Dual role of deposits
Deposits are both a product and an input. If you fail to acknowledge this you will manage your deposits (and funding in general) suboptimally. Here’s what I mean…
Deposits are a product. Products are things that customers purchase to get value. All your customers think of deposits as a product.
They deposit money because they want to keep their resources secure and execute transactions. These services are what your customers want (and will pay for). As a product you should seek to maximize the price of your deposits.
Deposits are also an input. They are a raw material (funding) that you use in the bank to produce other more profitable products (chiefly loans). As a raw material you should seek to minimize the cost of your funding.
Thus the most important distinction between products and inputs: Products have prices. Inputs have costs.
The good news is that higher prices on your deposit products directly lower your funding costs.
As bankers we often focus on the funding cost side of the equation. But to grow and maximize bank profits you must also manage the pricing side.
Consider the costs of providing and delivering deposits and price them accordingly. You’ve got everything you need in your core system to do this. You just need to decide to do it.