Thus far in 2017, interest rates haven’t risen as quickly or high as many industry prognosticators anticipated. And with interest rates stagnant for so long, you couldn’t blame some bankers for consulting a ouija board as opposed to fearless Fed forecasts.
But for those willing to stay more a practical course, signs point to steady movement, with a “more measured” increase taking effect, according to Brian Buckingham, vice president for deposits at Nomis Solutions
“Banks have been in a wait-and-see mode for three or four years now, with everyone knowing that [rates] would eventually rise,” says Buckingham, whose company consults with worldwide retail banks on pricing solutions for loan and deposit products. What does it all mean? The title of Buckingham’s BAI Beacon spotlight session poses an equally fitting question: “Rising interest rates: Now what?” He’ll be joined by Tom Hoscheidt, BAI’s managing director of research.
First, some history: After the financial crisis of 2008, deposits flooded retail banks as consumers and small businesses sought safety; hence, higher rates weren’t needed to woo depositors. Yet as the years passed, “most retail banks fell into more of a paralysis,” says Neil Stanley, CEO and founder of The Core Point consultancy and president of the TS Community Banking Group.
Here’s what Stanley means: “Bankers figured, ‘I don’t need to grow deposits.’ And there was dormancy in the approach to maintaining them.” Thus retail banks used that “really cheap money to leverage into loans. But now, with interest rates on the rise, “people expect to be paid for their deposits. Bankers are caught. It’s been 10 years since they’ve had to do that.”
Not that the grass under their feet will stop growing in the meantime. In the last three years or so, some aggressive super-regionals and online-only (or direct) banks have bumped up their deposit rates—in expectation of an increase—to win business from rate-sensitive customers.
That approach has worked “in broad strokes,” Buckingham says, as online banks have captured a greater retail deposit share in a short period: from seven percent in 2013 to nine percent last year.
Meanwhile, the promotions and the rate competition strategies that helped retail banks win and retain deposit customers in the past have lost their zing, Stanley says. Older customers are “not impressed with 1.3 percent return on a CD, because they can recall much higher rates.” And online banks, with their lower overhead, can offer price-sensitive customers the better rates that will sway them from their local financial providers.
Don’t expect that to change any time soon, if ever.
Buckingham points out that the evolving interest rate environment will only make direct banks “an even bigger threat” to conventional retail banks. “Nowadays we have a field that is vastly expanded with different value propositions,” he says. “You have a whole bunch more competitors with new business model [that allow them] to pay more for deposits… which means traditional banks need to questions how much of their deposits are in play.”
The massive move to mobile may also impact shifting deposits, since “the iPhone did not even exist with the last rising rate cycle,” Buckingham notes. With mobile banking and the embrace of other technologies enabling customers to move their money more quickly and easily, Buckingham suggests that banks need to become “more comfortable with harnessing data so they can put out offers to target the customers they want to acquire.”
While many traditional retail banks have had “a ‘land-and-expand’ business model where each one wants to be a customer’s only financial provider,” Buckingham says the market has already moved from this dynamic—and changing interest rates will only exacerbate this change: “As we move forward, and interest rates rise quickly, the model breaks down. Technology and the competitive landscape are going to affect the way consumers respond.”
For many retail banks, Buckingham says the “real challenge” is that they have long been operating all their various units as separate silos, and thus struggle to parse data that would indicate different classes of customers and their attitudes and preferences.
Hence, Buckingham recommends that retail banks consider three key concerns to better prepare for the changing interest rate environment:
- Offer the right products to suit the right purpose. "Many banks offer a jumble of confusing or competing products in a single area, which muddles a clear, direct proposition to prospects."
- Improve data analysis to making more informed decisions. “It will help the bank make sure there’s a mechanism to codify the pricing. Models are not crystal balls, but they will tell you what the data is saying.”
- Consider individual strategy based on size, market and goals for growth. Top banks flush with deposits, “are taking a more measured response and will continue to keep their rates low,” Buckingham says.
So, to borrow from a certain BAI Beacon session title, Now What? “[Banks] need to compare themselves against the right peers and not just chase the top rate,” Buckingham says. “It’s going to get brutal.”
Karen Epper Hoffman has written about banking and technology issues for nearly a quarter century for publications including American Banker, Bloomberg Businessweek and Financial Times’ The Banker. She has also spoken and moderated panels at industry conferences. She lives in Olympia, Washington.
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