As banks step into 2025, many are breathing a sigh of relief that the turbulence of 2024 is behind them. Inflation is cooling, interest rates are falling, and economic growth, while slowing, isn’t collapsing. On paper, the environment should feel less punishing. But behind the calm exterior lies a quiet storm building within banks’ balance sheets: persistently high deposit costs that threaten to erode one of banking’s most vital profit engines, net interest income (NII).
A Counterintuitive Reality
Conventional wisdom says falling interest rates should bring relief. Lower borrowing costs should spur loan demand, while funding costs, particularly deposit rates, should drop, widening banks’ margins. That’s the theory. Reality, however, is proving more complex.
According to Deloitte’s 2025 banking outlook, deposit costs are expected to remain elevated at 2.03%, significantly higher than the prepandemic five-year average of 0.9%. This stickiness defies historical patterns and is forcing bank executives to recalibrate their strategies.
What’s Keeping Deposit Costs So High?
1. The Liquidity Hangover
Banks are still navigating the aftermath of the liquidity crunch experienced in 2023 and 2024. Many institutions aggressively raised deposit rates to retain customers during periods of uncertainty. Now, even as the Fed begins to cut rates, customers have grown accustomed to high yields, and they’re not eager to accept less.
2. A War for Deposits
Consumer behavior has shifted. The pandemic’s excess savings have been depleted, and with total U.S. consumer debt now at an all-time high of $17.7 trillion, households are more discerning with their money. Deposit competition has become fierce. Banks are fighting to maintain liquidity, particularly regional and midsize institutions without the brand strength or funding diversity of the largest players.
3. Asymmetric Rate Movements
In this cycle, deposit betas, the rate at which deposit costs move relative to interest rates, are showing asymmetry. When the Fed hiked rates, deposit costs surged quickly. But now, on the way down, they’re falling at a much slower pace, lagging well behind rate cuts.
The Net Interest Margin Squeeze
The direct result of elevated deposit costs is a shrinking net interest margin (NIM). Deloitte forecasts the average NIM will drop to around 3% by the end of 2025, a visible dip from recent highs. For many banks, particularly those reliant on traditional lending income, this represents a significant blow to profitability.
What’s more, loan growth is not expected to be strong enough to compensate. While mortgage lending may rebound due to lower rates, other categories like credit card and auto loans face headwinds from financially stretched consumers. The net effect? Pressure on the top line with limited room to maneuver.
It’s Time to Rethink the Playbook
1. Shift Focus to Non-interest Income
With interest-based revenue under stress, banks must intensify efforts to grow non-interest income from fees, asset management, payments, and advisory services. These streams are less capital-intensive and more resilient in low-rate environments.
2. Optimize the Deposit Mix
Banks should review their deposit base to stabilize the mix between interest-bearing and non-interest-bearing accounts. Though challenging in today’s environment, encouraging digital wallet integration, bundled services, or loyalty programs could enhance deposit stickiness without relying solely on high rates.
3. Leverage Data for Smarter Pricing
Customer-level analytics can help banks price deposits more intelligently, offering competitive rates only where necessary, while optimizing margin across the broader portfolio. Personalized deposit strategies could become a competitive differentiator.
4. Asset-Liability Management Discipline
Asset and liability management (ALM) committees will play a more critical role in 2025. The need to carefully balance loan growth, deposit pricing, and interest rate risk will define strategic success or failure.
Winners and Losers: Who Has the Advantage?
Larger, diversified banks are in a better position to weather the storm. With stronger brands, broader funding channels, and higher liquidity buffers, they can afford to lower deposit rates faster and redirect customer flows. Smaller banks, on the other hand, are more vulnerable. Midsize and regional institutions with high exposure to commercial real estate and concentrated deposit bases could find themselves squeezed hardest.
The Bottom Line
The market may cheer lower rates in 2025, but for banks, the celebration may be premature. Persistently high deposit costs are emerging as a hidden drag on profitability, threatening to undermine the benefits of a softer monetary policy.
Net interest income, the workhorse of traditional banking, is under siege, not from a spike in defaults or a plunge in demand, but from a more insidious source: customers who won’t let go of high returns on their deposits.
If 2024 was the year of resilience, 2025 may be the year of reinvention. To thrive, banks must accept that old playbooks no longer apply and act swiftly to outmaneuver the margin killer lurking quietly in their funding costs.
