easily the customer can move the funds and what the bank would need to pay, economically and strategically, if that funding had to be replaced. It also depends on whether the deposit forms part of a broader operating relationship through which the bank captures payment flows, financial intent, behavioural information, fees and future product demand.
These distinctions are not new, but the environment around them is changing. The recent interest-rate cycle demonstrated that deposit pricing can adjust more aggressively than static assumptions might imply. Digital banking has weakened the historical connection between deposit gathering and physical distribution. Real-time payment infrastructure has made money increasingly easy to move. Financial platforms are allowing customers to maintain accounts with one institution while conducting a growing share of their financial activity elsewhere. Artificial intelligence could progressively reduce the informational friction that has historically supported depositor inertia, while stablecoins and other new forms of money create additional destinations for liquidity whose economic implications depend less on technological novelty than on how they alter the composition and behaviour of bank funding.
The implication is not that the deposit franchise is disappearing. Deposits remain one of the most important economic advantages available to commercial banks and continue to provide funding characteristics that wholesale markets frequently cannot replicate. The strategic question is nevertheless becoming more demanding because the future value of the franchise cannot be understood through deposit growth alone. Bank leadership increasingly needs to determine the economic quality of the funding it holds, what currently produces that quality and which structural conditions supporting it could weaken or disappear. That is where deposit management becomes Future Banking Economics.
The Central Thesis
The future value of a deposit franchise cannot be understood through deposit growth alone. The relevant question is whether the economics beneath the funding remain durable as customer behaviour, market structure and monetary architecture change.
The Same Deposit Balance Can Represent Very Different Economics
The accounting treatment of deposits can obscure substantial differences in economic value. Two institutions may report the same quantity of deposits while possessing funding franchises of very different quality.
One bank may have millions of granular household, SME and corporate relationships through which salaries, merchant receipts, payroll, collections, supplier payments and recurring transactions flow continually. The balances sitting on its books are therefore not simply deposits acquired from customers. They are the residual liquidity generated by economic activity that takes place through the institution. Such a bank may benefit from relatively stable balances, broader customer relationships, transactional income and substantial behavioural information that strengthens its ability to price, cross-sell and retain customers.
Another institution may hold a similar volume of deposits but rely more heavily on customers whose principal reason for maintaining balances is the rate being paid. Those deposits may be perfectly legitimate and may remain stable under contractual conditions, yet the economics of the franchise are different because retention depends more directly on price and less on operating integration with the customer.
The nominal balance can therefore be identical while the economic value is materially different. This distinction became particularly visible following the regional bank failures of 2023, when regulators intensified their examination of deposit concentration, insurance status and depositor behaviour. The resulting discussion reinforced a point that is strategically important beyond liquidity regulation: broad accounting classifications are often insufficient to explain how funding behaves. Deposits that appear similar in financial statements can respond very differently to stress, changing market rates or new alternatives available to customers.
The deposit franchise performs several economic functions simultaneously. It funds assets, provides liquidity, contributes to the spread between asset returns and liability costs and frequently identifies where the customer’s primary financial relationship resides. The same relationship can also generate payment activity, fee income, information about customer cash flows and opportunities for lending, wealth, insurance, foreign exchange and other services. In strong franchises, these economics reinforce one another because the relationship that generates the deposit also creates the behaviours that make the deposit durable.
The visible balance is therefore only one component of the franchise. Bancly describes the broader condition as Deposit Economic Quality, meaning the extent to which a bank’s funding remains stable, competitively priced, behaviourally durable and economically connected to valuable customer relationships as market conditions change. This distinction changes the strategic objective from maximising deposits to building a funding franchise whose economics remain attractive when the environment around it changes.
The Economics of a Deposit Begin With Why the Money Is There
Banks traditionally classify deposits according to product type, maturity, customer segment, currency or regulatory treatment. Current accounts, savings accounts, term deposits, retail balances, corporate deposits and institutional funding all provide useful distinctions for management and reporting, but these categories do not fully explain why a customer maintains money with the institution.
The reason the balance exists is economically important because different reasons create different forms of durability. A salary account may hold funds because income arrives there before expenditure occurs. An SME operating account may maintain balances because receivables, payroll and supplier payments pass through it. A corporate cash-management relationship can sit inside treasury operations and working-capital cycles. A household savings account can reflect accumulated trust, habit and convenience, while a term deposit can exist primarily because the bank currently offers the most attractive rate available to the customer.
These relationships cannot be treated as economically equivalent even when their accounting classifications appear similar. A deposit can be contractually stable while providing limited franchise value, just as a commercially important operating account can provide significant relationship value while remaining capable of moving rapidly under certain conditions. The economic quality of the franchise therefore needs to be understood through several dimensions rather than compressed into one ratio.
The first dimension is behavioural stability, which concerns the likelihood that balances remain under both normal and stressed conditions. Granularity, depositor type, insurance status, operating purpose and concentration all influence this behaviour. The second is price sensitivity, which concerns the degree to which retention depends on remuneration and the attractiveness of competing alternatives. The third is relationship primacy, which concerns whether the bank controls the financial activity that continually generates and replenishes the balance. Salary flows, collections, payroll, merchant payments, trade activity and treasury operations matter because they integrate the bank into the customer’s economic life.
The fourth dimension is replacement economics. If the funding leaves, the bank does not simply need another liability of the same nominal amount. It may need to replace a granular retail balance with more expensive wholesale funding, carry additional liquidity, accept greater concentration or sacrifice associated payment and relationship economics. The fifth dimension is mobility, which reflects how easily the customer can identify another provider, establish an alternative relationship and transfer funds.
Taken together, these dimensions provide a more complete view of the funding franchise because they explain why the deposit exists, what makes it valuable and what could cause that value to deteriorate.
Deposit Beta Is Becoming a Structural Variable
One of the traditional economic advantages of a deposit franchise has been customer inertia. When policy rates rise, banks do not always need to pass the full increase immediately to depositors, particularly where customers hold balances for transactional, operational or relationship reasons rather than solely for yield. If asset returns reprice more quickly than funding costs, the bank benefits from the resulting spread.
The degree of pass-through from market rates into bank funding costs is commonly expressed through deposit or funding beta. Recent monetary cycles have demonstrated that this relationship is neither fixed nor entirely within the control of the institution. Federal Reserve research has shown that funding betas vary with the magnitude and duration of monetary policy cycles, while nondeposit liabilities tend to reprice more aggressively than deposits. This continues to reinforce the economic advantage of deposit funding, but it also reveals why historical deposit beta cannot automatically be assumed to describe future depositor behaviour.
Deposit beta is ultimately an expression of customer behaviour, and customer behaviour is affected by the friction surrounding financial decisions. Historically, a depositor seeking a higher return may have needed to identify an alternative, compare institutions, complete onboarding, transfer money and continue monitoring the market. For many customers, the potential financial improvement was not sufficient to justify the inconvenience involved. That inconvenience had economic value for the bank because it created inertia, and inertia supported funding economics.
Digital banking has already reduced some of that friction. Greater interoperability can reduce it further, while artificial intelligence could eventually allow software to compare balances, rates, liquidity requirements and product alternatives continuously on behalf of customers. The likely strategic consequence should not be exaggerated into a prediction that automated agents will move every deposit towards the highest available rate. The more credible implication is that the marginal depositor can gradually become more informed, more responsive and more mobile.
The economics can therefore deteriorate even if the balance does not leave. If a customer who previously accepted a low or zero return begins demanding greater remuneration because switching has become easier, the bank may retain the relationship and retain the funding while surrendering part of the spread economics that made the deposit attractive. Deposit volume may remain unchanged even as the value of the franchise declines. Future funding strategy should therefore examine deposit beta not merely as a historical response to interest rates, but as a structural variable whose underlying drivers can change as customer information, mobility and financial decision-making evolve.
The Economic Signal
A bank can retain the deposit and still lose part of the franchise economics if customer mobility and rate sensitivity force the institution to pay more for funding that previously remained through inertia.
Transaction Primacy Is Funding Economics
The connection between transaction activity and deposit value may prove to be one of the most important strategic relationships in the future funding model. Historically, account ownership and financial activity were closely connected. The institution holding the customer’s primary account often received salaries, processed payments, managed corporate cash flows, received merchant proceeds, supported trade activity and provided the instruments through which the customer interacted with the economy. Those activities continually generated balances because money entered the relationship before it was spent or transferred elsewhere.
A salary arrives before household expenditure occurs. Merchant receipts accumulate before suppliers are paid. Businesses maintain liquidity around payroll and working-capital cycles. Corporates retain operating balances within treasury relationships. These are not random deposits. They are balances generated by the economic activity passing through the institution.
This is why transaction banking can create funding value far beyond its direct fee contribution. The operating relationship generates balances, deepens behavioural information, improves visibility into cash flows, increases opportunities for cross-sell and makes the broader customer relationship harder to move. Transaction primacy can therefore become balance-sheet economics.
The structural challenge is that the account and the interface can increasingly separate. Customers can hold money with one bank while initiating payments through another application. Businesses can retain deposits with one institution while operating through financial software that sits above the account. Open-finance architecture can allow third parties to observe and initiate activity around balances they do not hold, while wallets and platforms can increasingly own the payment experience without initially replacing the regulated account underneath.
This separation matters because the institution controlling the interface increasingly controls financial intent. It sees what the customer is attempting to do, when the activity occurs and which products or services may be required next. Over time, control of financial intent can influence transaction volume, cross-sell, pricing and eventually where balances themselves are held.
The economic transmission therefore runs from transaction primacy through operating flows and behavioural depth into balance formation, deposit stability, funding cost and ultimately NIM, customer profitability and ROE. Conversely, an institution can retain the underlying account while gradually losing some of the economic value associated with it if daily activity migrates elsewhere. Payments strategy, transaction banking and deposit strategy should therefore no longer be treated as separate strategic conversations. The strategic asset is not only the deposit currently sitting on the balance sheet. It is also the flow that continually recreates the reason for that deposit to exist.
New Forms of Money Matter Through Their Funding Transmission
Stablecoins have become one of the most visible subjects in the debate about the future of bank deposits, but the discussion often becomes less precise than the economics require. The current scale of stablecoins remains small relative to conventional bank deposits, which means that predictions of imminent large-scale deposit displacement are not supported by the available evidence. The strategically interesting question is instead how wider adoption could alter the composition and behaviour of bank funding.
Analysis by the Bank for International Settlements provides a useful framework because the impact depends on what happens after a customer converts a commercial-bank deposit into a stablecoin. If the stablecoin issuer subsequently places the reserve proceeds back into the banking system as wholesale deposits, aggregate banking-system deposits may initially remain unchanged. From an accounting perspective, the deposit has been replaced rather than lost.
Economically, however, the nature of the funding has changed. A granular retail deposit may have been replaced by a more concentrated institutional balance that is potentially more rate sensitive and receives less favourable treatment under liquidity and stable-funding frameworks. The banking system can therefore retain the same nominal deposit volume while the economic quality of its liability base deteriorates.
Other reserve structures produce different outcomes. If stablecoin issuers hold government securities, deposits may leave the banking system depending on who sells those securities, while the banking sector can also experience changes in the availability of high-quality liquid assets. If reserves are held directly with a central bank, commercial-bank reserves can decline. The economic consequences therefore depend on the design of the monetary instrument, the reserve asset, the behaviour of users and the structure of the banking system.
The correct strategic interpretation is not that digital money threatens deposits in a uniform way. Different forms of money create different funding consequences. Research on potential central bank digital currencies, for example, suggests that well-designed retail digital money can function principally as a payment instrument rather than a large-scale store of value, limiting the degree of deposit displacement under normal conditions.
Future Banking Economics therefore requires precision. Bank leadership should ask which form of money is being considered, who holds it, what backs it, what purpose it serves and through which balance-sheet mechanism it could alter funding composition, liquidity, pricing or credit creation. The technological label is less important than the financial transmission.
The Deposit Can Stay While the Franchise Weakens
The most important strategic implication is that funding deterioration does not necessarily begin with visible deposit outflows. Imagine a bank whose deposits are indexed at 100 today and remain at 100 five years from now. On the surface, management could reasonably conclude that the franchise has remained stable. The picture changes if the characteristics beneath the balance have moved materially.
Suppose the average funding cost has risen because a greater share of customers now requires active remuneration. Suppose transaction activity has migrated towards external interfaces, term and wholesale funding have increased, corporate concentrations have become larger and customers retain their primary account while moving surplus liquidity elsewhere more frequently. Suppose the bank is maintaining the same deposit volume partly through promotional pricing and more active retention management.
The deposit franchise has not disappeared, but its economics have weakened. The institution is paying more for the same amount of funding, receiving less behavioural information from the relationship, capturing fewer adjacent economics and facing a higher cost if those balances eventually leave. The balance-sheet line remains stable while the structural economic position has deteriorated.
This becomes particularly important when alternative funding is considered. Banks that lose granular deposits may need to replace them with wholesale or brokered liabilities that can be more expensive, more concentrated or operationally different. The true value of the deposit franchise therefore includes the economic difference between the funding the bank currently enjoys and the funding it would require if those deposits disappeared.
That difference constitutes part of the franchise value. Traditional deposit franchise analysis frequently focuses on the present value of funding obtained below market rates. Future Banking Economics extends the concept by incorporating the durability of the relationships that make those favourable economics possible.
The Future Competition Is for the Behaviour Behind the Balance
The changing deposit franchise also changes the nature of competition. Banks will continue competing for balances through pricing, convenience, brand, product design, service and distribution. The deeper competition, however, concerns the financial behaviours that continually produce those balances.
The bank receiving payroll occupies a different economic position from a bank receiving an occasional savings transfer. An institution integrated into a company’s collections, payroll, cash management and supplier payments occupies a different funding position from an institution competing only for temporary surplus cash. The bank settling a merchant’s daily flows has access to different behavioural and balance economics from one offering a standalone deposit product.
The economic value arises because recurring activity generates reasons for balances to remain. This makes the infrastructure surrounding the customer strategically relevant to funding. Payments become part of funding strategy. Transaction banking becomes part of balance-sheet strategy. Merchant acquiring, payroll, remittances, cash management and APIs can influence the deposit franchise because they determine where economic activity occurs and where liquidity accumulates as a consequence.
The strategic objective is therefore not merely to own the account. It is to own enough of the customer’s financial activity that the account continues to possess economic gravity. This relationship should eventually be quantified. If a bank captures a larger share of corporate operating flows, management should understand the implications for average balances, CASA, fee density, funding cost, customer profitability and retention. If transaction integration strengthens underwriting through better cash-flow information, that consequence should also be visible.
Investments in payments and transaction infrastructure should ultimately be accountable for changes in bank economics rather than being measured only through transaction counts, API volumes or digital adoption. The principle is straightforward: infrastructure becomes strategic when it changes the economics of the franchise.
The Deposit Franchise Needs a Different Scorecard
None of this diminishes the importance of traditional deposit measures. Deposit growth remains fundamental because funding capacity constrains the balance sheet. CASA remains important because transaction and savings balances frequently carry economically attractive characteristics. Deposit beta remains important because it provides evidence of rate sensitivity, while LCR, NSFR, concentration, maturity and currency continue to be essential measures of liquidity and funding risk.
The limitation arises only when these measures are treated as a complete description of the franchise. A more complete Future Banking Economics scorecard would incorporate at least six dimensions. Deposit volume would establish the scale of the funding base, but it would be evaluated alongside whether that growth is economically attractive. Funding cost would show the immediate price of the liability, but management would distinguish cyclical repricing from more structural deterioration in customer pricing power. Behavioural stability would examine how different funding categories behave through changing conditions rather than assuming historical retention remains constant.
Price sensitivity would extend deposit beta into a deeper understanding of the sources of customer inertia. Transaction primacy would identify which operating flows continually create balances and whether the institution remains embedded in the customer’s financial life. Replacement economics would show what happens if the funding leaves, including the interest cost of alternative funding, the liquidity implications and the wider loss of associated customer economics.
This produces a more demanding definition of funding strength. A bank could increase deposits while weakening the franchise if growth becomes increasingly expensive, concentrated or disconnected from operating relationships. Another institution could deliberately allow low-quality funding to leave and improve the economics of the remaining liability base.
The objective is therefore not maximum deposit volume. It is a durable and economically productive funding franchise.
From Deposit Management to Funding Franchise Governance
The changing nature of the deposit franchise also changes who needs to govern it. Deposit economics increasingly sit at the intersection of treasury, product strategy, payments, transaction banking, customer experience, technology, liquidity management and corporate strategy. A narrow product or funding conversation therefore risks missing the structural relationships shaping the franchise.
Deposit growth should continue to be governed, but leadership should understand which categories of growth create the greatest value after considering funding cost, liquidity, behavioural stability and relationship economics. CASA should continue to matter, but the institution should understand how much of it reflects genuine transaction primacy rather than accounting classification alone. Deposit beta should continue to be monitored, but management should understand why customer segments exhibit different levels of sensitivity and which sources of inertia are becoming weaker.
Payments and transaction banking should continue to receive investment, but the economic proof should extend beyond transaction growth. Management should be able to demonstrate whether those capabilities strengthen funding, fees, customer profitability, retention or information advantage. New forms of money should remain on the strategic horizon, but analysis should begin with funding transmission rather than technology narratives.
The board and CEO should consequently understand the assumptions supporting the franchise. They should know which balances remain because the institution controls the customer’s operating relationship, which remain primarily because of price and which categories would be most expensive to replace. They should understand how much of the current funding advantage depends on customer inertia, how that inertia could change as financial search becomes easier and which alternative forms of money could alter liability composition even if aggregate deposit levels remain stable.
These questions move deposit strategy beyond liability management. They make it a question about the bank’s position within customer financial behaviour.
The Economics Beneath the Deposit Franchise
The deposit franchise remains one of the most important structural advantages available to commercial banks. Conventional deposits continue to dominate funding in many banking systems, while trust, regulation, deposit insurance, payment infrastructure and customer relationships continue to reinforce their role. New forms of money remain small relative to the scale of commercial-bank liabilities, and there is little analytical value in assuming that every new financial instrument inevitably disintermediates banks.
The more consequential risk is subtler. A deposit franchise can weaken without disappearing. Funding can become more expensive while balances remain. Depositors can become more mobile without immediately leaving. The account can remain while the interface migrates elsewhere. Customers can retain their primary banking relationship while moving surplus liquidity more actively. Stable retail funding can gradually be replaced by more concentrated institutional funding. CASA can remain apparently healthy while the behaviour beneath it becomes less favourable.
These changes can accumulate long before deposit attrition becomes dramatic enough to attract executive attention. That is why the future of bank funding cannot be understood through deposit growth alone. The stronger franchise will not necessarily belong to the bank reporting the fastest increase in deposits, nor will it necessarily belong to the bank reporting the lowest current cost of funds. It will belong to the institution that understands why its funding exists, how durable those reasons are, what behaviours continually recreate the balances and how structural change could alter the economics before reported deposit volumes begin to move.
The governing objective is therefore not simply to retain the deposit. It is to retain the economic characteristics that make the deposit valuable. This means protecting transaction primacy where transaction primacy creates funding advantage, understanding where pricing power is structurally durable rather than temporarily convenient, distinguishing granular relationship funding from concentrated liquidity and knowing the replacement economics of the franchise before stress forces those economics into view.
Most importantly, it means recognising that reported funding performance and structural funding position are not the same thing. The balance-sheet line tells management what funding the bank currently holds. The funding franchise tells leadership what that funding is economically capable of doing for the institution.
The central strategic question is therefore not simply how much deposit growth the bank should target. It is whether the conditions that currently allow the institution to attract stable, competitively priced and strategically valuable funding will remain intact over the decade ahead, which of those conditions are already changing and what decisions should be taken before those changes become visible through cost of funds, NIM and ultimately ROE. That is the question underneath the liability, and increasingly it is one of the questions underneath the future economics of the bank.
The Question Underneath the Liability
What must remain economically true for today’s deposit franchise to continue providing stable, competitively priced and strategically valuable funding over the decade ahead, and which of those conditions are already changing?
