The U.S. has returned to the low-interest environment of pre-2018, following the Federal Reserve’s 50 basis point cut to the Fed funds rate, and its subsequent cut, both in an effort to contain the economic damage from the COVID-19 outbreak.
Bankers had been dusting off their 2017 playbooks to revisit deposit growth strategies for when the Fed funds rate was last in the 1%-1.25% range, and now must assess things in light of the Fed’s reduction in that key rate to a range of 0%-0.25%. When yields are low, consumers have little incentive to lock up funds for any length of time and are equally unlikely to move deposits for marginally higher returns.
Management has been focusing on protecting employees and serving people in a highly unusual period. But the economics of banking still march on. Banks and credit unions must be wary of falling into the old trap of resorting to undifferentiated, headline-grabbing rate promotions to accelerate deposit growth and stem deposit outflows. These competitive knee-jerk reactions can increase deposit costs and “hot money.” This is a pivotal time for financial institutions to move beyond myopic attempts at quick fixes.
Now is the Time to Stress Data Analytics in Pricing
As pricing practices, data analytics and behavioral economics have matured, institutions have more tools available. Leveraging the vast amounts of data generated by consumer activities, banks and credit unions have an opportunity to create targeted customer-specific pricing, marketing and engagement campaigns that deepen depositor relationships, build loyalty and deliver sustaining long-term value for consumers.
The amount of potentially meaningful transaction data associated with depositors’ activities within a financial institution is sizable. This includes data on the movement of funds between a pair of products owned by the same person or household, and involving accounts held externally at other financial institutions.
Flow-of-funds models built on such data give banks and credit unions an almost surgical ability to deploy pricing and marketing tactics at the individual or household level, without risking the all-too-common overreaction in broad stroke rate promotions.
In a recent example, an institution was alarmed to see a steady loss in market share for its term deposit book, and questioned if it needed to price these products more aggressively. On closer examination through flow of funds analytics, management discovered funds were actually moving into products within the institution as opposed to competitors. Having insights into the fact that deposit balances are not moving out in search of higher rates helped this institution avoid potentially triggering a pricing war.
In another example, an institution was able to identify and map out the “financial network” of a significant depositor. That network consisted of several competing online financial institutions. The institution tailored an attractive, personalized high-yield offer to help stem the outflow of balances, without resorting to costly broad stoke promotions.
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Create Value for Consumers Beyond a High-Rate Strategy
Don’t let the prevalence of financial comparison websites distract your planning. High rates are not universally appealing in low-rate markets. For some segments it is an afterthought when deciding on where to best deposit money.
One institution found as much as 35% of its deposit base belonged to a consumer segment that seeks motivation and guidance on how to save better. The institution also uncovered that these are consumers with good incomes. To enhance its value proposition for this group, the institution launched an interactive online tool designed to help them establish the habit of saving.
Fintechs such as Qapital, SoFi and Chime are already leading the way in this area. For example, Qapital offers to help customers meet savings goals through a system of nudges and rewards, while Chime eschews overdraft fees and monthly maintenance fees in the name of financial wellness.
There are a number of strategic ways to gather deposits. This includes designing compelling value-added features that address targeted consumer segments’ personalities, motivations and needs.
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Engaging Consumers to Deepen Their Loyalty
Don’t take a longstanding advantage over nonbanks for granted. During periods of great fear, federal deposit insurance proves to be a reason for consumers to put their funds in an insured bank or credit union. Market volatility drives increased demand for safe assets.
Beyond this basic shared by all banks and credit unions, this is also the time to double down on programs that build loyalty and deepen relationships. This can include introducing rewards for loyal customers, increasing personalization, improving the banking experience, and finding ways to be more responsive to depositors.
Institutions can also consider adding empathetic, human touches. Using AI and advanced analytics, for example, banks and credit unions can identify instances when a valued customer has accidentally overdrawn an account or is late in making a payment. The institution can automatically extend a fee waiver along with a friendly note. Thoughtful gestures like this go a long way to making someone feel more comfortable in continuing a relationship with the institution.
In the end, we expect deposits to remain a very competitive game. The imperative to grow deposits will largely be driven by loan growth and the shape of the stock market, which may both prove to be question marks for some time.
Some institutions will adjust rates downward faster than others. Deposits could grow simply because there is a flight to safety, as happened in 2008. When liquidity is high, rates can go down even further. We could also see a quick snap back if the Fed’s decision turns out to be an overreaction.
Institutions must stay nimble and rely on their data.