Understanding Core Deposits

By Ashley Kilroy · August 05, 2022 · 7 minute read

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Understanding Core Deposits

Although you may have never heard the term before, core deposits are a basic concept in retail banking. When customers (probably just like you) deposit funds in a checking, savings, or money market account, financial institutions consider this money to be core deposits. Financial institutions then use core deposits to loan money to other consumers and generate profits through interest-bearing investments. So, generally speaking, growing core deposits helps institutions better leverage these funds and earn profits.

Though this may sound like technical knowledge, the truth is that understanding how core deposits work and why they are important can help you better navigate your banking life. Read on to learn more, including:

•   What is a core deposit in banking?

•   How do banks increase core deposits?

•   How are core deposits and interest payments connected?

What Is a Core Deposit?

Simply put, core deposits are a stable source of capital for financial institutions like banks and credit unions. It’s money that consumers deposit and that the bank then turns around and uses elsewhere. For instance, those funds could be part of a loan. Core deposits usually include individual savings accounts, business savings accounts, and money market accounts.

In addition, financial institutions may offer incentives to encourage consumers to deposit money in a specific account to increase their core deposits. Building their capital with core deposits can have an array of advantages for a financial institution, including boosting revenue.

How To Calculate Core Deposits

Given that core deposits can reflect a bank’s health, it may be valuable at times to figure out how much a financial institution has. This may be a bit technical for a typical layperson, but here is the technique.

To calculate core deposits, one can look at the balance sheet or deposit footnotes that consist of checking, savings, and money market deposits. Ideally, it’s best to leave out particular broker or certificate deposits since both deposit accounts tend to follow rates and involve higher costs for the financial institution. Banks that are oversaturated with deposits like this may have liquidity issues and struggle to fund their loan portfolio.

The next step: Compare the number of core deposits to overall deposits to find the ratio of core deposits. Banks with 85% to 90% core deposit ratios are considered to be solid financial institutions. Additionally, banks should generally have a substantial percentage of non-interest-bearing deposits, consisting of about 30% of total deposits. That ratio of 30% or higher also indicates that a financial institution is in good health.

Recommended: When Will Direct Deposit Hit My Account?

Methods for Increasing Core Deposits

Now that you know what core deposits are, let’s take a moment to acknowledge their value: The success of a financial institution relies on the growth of its core deposits. For this reason, financial institutions continually look for ways to attract and retain their customer base and increase those deposits. It’s critical to success.

Here are some strategies financial institutions implement to grow their core deposits.

Cultivating Relationships

Banks can boost core deposits by cultivating relationships with their current customers. After a consumer puts their money in the institution (whether by setting up the direct deposit process, electronically, or with a teller or ATM), they are now a client. The bank or credit union can focus on nurturing that relationship, so the consumer uses the bank for all of their banking needs. Perhaps they will move a savings or business account that they keep elsewhere to this bank. What’s more, if the customer feels valued, they will likely share their experience with friends and family. This good word of mouth can lead to the growth of core deposits and strengthen the financial organization.

There are a variety of ways to cultivate better customer relationships. With account holders who bank at bricks-and-mortar institutions, one technique is to enhance interactions with the staff. For example, a teller or bank representative might suggest personalized products to meet a client’s needs, such as one of the different kinds of deposit accounts. Online banks can also glean their customers’ needs and create tailored offers with incentives, like a cash bonus or additional services (say, budgeting help).

Another initiative might be to reach out to high net worth clients to personalize the relationship, knowing that these individuals are likely to have cash to deposit. Banks that pay attention to their customer’s needs and make an effort to add special touches can improve customer satisfaction, increasing core deposits.

Recommended: How to Deposit Cash at an ATM

Bolstered Online Services

As more and more banking transactions go digital, enhancing online services can encourage more customers to deposit funds at a financial institution and potentially do so in larger amounts.

This can be an especially good tactic for smaller financial institutions. Community banks may struggle with growing core deposits. If an institution like this has limited capital, enhancing online services can be an important avenue to pump up those core deposits. Improved online services may well cost a fraction of what it does to bolster a physical bank branch. Creating digital services can also help the bank reach more consumers. While a bank branch may generate between 75 and 100 new accounts per month, a digital branch could help increase this number by hundreds.

When opening a new account, many consumers choose to compare options online first. Even if a bank has competitive rates and has conveniently located branches, prospective account holders may choose competing banks if they rank higher on search engines like Google or Bing. For this reason, creating an online presence and digital services can grow the number of deposits.

Additionally, digital services offer convenience, one of the most critical and valuable factors for many consumers. Leading very busy lives, customers want to partner with a bank that they can access at all hours of the day and night, which is an advantage of mobile deposits and transfers. Banks that offer that advantage could win more business and core deposits.

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Offer Tailored Services

Financial institutions that offer tailored services to particular industries or specialized banking products can attract consumers who value these services. For example, banks can identify niches or target audiences in their community that provide the most deposit advantages. If they are doing business in an area known for an abundance of hospitals, they might develop more banking products and services that meet the needs of healthcare professionals (say, ways to pay off student loans faster). They can mold an incentive strategy around the industry to attract more customers and core deposits.

Recommended: Understanding Funds Availability Rules

Banking Risk and the FDIC

When working to attract more customers and core deposits, it’s important to recognize that many clients will wonder, Is my money safe? A financial institution must strike a balance between core deposits being available for consumers to withdraw funds and their cash being used to make loans and otherwise generate revenue. (After all, some of a bank’s profits are based on charging a higher interest rate on loans than is paid on deposits. customer’s interest rate minus fees and other service charges.)

There are governmental guidelines for this: All financial institutions must have bank reserves, a percentage of deposits they must hold and have available as cash. In the past, this figure has ranged between 3% and 10%. But as of 2020 and the COVID-19 crisis, this requirement was lowered to 0% to stimulate the economy. So, since banks are not required to set aside any deposits, if all of the depositors requested total withdrawals from their accounts, the bank wouldn’t have enough money to fulfill this request.

That’s where the Federal Deposit Insurance Corporation (FDIC) comes in and can insure core deposits. Just how much does the FDIC insure? Up to $250,000 per depositor, per ownership category, per institution. So even if the bank were to fail, consumers will have at least this amount covered.

The Takeaway

Core deposits — the funds put in checking, savings, and money market accounts — help banks make money and offer loans to consumers. Growing core deposits is vital to an institution’s success, and this goal can be achieved in a variety of ways, including offering more personalized services and more online banking capabilities.

If you are interested in the benefits of digital banking, see what banking with SoFi can offer. We’re an online bank, and when you open Checking and Savings with direct deposit with SoFi, you’ll earn a competitive APY and pay zero account fees. High interest and no charges eating away at your balance means your money can grow faster.

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What is the difference between core deposits and purchased deposits?

Core deposits are typically stable bank deposits, such as those in checking accounts and time deposits. Purchased deposits are rate-sensitive funding sources that banks use. These purchased deposits are more volatile and, as rates change, more likely to be withdrawn or swapped out.

What is a non core deposit?

Non core deposits are certificates of deposit or money market accounts that have a specified rate of interest over their term.

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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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