What are Core Deposits?

Core deposits are the primary sources of money for local banks and credit unions. In general, core deposits range from smaller sources such as individual consumer savings accounts, to larger sources, such as business checking and money market accounts. One of the key uses of core deposits is as a source of funds to offer loans back to depositors. A financial institution will often offer incentives to attract customer to choose specific deposit products, typically in an effort to grow and/or maintain its core deposit holdings.

Most community banks and credit unions are built on the premise that money customers keep in their various banking accounts will be used as collateral to make loans to other customers. These deposits made by regular customers are known as core deposits, and they are typically central to the operation of the financial institution. Some of the most common sources of them include checking, savings, certificates of deposit (CDs) and money market accounts.

Financial institutions typically make a significant portion of overall income off interest and fees associated with loans and other services that are made possible by core deposits. In general, the greater the number of customers and core deposits the financial institution can attract, the more its ability to loan out money and generate income. Typically, the greater a bank’s income, the bigger it can grow and more products and services it can offer.

Due to the connection between core deposits, product offerings and income, many banks and credit unions offer incentives to attract consumers and businesses to choose them. At the consumer level, such incentives may include tangible giveaways, such as small household electronics, like digital music players, presented to the customer when he or she opens an account. They may also include less tangible rewards and savings, such as checking accounts with no minimum balance requirements or debit cards with no automated teller machine (ATM) fees attached. For businesses, incentives may include checking accounts with no maximum number of checks per month or CDs with higher than average rates of return.

In recent years, many financial institutions have experience difficulty in maintaining and/or growing core deposits. Economists believe one possible cause of this is the expansion of online financial institutions, which are often able to offer higher yields on products such as certificates of deposits because they have lower overhead costs. Another possible cause presented by many economists is the overall trend of less consumer saving. The incentives described above are one of the primary methods many local institutions use to help combat declining core deposits.