Are Small Business Deposits Back on the Rise?

On average, a car uses 433 gallons of gasoline per year. That’s a lot of energy needed to keep the engine running smoothly and ensure the car can get from point A to point B. The fuel not only keeps the car moving but also enables every system, from the air conditioning to the engine, to function as it should. Just like a car can’t operate without gas, financial institutions can’t operate without a steady flow of small business deposits to power their daily functions and long-term growth. To shed light on the current state of deposits at financial institutions and what we can expect in the future, BAI Research hosts a quarterly webinar series titled “The State of the U.S. Deposit Market.” The most recent webinar held on September 18 featured insights from BAI Research Managing Director Tom Hoscheidt. Here are some of the key points that we think you’ll find most interesting. Strong Growth in Small Business Deposit BalancesAccording to Hoscheidt, growth in small business deposit balances at US banks has been stronger than anticipated and is currently positive year-to-date. “Growth in small business deposit balances turned positive in the spring and has steadily risen since with a positive trajectory,” he said. The weekly cumulative total growth in deposit balances stood at 2.5% as of early September, compared to -1.1% at the same time last year. This balance growth has been driven partly by checking account deposits, which were up 1.7% compared to -1.9% at the same time last year. “We’re still below the historical trend line, but we started seeing an increase in the last cycle,” Hoscheidt noted.Small business money market deposit account (MMDA) balance growth is even higher — it stood at 4.0% as of early September, compared to -4.6% a year earlier. Meanwhile, weekly cumulative CD deposit balance growth was up over 276%, building off the strong base established in 2023.Weekly cumulative non-checking deposit growth as of early September stood at 6.0%, nearly twice as high as the 3.6% a year earlier. “This tells me that things are firing on all cylinders: checking accounts, CDs and MMDAs,” Hoscheidt said. Deposit Balance Growth Concentrated Among Large BanksHoscheidt pointed out that the small business deposit growth banks have experienced so far this year is concentrated among large banks, which saw 3.3% cumulative deposit balance growth. Conversely, regional banks have experienced -2.7% cumulative deposit balance growth so far this year.Breaking this down further:

Source: BAI State of Deposits Webinar
Growth in small business deposit balances also tends to be seasonal, building throughout the year before dropping off at year-end. “Deposit balance growth has generally been less negative during tax payment seasons and more positive during build-up periods,” Hoscheidt said.Looking AheadBAI Research is projecting deposit balance growth of between 0% and -2% between now and year-end. “We’ll see positive growth right up until the December runoff cycle,” said Hoscheidt.As far as 2025 goes, BAI Research is still finalizing its projections. “But as long as interest rates remain above 2%, we believe that positive deposit balance growth will remain flat to slightly positive next year,” said Hoscheidt. “If inflation picks up again, deposit growth will be more flat.”Hoscheidt doesn’t expect interest rate cuts by the Federal Reserve to have a big impact on deposit balance growth over the next year. “Even with the September rate cut, we’re still in a somewhat elevated interest rate environment,” he said. “Depositors have tasted 4% to 5% interest rates and will still want to maximize returns on their deposit dollars.”As we look ahead, the outlook for deposit growth remains positive, with continued growth expected in the coming months. By staying informed about market trends and adapting their strategies accordingly, community financial institutions can capitalize on the opportunities presented by the growing small business sector.