Hello! Kiah here. Welcome to Fintech Takes Banking, my weekly newsletter where I highlight things I think are interesting or important for bankers and the surrounding environs.

This newsletter comes to you as I'm traveling to Toronto for FDATA's 2026 Global Open Finance Summit, and a coworking day/evening gathering I'm really looking forward to. Thanks to Tarique Khan and Dan Murphy for organizing these events!

Was this email forwarded to you?

Subscribe Here

BANKERS, WE NEED TO DEFINE THE RELATIONSHIP

Opening an account doesn’t mean you’ve won the customer over. It could be casual, they could be taking a little test drive.

If they fund it with $100 and ghost you three months later, that’s not a problem with the technology. That’s a growth problem. How do you win them over?

Jorge Garcia from Linker Finance and I are breaking down what it takes to turn account openings into actual relationships.

Join us?

Deposits Free and Clear

The well of free money at banks is shrinking. Tech and competition may drain it faster.

Noninterest-bearing deposits at banks peaked at the end of 2021, thanks to pandemic-induced stimulus. Since then, the amount and share of noninterest-bearing deposits in the banking industry has shrunk — even as deposits grow across the industry. The shrinking base of free funds has major implications for banks, given the specter of rising rates, technology and competitive pressures. How will banks respond and what happens when their funding becomes more expensive?

“My mentor used to say that deposits and funding are the raw materials of a bank,” said Justin Bakst, executive director of products and solutions at Darling Consulting Group. “You want the most affordable raw materials to fund your business on the lending side.”

Lots of Deposits

The good news is that there are still more noninterest-bearing deposits in the banking industry today than there were in 2020, according to data from the Federal Deposit Insurance Corp. Their growth is tied to two crises: the Great Recession and the coronavirus pandemic. Between 2009-15, the Federal Open Market Committee kept interest rates at zero to stimulate economic growth, but there weren’t as many readily available alternatives for customers to put discretionary funds that were both safe and liquid, said Billy Guthrie, a deposit consultant at Darling Consulting.

Then during the pandemic, the government and central bank flooded the economy with stimulus funds, pushing NIB deposits to their highest levels since the mid-1980s. Billy said demand deposit accounts went from between 20% and 25% of bank funding to about 30% before dropping down again. NIB deposits went from $3.6 trillion at the end of 2019 to its eventual peak at $5.2 trillion in the first quarter of 2021, according to the Federal Reserve Bank of St. Louis, using data from the FDIC Quarterly Banking Profile.

They total about $4 trillion as of the first quarter of 2026. Their presence is dwarfed by interest-bearing deposits, which have steadily climbed from about $3 trillion at the start of the millennium to $15 trillion in the first quarter of 2026.

... But Lots of Competition

Liquidity in general is very high in the banking space, and banks still have a large share of it, said Christopher Marinac, managing director at Brean Capital. But any banker will tell you there’s a lot of competition for that liquidity, which now includes crypto and stablecoin companies, online-only banks, credit unions and money market funds, among others. Some of these firms are happy to offer rates close to the federal funds rate — or higher —to attract money. Technology has made it easier for these firms to find bank customers and woo their deposits away with interfaces that look similar, or better, than bank interfaces.

“It may not be that stablecoins turn everything upside down,” Chris said. “It may just be that customers get smart.”

The FDIC flagged deposit reshuffling, which is when funds move from low- or no-interest accounts to higher-interest accounts, as a risk to banks in its 2024 Risk Review. Depositors moved funds from transaction and savings accounts to time deposits, which grew seven percentage points in a year to 26% of median bank deposits at the end of 2023. Inflows into these products increased interest expense: The industry’s cost of funding went from 55 basis points in 2022 to 2.13% in 2023, which eroded revenue and compressed net interest margins.

“As deposits declined, banks raised deposit interest rates to retain deposits and relied on more expensive nondeposit liabilities,” the FDIC wrote. Still, the banking industry saw outflows of $401 billion in 2023 overall.

The impact of deposit reshuffling had ebbed by the time the 2026 Risk Review came out. The yield curve was steeper at the end of 2025, and the FOMC lowered the federal funds rate range to 3.5% to 3.75%. Banks saw declines in interest expense relative to interest income, which improved their NIMs. Dropping deposit costs by 33 basis points lowered funding costs from 2.61% in 2024 to 2.26% in 2025, the FDIC found. Most banks in the industry —91% —reported higher NIMs in 2025.

It’s not clear what will happen with deposits if the Federal Open Market Committee begins raising rates again. The target range of the fed funds rate was still 3.5% to 3.75%, but that may change sooner rather than later. The September FOMC meeting begins on the day this newsletter is sent; on Sept. 11, FedWatch from the CME Group had an 86.5% probability that the FOMC will bump up the target rate to 3.75% to 4% at the meeting’s conclusion.

On one hand, it seems unlikely that deposits will drain out of the banking system as rapidly as they did in 2022-23. On the other hand, the last rate cycle demonstrated how willing bank customers are to move their funds, and how fast that can happen en masse.

Nathan Stovall, managing director at Performance Trust Capital Partners, said the metric to watch is the spread between the industry’s cost of deposits and the fed funds rate; he said that difference of 300 basis points could dictate “a lot” of deposit behavior.

It’s also not clear how technological advances could play into deposit shifts or disintermediation. Stablecoins are one instrument that banks worry could cause deposit withdrawals if customers want to purchase them for use.

“If money is going into stablecoins, it has to come out of something else. Large banks like Chase and Citi will see reductions, but not as much, because they'll be able to make it up in the wholesale banking market,” said Andrew Nigrinis V., an economist at Remington Economics, when we spoke about stablecoins and narrow banking. “Smaller banks are going to suffer because they won't be able to make it up in the wholesale market — they'll have to offer higher deposit premiums.”

For now, it seems that the bank industry and lobby have successfully pushed back on passage of the Clarity Act over whether or not stablecoins can pay yield. But it remains to be seen whether that legislative victory holds, and how popular stablecoins become in the financial services ecosystem.

And then there’s artificial intelligence and agentic AI. Large language models were in use during the last interest rate cycle; since then, the potential of agentic AI has only grown in sophistication and capabilities, as well as consumer and corporate adoption.

An estimated $23 trillion in retail deposits and investable assets — specifically those in low-yielding accounts — could be “potentially in play” if personal financial AI agents become widely used, wrote Bob Hedges, a digital fellow at MIT’s Initiative for the Digital Economy and former chief data officer at Visa, pointed out in a June Open Banker op-ed. The potential impact of deposit intermediation could be a 20% reduction of net interest income within three to five years for banks that aren’t able to effectively respond, he wrote, citing an Accenture study.

But not every deposit will carry the same vulnerabilities; he believes that the deposits that are most vulnerable are at banks that lack “granular deposit product systems and pricing models that enable complex and loyalty-inspiring pricing,” which smaller regional and community financial institutions may not have.

“Deposit outflows and repricing will put pressure on many banks’ underlying profitability. For banks facing severe margin pressure, what starts as an existential strategic threat from AI could quickly become a profitability or liquidity issue,” Hedges wrote. “Community banks, whose margins are more dependent on low-cost deposits, may be particularly vulnerable to AI agents’ repricing of their retail deposit books.”

No Such Thing as a Free Lunch Money

Noninterest-bearing deposits are shrinking, funding could get more expensive and deposits could leave the bank space. How should banks think about responding to these competitive threats?

Banks may need to come up with a deposit strategy that considers the new operating environment. The tactics and strategies they use will look different at various institutions. Banks may need to identify the core accounts and customers they want to retain and how they will do that. That might include more-attractive pricing for the customer. Under this approach, an interest-bearing deposit can still be a core account.

“I’m not saying [NIB deposits] are going away, but I'd prepare for deposits to become more expensive, the same way I budget for things getting more expensive,” Nathan said. “That's the drift in the direction of the price of money for banks, partly because everyone wants a bank deposit.”

Nathan isn’t sure how broadly adopted stablecoins and other alternative payment forms will ultimately be, but if they’re popular, it could be a “double whammy” for banks: deposits exiting the banking system, plus the loss of fee income from ACH and wire transfers.

“Why would you pay a bank a fee for that if you have something that moves money without one?” he said. “Both effects, if you get broader adoption, are negative for banks by a couple of basis points or more.”

When it comes to user-directed agentic AI, banks should explore analytical approaches and existing deposit management frameworks if they’re not already, Hedges wrote. This includes identifying “the key structural and behavioral attributes” that could influence depositor behavior, such as “digital engagement intensity, rate-paid sensitivity, balance tiers segments, tenure with the bank [and] depth of the relationship.” He suggested a two- or three-year time frame for an adoption and migration curve for funds to migrate or reprice.

On the bright side, banks do have excess capacity to tap the wholesale funding markets, Justin said. He called current levels of 3% to 4% “pretty low,” relative to the amount that banks took on during the Great Recession, and that wholesale funds can be a good option, if “used strategically and safely.”

But more expensive funds could pressure banks’ net interest margins. Net interest income is the way most community banks make most of their money, even as margins have compressed over time, according to a June community banking bulletin from the Federal Reserve Bank of Kansas City. Researchers found that the aggregate net interest margin at community banks fell about 10% in 25 years, from 4.25% in March 2001 to 3.81% in March 2026.

“Despite lower margins, community banks have become increasingly dependent on net interest income,” the researchers wrote, while it makes up a smaller portion of revenue at bigger banks. Revenue from interest income rose from 68% in 2001 to 79% in March 2026, peaking as high as 81% in 2022. The researchers wrote that this reliance reflects declining noninterest income over that time.

“[T]he past decade has seen prolonged yield curve flattening and even inversion, limiting banks’ ability to generate spread income compared to historical norms,” they wrote. Keeping deposit costs low was a crucial buffer to battling a flat yield curve. “[B]anks mitigated further NIM compression over the 25-year period by reducing their cost of funds. Funding costs have declined, though to a lesser extent than the decline in earning asset yields, impacted by a significant shift in deposit composition away from time deposits toward lower-cost non-maturity deposits.”

The Free Money Paradox

One thing that could bring deposits back into the banking system? A potential economic downturn. Justin at Darling Consulting pointed out that a broader crisis, one that could impact some of the nonbank competitors seeking to attract customer funds from banks, could reverse some of the deposit outflow. Indeed, noninterest-bearing deposits increased in the Great Recession and during the pandemic, in part due to stimulus and a flight to quality.

“There's fear-based behavior and rates come down,” he said. “That’s what happens when people are scared.”

He might be onto something with that observation. But it remains to be seen if that’s a future catalyst anyone actually wants.

FROM THE VAULT

What’s on my mind and filling my time:

🧎🏼Forgive me, Father: Trends forecaster Sean Monahan recently wrote about the seven deadly sins of tech and how they have contributed to today’s low-trust society. It’s not ostensibly about financial technology, but some of the observations are disconcertingly applicable.

🧊 Iced out: Is there any more of a niche industry than ice manufacturing and distribution? This profile of Reddy Ice in Texas Monthly showcases both the luxury and utilitarian nature of ice. It’s A RIDE. (For further learning, check out this Gastropod episode about ice houses and the invention of refrigeration.)

🎙️ On Bank Nerd Corner: I’m joined by Melissa Koide, founder and CEO of FinRegLab, to discuss the research organization’s latest project focused on personal financial agentic AI that has the potential to not only inform consumers, but act on their behalf. We talk about the tech, the metrics and the complicated, emotional reality of personal finance.

🛫 Catch Me At: FDATA’s 2026 Summit this week in Toronto. CBA Committee Summit on Sept. 23 in McLean, Virginia. MX Money Experience, Oct. 4-6, in Park City, Utah. Money2020, Oct. 18-21, in Vegas baby! Make sure to sign up for Fintech Takes the Court on Oct. 18 and either play or spectate/commentate with me. AFC Policy Summit on Nov. 17 in Washington.

Congrats on sticking with me through Deposit Month! I may have one more newsletter about something related to deposits, depending on how I feel. =) As always, feel free to reply to this newsletter with ideas, thoughts, comments and questions! - Kiah