Saving the CD: The evolution of liquid accounts shows the way

No one wants CDs. Ask bank executives anywhere in the country whether they would rather have depositors open new savings accounts or new CDs, and they would answer: Savings or checking accounts. Depositors would say the same..But does that close the case? It would, perhaps, if banks could fund their entire balance sheet with liquid accounts, but they can’t, and bank failures such as Silicon Valley Bank show doing so would be unwise. Banks need term deposits. It’s not a question of whether they are wanted. The real question is: How can banks make term deposits less expensive and more stable?There is an answer that bankers have not sufficiently explored because they have noted the evolution of liquid accounts during the past 40 years. At a basic level, banks are buying funding from depositors at a price (the interest rate) when they gather deposits. When depositors don’t value a particular product, such as a CD, banks have to pay depositors more to compensate for that limited desirability.Given that depositors want a high rate and liquidity, savings or checking accounts tend to be less expensive for banks. Even when using high teaser rates to originate savings accounts, banks retain the ability to lower the rate. Liquid accounts are generally seen as better in every way for both parties.Rather than simply declaring an indispensable deposit anathema, savings and checking accounts illustrate how to fix the CD. If bankers take a deeper look at what has made liquid accounts the deposit success story of the last 40 years, banks would spend less on interest expense because CDs tend to carry both high rates and large balances.History offers answerYes, depositors want high rates and liquidity. But the history of bank deposit volumes shows depositors have preferred liquidity much more given the rate choices they have been offered. They have preferred savings, money market, and checking accounts, as shown by the FDIC’s non-maturing, interest-bearing deposit volumes, regardless of the Fed Funds rate since 1984..Interest-bearing liquid deposit accounts have boomed. But it’s not simply the liquidity of these accounts that has made them so appealing. The “product,” as depositors experience it, is actually much more versatile today for checking and savings accounts than it once was. Depositors can still withdraw funds at any time, but wave after wave of technological and regulatory enhancements have built even greater value for that liquidity. Debit cards are just one of many innovations that have increased the convenience of liquid accounts during the last 40 years. The checking account’s value as a liquid account changed permanently after The Bank of Delaware launched a debit card pilot program in 1966. Since then, carrying a card or adding the account to a digital wallet has become preferred over carrying cash or a checkbook. There is a high correlation between the number of debit transactions and the volume of deposits in non-maturing, interest-bearing accounts. Then, in 2020, the Federal Reserve Board altered Regulation D to allow customers to make an unlimited number of convenient transfers and withdrawals from their savings deposit accounts—the limit had been six per month before. Online and mobile banking combined debit and ACH payment functionality to create even more utility for liquid accounts. Now, tech companies attempt to add their own innovations as they try to steal customer relationships, but the base-level liquidity of savings and checking accounts remains the root of their appeal.Again, interest rates have risen and fallen dramatically during the growth of interest-bearing non- maturing accounts. Their growth has come from the expanded utility of their liquidity. Could that fact help banks improve CDs—and even reduce their cost?The mostly unchanged depositWalter Wriston, then executive vice president of First National City Bank of New York (now Citibank), introduced the negotiable certificate of deposit in 1961. If you have a CD today, it is the flawed design that Wriston was trying to fix more than 60 years ago.When rates fell near zero after 2008, the CD became a kind of deposit pariah. CDs were already known as the “locked-in” deposit because, while depositors can technically remove funds, they must pay an early withdrawal penalty. When low rates came, CDs neither paid high interest, nor offered liquidity options with any utility. The industry sentiment became “no one wants CDs” because it was true—only a select few depositor segments wanted them.If more liquidity made savings accounts more popular regardless of the interest rate market, could more liquidity do the same for CDs? The truth is that few bankers have tried it, but banks have a safe, compliant, and fair way to make that change. And it would make CDs considerably more profitable.How to innovate the CD againSuggesting banks increase CD liquidity is not the same as suggesting banks make CDs fully liquid. The recommendation here is not to start offering no-penalty CDs. Bankers will wonder immediately: Doesn’t adding liquidity mean the bank will stop imposing penalties for early withdrawal? No, and yes.No: The industry already offers CDs without penalties, but those products fail to address legitimate reasons for imposing a consequence for early termination, such as interest rate risk. There are not many good reasons to pay a CD rate and give away the bank’s option to reprice the deposit, which it could otherwise preserve by offering the depositor a savings account.Yes: The issue with the old CD penalty is that it cuts both ways. It hurts depositors when they are helping lower banks’ interest expense. It also doesn’t protect low-cost CDs from leaving for better rates..Banks can make CDs more liquid by adding a transparent process that allows early withdrawals; that process, however, would be based on the damage or benefit created by an early withdrawal. In that case, banks and depositors would see win-win scenarios.How would that work?Take, for example, a fairly common situation: A depositor wants to withdraw their CD. Before a banker objects, early withdrawal is rare now for banks, for the reason stated in the previous paragraph. That is why we start with the intention: A depositor wants to withdraw their CD.Suppose they have 12 months remaining on it, a rate of 5.2 percent, and a current balance of $100,000—a common occurrence during the past five years. If the CD matures, the institution will incur $5,200 in interest expense. Now, suppose wholesale rates are at 4.2 percent—a real scenario from recent years. If the depositor withdrew at the time, the potential benefit to the institution is approximately $1,000 in saved interest expense. The interests of the bank and depositor align, so why not share the savings with depositors? CDs would then not only gain liquidity; they would reward depositors for utilizing it.It is a bit of a mischaracterization to say bankers don’t want all CDs. They actually love certain CDs—namely, the ones locked in at 1 percent or 2 percent. Yet, these are the least protected by the traditional penalty. Ten financial institutions studied in 2025 had $4.04 billion in certificates. They also had some $112 million in CDs at rates below 1 percent. When deposit rates rose, millions in deposits were not prevented by the penalty from leaving for a new CD at a higher rate because the traditional penalty was based on interest rate. That left banks to replace the funds at higher rates, thus losing the profitability represented by low-cost CDs.The non-liquidity of the old CD design doesn’t even protect the best CDs for the bank. So why not take a cue from The Bank of Delaware or First National City Bank of New York? Bankers should innovate again. It’s time to give CDs what depositors love about savings accounts: A known and transparent liquidity process that enhances the value of the CD.At a time when every competitor—banks, credit unions, and fintechs—wants more profitable deposits, why not improve the deposit product that everyone has ignored and make it more attractive to the bank and the depositors simultaneously in the process? Neil Stanley is chief executive officer and founder of The CorePoint. With more than 30 years of experience at three high-performance family-owned banking groups, he has been granted two U.S. Patents for business, one for market-valuing time deposits to allow early withdrawal. He has held various roles, including Holding Company Vice President, Chief Liquidity and Investment Officer, Chief Credit Officer, President of Community Banking, and Bank CEO.