After seven years of near-zero interest rates, the U.S. Federal Reserve has announced that it will gradually raise short-term benchmark interest rates by 0.25%, a sign of confidence in the economy. Reactions have been swift, U.S. banks have already responded by raising prime lending rates, governments around the world are planning around its impact, and a host of industries – from housing, auto, and construction – are bracing for associated ripple effects.
For banks, the need to strike a balance between deposit stability, profitability, compliance, and customer retention is now more important than ever before – but how well prepared are they for this increase?
For a while now, many banks have hoped to coast with market trends, believing that higher interest rates can be transferred to borrowers quickly while delaying the benefits onto savers with ease. Yet, much has changed since the last time the U.S. Federal Reserve changed their rates. With the onslaught of new technologies and a host of competitors, banks are working in a more complex and challenging environment for deposit pricing than ever before.
Here are four key reasons why banks must get their deposit pricing execution right:
#1: It’s a brave new world
To put it into perspective, the last interest rate change cycle came at a time when Apple had not yet launched the iPhone, the Pussycat Dolls were top of the charts, and Justin Bieber had not yet embarked upon teenagehood. Consumers tended to do all their banking at a branch and it was largely quite an effort to make a switch. Today, consumers are able to compare prices, negotiate offers, move deposits, and change providers with a few clicks of button. This ability has increased price sensitivity to interest rates as well as spurred rate competition, threatening banks’ previously secure grip on retail deposits to disruptive competitors.
#2: Honing in on customer value
Banks must now offer customers the products and services they truly want in the way that they want them- and that means they need to understand their customers better. Banks that stick to reviewing their pricing mechanisms just once a year while failing to account for the broader value of a multi-product customer relationship may find themselves unable to stem the outflow of customers during times of rising rates. Furthermore, because of the extended low rate environment, customers may look to deploy their savings away from banks that have excess deposits sitting in low-interest savings accounts. Banks must be prepared to respond in an environment that will now see balances moving in search of higher yields at a faster rate.
#3: Segmenting for success
Banks must be able to analyze short-and longer-term transaction behaviour across customer relationships in order to segment customers successfully. Such segmentation offers banks the ability to better determine price elasticity and optimization while focusing on developing a holistic rate strategy that boosts customer loyalty. For banks that have already invested in automated technology for retail deposit pricing, segmentation is a valuable tool to provide customers with value they won’t easily find with your competitors.
#4: (Not so) risky business
As a result of Liquidity Coverage Regulations, retail deposits are generally more valuable when developing a funding/liquidity strategy. Banks that are able to track and analyze customer deposits should deploy a responsive rate management mechanism to meet regulatory requirements for transparency.
We’ll be keeping a close eye on the impacts of the interest rate hike on financial services providers. Earlier this year, Zafin and Nomis Solutions formed a strategic partnership aimed at helping banks segment customers, optimize deposit rates, and automate pricing governance processes.
Interested in how Zafin and Nomis can take your rate management for retail deposits to the next level? Click the button to learn more.
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