LOMBARD, Ill.—With rate sensitive deposits likely to begin moving, financial institutions are better positioned to grow and retain deposits if they monitor deposit retention closely and use selective pricing on existing accounts and new product offers, recommends Raddon Financial Group.
By doing so, FIs will be able to control their cost of funds in a rising interest-rate environment, explained Bob O’Meara, VP of research, in the latest edition of The Raddon Report.
“In 2016, financial institutions are facing new challenges regarding deposit acquisition and deposit retention – challenges they have not had to deal with for a number of years due to an artificially imposed low-interest-rate environment,” said O’Meara. “With interest rates on the rise, institutions are struggling to determine how much they need to pay to grow and keep deposits, as well as the impact new rate offers will have on funding costs.”
Big Balance Growth
Deposit balances grew dramatically, increasing by 82% between 2007 and 2015, noted O’Meara. Federal Reserve data shows deposits at financial institutions are now at the $10.4 trillion level, with balances in liquid accounts – checking, savings and insured money market – at an all-time high of up to $10 trillion.
“Recognizing this vulnerability in deposit flows, a number of Raddon clients have established tracking systems to look at deposit flows beyond just account type,” explained O’Meara.
These tracking systems use household databases to segment and track deposit flows by specific household characteristics:
- Single-service status
- Household deposit balance
- Highest lifetime household balance
- High balances in an individual account
- Demographic segment
O’Meara said the tracking systems help financial institutions better understand consumers who leave or move funds from their organizations for higher interest rates.
Bob O'Meara, Raddon
“By determining the deposit flows of rate-sensitive consumers, institutions are also better positioned to mitigate disintermediation by offering products to retain deposits before they leave, as well as re-acquiring funds that may have already left,” he said.
O’Meara explained that last year one Raddon client identified less than 100 customers it deemed as rate-sensitive and tracked their deposit flows over the course of the year. These customers had $50,000 or more in total deposit balances.
“Over the course of a year, the financial institution found these customers withdrew a deposit balance amount equal to 1% of the bank’s total deposit balances,” explained O’Meara. “In addition, this segment’s average total household balances dropped from $56,000 to $1,500. The financial institution concluded it would not have to ‘price up’ the existing balances these customers have with their organization, but rather, offered these customers some type of high-rate product in hopes of winning back some of the deposits now held elsewhere.”
Beyond identifying rate-sensitive consumers in their deposit product portfolios, financial institutions also must be cognizant of the consumer’s overall interest-rate sensitivity, as well as the appeal of new deposit product offerings, continued O’Meara.
“Raddon’s research demonstrates consumers are not excited about interest rates below 1% and many are not excited by a 1% interest-rate offer,” said O’Meara. “In fact, many Raddon clients have discontinued interest-rate media advertising below 1%, because the ads are not productive in terms of deposit account acquisition.”
Rich Appetites
With consumer interest-rate appetites so rich, financial institutions in need of deposits must have money budgeted for selective promotional rate offers in the neighborhood of 1%, insisted O’Meara.
“Selective promotion of high-rate offers is essential or existing deposit balance cannibalization will significantly increase the effective cost of acquiring new deposits,” he said. “To be able to afford such an offer, financial institutions need to be very selective in how they allocate interest rate increases across existing products and balances. Rate increases on existing accounts should only be viewed as a defensive measure targeted for groups of depositors with above-average attrition rates.”
Entirely new product offers also should be used for deposit-acquisition campaigns in an attempt to control cost-of-fund increases, added O’Meara.
“Raddon’s deposit research identifies the consumer appeal of a new account, such as high-rate savings accounts and CDs with enhancements like raise-your-rate options or bump-rate CDs, is very high,” O’Meara said.