Every rising rate cycle is accompanied by a paranoia among bankers about repricing existing deposits. 0% interest rates for over 2 years resulted in an unusually high percentage of deposits piling up in non-interest and nominal interest rate buckets in the current cycle. In order to avoid repricing risk, many bankers overpay for “new money.” This is due to the assumption that attracting new money requires more aggressive rate pricing than expanding existing customer deposits. Data consistently shows that the additional interest expense to attract new money often outweighs the actual costs of repricing when modest pricing is used to expand the savings accounts of existing depositors.
As large tranches of premium-priced deposits mature in compressed periods of time, overpaying for new money squeezes net interest margins in the short-term and increases retention stress downstream. Banks may be left with a higher proportion of high-cost deposits that need to be repriced at a later date, putting even more pressure on net interest margins.
Therefore, how can community banks and credit unions set their pricing to achieve their funding needs without overpaying? One approach is to think about an equation where propensity to buy and rate-offer are key variables. The higher the propensity to buy, the less you have to rely on rate for growth, while the lower the propensity to buy we need, the more rate to fill the gap. By using proven analytics to identify and quantify your high propensity buyers, you can model scenarios for volume growth based on particular rate/term combinations and get more or less aggressive with your pricing based on volume needs at points in time.
For example, let’s say that you have a group of customers with a high propensity to buy new deposits, based on their past behavior and other factors such as creditworthiness and financial stability. You can use this information to develop a pricing strategy that focuses on expanding the deposit wallets of these customers, rather than offering aggressively high rates to attract new depositors. This can help you achieve your funding goals without overpaying for new money and causing retention issues in the future.
Once you have clarity on your pricing strategy, there remains one final challenge: a rate card that no customer sees will not affect your portfolio. Marketing must become your rate card as the measurable vehicle for sharing deposit price points with particular audiences through multiple channels based on proven data modeling. This allows you to measure the impact within those audiences in terms of point-in-time purchase activity, retention, and net new funding generated.
The aggressive nature of the rate increases in the current cycle increases the risk of overpaying, but it also creates opportunities for increased profitability for bankers who are smart enough to let the data guide them. By using analytics to identify and quantify high propensity buyers, modeling scenarios for volume growth based on rate/term combinations, and using marketing as the rate card to share deposit price points with targeted audiences, community banks and credit unions can set their pricing to achieve their funding needs without overpaying and causing retention issues in the future.
One key aspect of using marketing as the rate card is to choose the right channels for sharing your deposit price points with particular audiences. This can include traditional channels such as print and radio advertising, as well as digital channels such as email marketing, social media advertising, and targeted display ads. It’s important to consider the preferences and behaviors of your target audience when selecting channels, as well as the costs and potential reach of each channel.
Once you have chosen your channels, you can use data and analytics to measure the impact of your marketing efforts. This can include tracking metrics such as point-in-time purchase activity, retention, and net new funding generated. By analyzing these metrics over time, you can identify which channels are most effective at reaching and converting your target audience, and adjust your strategy accordingly.
It’s also important to consider the potential risks and benefits of using marketing as the rate card. On the one hand, it can be an effective way to share deposit price points with targeted audiences and measure the impact of those efforts. It can also expose you to risks such as regulatory scrutiny, customer complaints, and reputational damage if they perceive your marketing efforts as misleading or predatory. To mitigate these risks, it’s important to be transparent in your marketing messages, and to ensure that your rate offers are fair and consistent with market conditions.