Sharply higher inflation has brought the prospect of much higher, and fast-rising interest rates. Financial institutions will find that they must sometimes pay up for deposits they already have in order simply to retain key business and consumer customers.
This was the consensus of a panel of experts from Curinos discussing bank deposits in an unusual economic environment. While there have been periods of rising rates in the experience of the present generation of bankers, few have faced that to the degree the panelists expect to see. Going forward the Federal Reserve is expected to make more increases more frequently than anticipated, but also, potentially, in bigger steps — half-point increases in some cases rather than quarter-point hikes.
Bankers face multiple conundrums in dealing with these factors. They will have to confront these choices even if they are flush with deposits now, said Curinos experts, because the challenges will run several years.
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Rising Rates Demand Responses and Plans from All Banks
“In general, and particularly in their commercial lines of business, banks are sitting on so much excess liquidity,” said Peter Serene, Director of Commercial Banking. “So, if you don’t really need more deposits now or in the near future, then you might want to hold back a little bit on passing through the rate increases that you’ll be seeing.”
That’s the logical stance, driven strictly by numbers. However, that said, “what applies at the systemic level may look very different at the individual bank level and at the individual customer level,” Serene continued. “Banks have a really important piece of work to do, to determine how they stack up to the rest of the industry and to their peers in terms of the types of deposit balances they’ve brought on.”
3 Key Questions Banks Must Ask:
1. How long will the deposits we have stay?
2. How long will our institution benefit from the circumstances that brought the glut of deposits?
3. Realistically, can our bank expect to see some money leave, if it hasn't already?
Multiple factors created the abundance of deposits. On the consumer side rising deposits came about through unspent stimulus checks, foregone spending, and a move towards the safety of insured deposits. On the commercial side, these included companies borrowing as the pandemic began simply to have cash on hand and, later, the proceeds of the Paycheck Protection Program.
With loan demand still relatively low, many bank and credit union marketers may see no need for paying up for deposits that they already have. But many institutions won’t have that luxury.
“Sitting on the sidelines and paying no rate is going to become less and less tenable as time goes on. You are going to have a lot of clients saying, ‘Wait a second, my loan rates have gone up by a percentage point or more. Why are my deposit rates still sitting down at nothing?'”
— Adam Stockton, Curinos
However, banks have to approach pointed customer questions about deposit rates carefully.
“How do you think about the need to give a higher rate to customers in a way that protects the most valuable relationships that the bank has, when you still don’t need deposit growth?” said Adam Stockton, Director, Retail Deposits. “You don’t want anybody to walk out the door and feel that they’ve been treated unfairly, but you don’t want to price way up either.”
Data is the Key to Banks’ Deposit Rate Response
Agusta Patton, Director of Deposit Pricing Solutions, stressed the importance of analytics that clearly reveal who will be leaving and who will be staying as rates rise.
“Are you losing single-service customers? Or are you losing your core, most-profitable, deep-relationship customers? In which deposit products? And in which geographies?,” said Patton.
The Curinos panelists warned that institutions will have to pay closer attention at this time not only to what’s going on with rates in their own market, but more broadly. Not only other banking institutions must be on their radar but also fintechs and digital players like neobanks.
Tracking the right competitors will be critical, according to Patton. The traditional deposit rivals of past rate wars may not be the players going after your depositors now, she said.
Beware Promotions You Don't See:
Watching internet rate boards and competitors' advertising may not reveal deposit rate factors like 'insider offers'.
Everyone will be trying to retain key customers at the cheapest possible total cost, said Patton. “You’ll have to be looking beyond the splashy rates in marketing efforts,” she stated “You’ll need to find ways to understand how competitors are paying from the back pocket — exception pricing offered to both retail and commercial customers.”
This challenge faces all institutions, even those who may choose to lag their competitors on deposit pricing based on public promotions. While some of the premium offers may be offered face to face or even only if an existing customer presses the point, competitors may be pushing out special offers to select lists via emails and text messages or even direct mail. Retailers have been doing this kind of thing for years, offering “insider sales” and other limited lures.
Rates Aren't Your Only Tool:
Banks must avoid the knee-jerk reaction of only using rate for deposit promotions.
Targeted offers made to select customers for the sake of retention could be tied to other perks, such as one-time cash bonuses or even for new deposit products not offered to the general public. The key point is to plan these steps up front, according to Patton. You can’t make this up as you go.
Rate Battle Will Involve the Full Spectrum of Deposit Maturities and Players
The other side of the retention battle is that as the battlefield gets bigger, customers can search more broadly for attractive rates. (In fact, search engine optimization and search engine marketing have become
“People will watching the market and looking beyond where they have looked in the past,” said Stockton, “and they will find some good deposit rates out there. It may not be on every deposit product and may not be available from every bank nor all at the same time across the market. But the options will be there.”
Stockton added that CDs are becoming more attractive to people in the rising rate environment. “We are seeing increases in CD rates similar to those in the prior couple of interest rate cycles, when CD rates were some of the earliest rates to move,” said Stockton. Customers will be weighing the pros of grabbing higher rates sooner even though they will get locked in, versus holding out for higher rates while rates in general rise.
Stockton noted that many digital banks don’t offer checking accounts and focus more on savings accounts and CDs and did not see the surge in deposits that many other institutions did.
As a result, he said, some digital banks have been modestly edging up their savings rates. However, some have bumped up their CD rates to over 1% for the first time in more than a year and a half.
Even as the digital banks raise their rates, Stockton says some fintechs have been getting into the fray.
Traditional banking institutions must take this seriously, Stockton said. “We’re looking at a time when customer preferences have shifted online, and the online players are likely to be the ones leading in terms of the rates that they’re willing to pay on deposits,” he said.