Crisis in promotional deposit pricing
Price promotions long have been an important tool for deposit-gathering, both to meet long-term funding goals and to quickly acquire balances in special situations. While the deposit-rich environment of recent years has muted much of the need for deposit promotions, these campaigns are set to proliferate as banks seek funding to accelerate loan growth and begin to cope with rising rates.
But even as deposit price promotions gain fresh industry attention, their effectiveness is being undercut by diminishing returns. Campaigns that initially had strong success in prior years are progressively losing energy. In a vicious cycle, the bank is left in a position of needing to launch more promotions, yet each campaign is less effective than the one that came before.
Why is this happening? One culprit is web-enabled shopping, which has diminished the punch of local promotions as consumers effortlessly monitor rate trends and offers nation-wide. Another is growing consumer price sensitivity in expectation of rising rates. Established account holders are increasingly motivated to grab promotional offers; which have the counterproductive effect of raising the interest carry on current balances.
It is a potentially serious situation that will require improvement in the metrics, skills and strategies used to drive deposit-gathering – even among the many banks that have made significant progress in recent years. The advent of promotional fatigue has changed the basis of customer decision-making, particularly key assumptions about their behavior.
One priority is to do a far better job of estimating balance retention over time. Another is to revise the financial calculus of price promotions to account for the cannibalization of lower-cost deposits already on the books. New organizational strengths will be needed as fresh approaches will require tighter coordination between organizational units.
Old Assumptions vs. New Realities
Many banks assume they can efficiently generate incremental balances by limiting promotional offers by geography and only for new deposit funds, abilities that have provided rich opportunities for targeted price promotions in the past. But the levers of deposit promotion have changed.
Information. The Internet has radically changed access to information. Online ads bring deposit account offers to consumers do not need to look up at billboards, read local papers or step into a branch – prompting them to consider a specific bank. The availability and aggregation of online rate information makes rate comparison easier and more transparent. And consumers are becoming more willing to open new savings accounts online, with non-local providers, playing into the hands of direct banks that show up in search engines touting “the best rate” nationally.
Switching. Digital banking has eliminated much of the friction that limited deposit movement and account churn. Aggregation sites provide easy, anonymous, anywhere access to national rates. Online fulfillment makes account opening immediate and convenient. “Me2Me” transfers allow electronic one- to three-day money movement, enabling consumers to open and keep savings accounts separate from payment accounts. Online account management provides instant information for consumers to monitor balances and rates, and to optimize rate returns across accounts and banks.
Regulation. With the implementation of Basel III, consumer and small business deposits are treated more favorably in calculating the liquidity coverage ratio, increasing their value compared with most alternatives. This regulatory change now encourages existing retail players and new entrants to compete more aggressively for retail deposits – including the use of promotional rates.
Competition. Today the use of enhanced deposit analytics is the competitive norm, increasing the likelihood that tailored promotions will be more widely used and therefore less responsive. Sophistication in systems, targeting and pricing analytics is now seen among smaller multi-market regional and community banks, and the direct banks are piling on as well. New expertise is needed to stand out in the marketplace.
A core task is developing the right measures of promotional cost and effectiveness – a warning and avoidance system that will help the bank to steer away from ill-fated promotions with diminishing returns. Two key indicators are deposit balance retention and the true marginal cost of promotional deposits.
Retention. Balance runoff can be excessive for certain customer segments, negating results from promotional campaigns. By segmenting customers based on a sharpened understanding of likely balance retention rates, the bank can focus on high-potential depositors and clarify which offers to make to preserve and grow stable balances. Propensities for “stickiness” versus “runoff” have profound implications on which deposits have long-term value and are worth the promotional effort.
Marginal Cost. Cannibalization occurs when current depositors grab onto price promotions intended to win new business. All too frequently, campaigns invisibly sink underwater when this outcome is omitted from deposit planning.
The true marginal cost of promotional deposit balances considers likely subsequent runoff; the estimated adoption by existing accounts to the new higher rates; and the overall retention of promotional deposits. The big picture – made clear by a granular, customer-level analysis over time of promotional and established balances – is that the unwanted repricing of current balances is increasing at a rapid rate.
Setting the Agenda
Each bank needs to understand the extent of its exposure to promotional fatigue. This knowledge, combined with the growth outlook, shapes the deposit agenda. Drivers include the funding growth needs of the individual bank and the promotional challenges facing the bank in each of its markets and products.
So, what are the common themes across these agendas? First, banks will need to invest in the analytics and technology to capture the effectiveness of traditional promotions and deploy more advanced approaches to improve them. In a dynamic environment, customer expectations and competitor responses will continue to intensify, which will require more granular customer data, including transaction-level history and shopping behavior, to better target pricing (this data also allows for segment-level pricing for those with the capability).
Second, capabilities need to be aligned with promotional philosophy. Some institutions believe in “customer-of-one” targeting, using specific price points that are not broadcast to the broader customer base. Others worry about customer and front-line acceptance of these differentials and instead opt for transparent, give-for-get logic – providing rate incentives tied to the acquisition and retention of specific balance amounts.
Third, the organization will need to evolve its rhythms on how the product and marketing teams interact with the front-line in the preparation, delivery and measurement of campaigns. Old metrics need to be upgraded. Marketing must become more nimble to deliver a greater variety of targeted offers, more frequently. The front line will need the right proof points to deliver the new reality with conviction.
Finally, whatever the tactical agenda, analytic development should be supported by an aggressive test-and-learn program for new field applications that leverage technology and multichannel offer delivery to maximize returns on these efforts.
For many banks, moving beyond a simple adherence to traditional promotions will allow them to maintain structurally lower deposit costs while achieving required funding levels. For others, such measures may not be sufficient, calling into question whether shareholder value is better maximized with analytically-derived deposit growth serving as a governor on asset growth, rather than the other way around.