BankNews.com

BankNews

The War on Deposits

Can regional banks compete … and win?

By Ashwin Gurnani

Eastern Front: Rising Rate Environment

In December 2018, besides raising the federal funds target rate, the Federal Reserve’s Federal Open Market Committee modified its guidance on rate increases in 2019, reducing the guidance from three to four rate increases down to two. The minutes of the meeting also included language on how the committee would be patient with future rate increases.

Such an event has significant impact to a bank’s deposit portfolio and rates offered to customers. The increase in the fed funds rate leads to potential deposit rate movements, either proactively or in reaction to competitor actions. However, the bigger impact is on the forecast for deposit portfolio balances and interest expenses for 2019. Expected fed funds rate changes are used to set expectations on future customer rates, forecast the deposit balances and the cost of those deposits for the fiscal year. These forecasts also inform the liquidity of the balance sheet, which in turn influences the bank’s lending expectations and overall profitability.

Western Front: Fintech Challengers and Disruption

In addition to rate-environment challenges, regional banks are also facing an extremely challenging competitor environment. Every day there is a new fintech looking to offer checking and savings accounts. Firms like Affirm, Chime and SoFi provide deposit products with exceptional digital capabilities, high rates and no fees.

In addition to rate-environment challenges, regional banks are also facing an extremely challenging competitor environment. Every day there is a new fintech looking to offer checking and savings accounts. Firms like Affirm, Chime and SoFi provide deposit products with exceptional digital capabilities, high rates and no fees.

A Winning Strategy and Regional Success Story

Considering these challenges, how does a regional bank or credit union compete? Leveraging a deeper understanding of their own customers’ data, banks are able to access solutions that help with efficient forecasting and developing customer-specific pricing strategies that improve retention and customer experience. For example, a regional bank in the northeastern United States with approximately $30 billion in retail deposits is addressing these challenges with advanced analytics and cloud-based solutions. Partnering with FICO, the bank is able to access sophisticated price-elasticity analytics, packaged within an easy-to-use interface that is deployed in the cloud. The solution allows the bank to provide targeted interest rates on savings and CDs based on customer price-elasticities, which helps attract and retain the most valuable customers. Such capabilities help get ahead of challenges from fintechs and online banks, who typically offer “one-size-fits-all” deposit rates. Moreover, leveraging a cloud solution allows faster time-to-market of the analytic pricing solution.

The solution combines price-elasticity models with competitor rates, fed funds and macroeconomic expectations to forecast the deposit portfolio for the next 12 to 24 months. Forecasts include total portfolio balances, new money to the bank, cannibalization within the portfolio, attrition of balances and interest expenses/cost of funds.

Upon the guidance change from the FOMC, access to this solution enabled the bank to quickly reforecast its portfolio, assess pricing strategies for 2019 and provide liquidity guidance to the rest of the organization. While the solution is used on a regular basis to understand portfolio funds flows, segment balance changes and optimization of deposit rates, the bank can also forecast over the mid-to-long term, enabling it to run effective what-if analysis and better plan for the future.

Beyond Competing: Outmaneuvering, Investing and Winning

Looking forward, there is an impetus for regional banks to pursue granular pricing strategies across deposits and lending products. By understanding a customer’s sensitivity for rates and fees across all retail products, banks can implement personalized offers that capture the customer’s entire relationship, enhance customer experience and ensure higher retention.

However, before we develop customer-centric pricing strategies, we need to solve the primary challenge of implementing such strategies: overcoming limitations of archaic core systems. The good news is that technology has moved quickly to provide banks with solutions that overcome this challenge. Instead of expensive core system rip-and-replace projects, technology companies offer modern software that executes granular strategies through APIs and intelligent integration with old core systems. These technologies provide a “shell” around the core system, strip several functionalities out of the core, provide business user interfaces to implement strategies, and execute business rules/exceptions/overrides in batch and real-time. As banks look to enhance their P&L with personalized, customer-centric prices and offers, it is imperative they explore investing in such execution technologies.

Regional banks recognize the challenges they face from competitors, the macroeconomic environment and customer expectations. Methodologies that might have been successful in past rising-rate environments are not relevant today. With continued reduction in cloud solution costs and accessibility to advanced analytics (such as machine learning and mathematical optimization), regional banks can compete — and win — against their larger counterparts. Regional banks need to recognize that now is the time to invest in advanced deposit pricing strategies.

Ashwin Gurnani is the global deposits practice leader at FICO. For more information, visit www.fico.com.

  • Sign Up

  • Categories

  • Archive

Software: Kryptronic eCommerce, Copyright 1999-2019 Kryptronic, Inc. Exec Time: 0.073953 Seconds Memory Usage: 3.799812 Megabytes
Kryptronic