bg-arrow-down icon-arrow-up icon-back-to-top icon-linkedin icon-menu icon-search icon-twitter logo-white slider-arrow-left-gray slider-arrow-left slider-arrow-right-gray slider-arrow-right

The Art of Saying “No” in Retail Deposit Rate Negotiations

Navigate today. Anticipate tomorrow.


Novantas has joined with FBX to create Curinos.
Visit our new website here

After years of towing the line on rate negotiations for retail deposits, many bankers have resumed the uneconomic and inefficient practice that often delivers premium rates to customers who aren’t loyal to the bank.

The current industry environment of low rates and widespread cost pressures underscore the need for banks to negotiate rate sparingly with analytics that can help set guidelines for bankers and customers alike.

In essence, it’s time for bankers to start saying “no.”

CREEPING BACK AFTER A DECLINE

Rate negotiation has long been a thorn in the side of bankers. Following rampant use in the prior rising-rate environment of 2004 to 2006, most U.S. banks adopted stringent restrictions in an effort to eliminate the practice. And it seemed to work: negotiations were used in less than 1% of non-wealth balances in 2015 based on Novantas Comparative Deposit Analytics (CDA) benchmarking.

But the pace of negotiations started to increase again in recent years as rates rose and rate competition returned with a vengeance. By 2019, rate negotiations had jumped up to represent 5% of balances.

While the 5% figure represents a relatively small portion of overall retail balances, it underestimates the impact of negotiation. For example, the 5% of portfolio balances equates to an average of 25% of acquired balances in any given month across CDA participants.

Negotiated pricing occurs in a number of ways, from above rate-sheet exceptions for high-balance customers to allowing customers to receive a promotional rate for which they don’t qualify to products that allow for negotiated pricing, such as mortgages and Canadian term deposits.

5% LOOKS PRETTY LOW FROM THE COMMERCIAL SIDE OF THE FENCE

PETE GILCHRIST
EVP, New York
pgilchrist@novantas.com

Of course, most negotiated deposit rates are in the commercial line of business. While retail executives may worry about 5% exception-priced balances and wealth managers may stress about 50%, the amount of exception-priced interest-bearing deposits in commercial is as high as 80+%. The practice is most prevalent among large corporates which seem to be immune from pricing pressure driven by the low-rate environment and challenged profitability.

With so many exceptions, you might wonder why banks bother with standard prices at all. Historically, banks have believed that you can achieve better profitability overall by maintaining a low standard rate and relying on relationship-management intelligence to set a price that reflects the whole relationship. But it is very difficult to convince banks to run a controlled study that proves or disproves this advantage.

Still, commercial lines of business do have some tricks to share with their retail brethren. Over the last few years, banks have been making progress in driving data and analytics into the hands of its relationship manager negotiators. When armed with data on a client’s on-us and off-us holdings, combined with analytics that estimate the likely price sensitivity of different balances, it turns out RMs do a much better job at negotiating pricing. Success improves further when RM incentive plans consider deposit quality and growth metrics.

5% LOOKS PRETTY LOW FROM THE COMMERCIAL SIDE OF THE FENCE

PETE GILCHRIST
EVP, New York
pgilchrist@novantas.com

Of course, most negotiated deposit rates are in the commercial line of business. While retail executives may worry about 5% exception-priced balances and wealth managers may stress about 50%, the amount of exception-priced interest-bearing deposits in commercial is as high as 80+%. The practice is most prevalent among large corporates which seem to be immune from pricing pressure driven by the low-rate environment and challenged profitability.

With so many exceptions, you might wonder why banks bother with standard prices at all. Historically, banks have believed that you can achieve better profitability overall by maintaining a low standard rate and relying on relationship-management intelligence to set a price that reflects the whole relationship. But it is very difficult to convince banks to run a controlled study that proves or disproves this advantage.

Still, commercial lines of business do have some tricks to share with their retail brethren. Over the last few years, banks have been making progress in driving data and analytics into the hands of its relationship manager negotiators. When armed with data on a client’s on-us and off-us holdings, combined with analytics that estimate the likely price sensitivity of different balances, it turns out RMs do a much better job at negotiating pricing. Success improves further when RM incentive plans consider deposit quality and growth metrics.

THE HIGH COST OF NON-STANDARD PRICING

These forms of non-standard pricing drive substantially higher interest expense. Novantas has found that an average of 16% of total savings/MMDA interest expense is held in the 5% of negotiated balances, an impact of over 12 basis points in total portfolio deposit costs for savings/MMDA. Chronic negotiators saw even higher cost, as top quartile banks averaging 36% of interest expense in 11% of balances. The numbers are even higher in the wealth line of business where many banks individually negotiate more than 50% of deposits.

Even more critical in the current environment is that individualized pricing incurs labor expense that is often hidden in other parts of the P&L. Branch visits that are made solely for the purpose of renewing a promotion or negotiating a higher rate on a renewing term deposit can take 30-60 minutes of sales time. In addition, many banks staff a “pricing desk” with multiple full-time employees who run an approval and audit process.

Price Negotiation on Deposits is Common in Both the U.S. and Canada, but are Implemented Very Differently

Source: Novantas Research

NOT ONLY COSTLY, BUT INEFFECTIVE AND RISKY

A Novantas analysis of six Comparative Deposit Analytics banks with the highest levels of non-standard pricing revealed that none showed consistency in how much negotiated pricing they used at a region or a branch level. There was no observable correlation with local competitive rate dynamics, nor were there markedly higher levels of balance retention at the regions or branches with the most price negotiation. In addition, an analysis of Novantas’ customer-level deposit scores shows no benefit of increased persistence of negotiated deposits. In fact, many negotiated deposits leave the bank within six months despite receiving a higher rate.

Furthermore, a Novantas analysis of CD renewals at one institution determined that bankers should have turned down 8-10% of customer rate requests.

The costly negotiation behavior also carries enterprise risk. Conduct risk, in which certain classes of customers receive better treatment through front-line negotiation, was such a concern in the U.K. that regulators banned all rate negotiation. Another worry is that the sales force will alter behavior to maximize their incentive compensation, further driving up negotiation cost.

Ultimately, banks that allow negotiation are introducing negative attention from regulators and watchdogs in return for a behavior that is more costly than beneficial.

Person-to-person negotiations aren’t effective, leaving banks to figure out how to provide offers through digital channels.

THE TIME TO ACT

This long, low-rate environment will allow banks to unwind negotiated pricing that was put into place over the last two years and try new practices that go beyond the ineffective reforms of the last low-rate environment. Furthermore, branch network considerations and shifting customer preferences raise the stakes for near-term changes.

As customer preferences rapidly shift towards digital banking during the COVID-19 pandemic, banks must adapt now for a future that is digital-led instead of branch-led. Person-to-person negotiations aren’t effective, leaving banks to figure out how to provide offers through digital channels. This leaves banks with a choice: either build a new digital-led negotiation process (see sidebar) or begin to shift the paradigm to something more sustainable.

In addition, many banks are undertaking another round of deep cuts to the branch network and reducing staffing levels. There is little time for low-value activities in a thinner sales and service model. Sales figures that are simply a renegotiation of rate may artificially prop up already-flagging branch statistics.

img-edit

the role of negotiations in digital channels

Negotiations about rate take on a whole different look when the customer is looking at a computer screen instead of a banker across the desk. Banks are scrambling to bolster digital capabilities amid the pandemic and the issue of rate should be part of those improvements.

The ability to personalize offers can play a significant role when rate is under consideration. But just like in the physical environment, any offers must provide benefits to both the bank and the customer.

As banks seek to attract, deepen and retain the best customers, they will need to develop, test and adopt new digital capabilities in order to maximize value for customers and the franchise. Potential examples include:

``Supersize it``

Just as McDonald’s encouraged customers to order a larger order of fries for a small increase in price, banks can use the digital channel to offer a higher rate for a larger balance or more profitable behaviors. This can be done through personalized pop-ups based on the customer’s profile.

Value Exchange

A simple chart can show what the customer needs to do to get a higher rate, including duration and balance size.

“Act Now”

Limited-time specials that are tied to incremental balances or behavior can conquer inertia with an offer that feels too good to resist.

“People Like You”

Guide to appropriate offers by referring to actions taken by similar customers. Expand the opportunities with a button at the bottom that tempts the customer with “other products and offers that may be interesting to you.”

Good, Better, Best

Provide assorted options that can be easily compared.

the role of negotiations in digital channels

Negotiations about rate take on a whole different look when the customer is looking at a computer screen instead of a banker across the desk. Banks are scrambling to bolster digital capabilities amid the pandemic and the issue of rate should be part of those improvements.

The ability to personalize offers can play a significant role when rate is under consideration. But just like in the physical environment, any offers must provide benefits to both the bank and the customer.

As banks seek to attract, deepen and retain the best customers, they will need to develop, test and adopt new digital capabilities in order to maximize value for customers and the franchise. Potential examples include:

``Supersize it``

Just as McDonald’s encouraged customers to order a larger order of fries for a small increase in price, banks can use the digital channel to offer a higher rate for a larger balance or more profitable behaviors. This can be done through personalized pop-ups based on the customer’s profile.

Value Exchange

A simple chart can show what the customer needs to do to get a higher rate, including duration and balance size.

“Act Now”

Limited-time specials that are tied to incremental balances or behavior can conquer inertia with an offer that feels too good to resist.

“People Like You”

Guide to appropriate offers by referring to actions taken by similar customers. Expand the opportunities with a button at the bottom that tempts the customer with “other products and offers that may be interesting to you.”

Good, Better, Best

Provide assorted options that can be easily compared.

STRATEGIES TO AVOID RATE TALKS

Many banks should go back to the drawing board to overhaul their rate strategies.

First, exceptions must be reduced or eliminated. That may create uncomfortable conversations for bankers who are accustomed to acquiescing to customer demands. The good news for bankers is that customers have fewer alternatives when rates are low across the industry, so the time for the tough conversations is now.

Second, banks should develop clear and stress-tested policies around exceptions. Many banks found that the floodgates opened once exceptions started up again as rates rose. Banks must be realistic about which segments will be considered for exceptions in the future and then ensure the criteria will work and be followed through the cycle.

Third, analytics is critical. Centrally identifying rate-sensitive customers will be critical to success moving forward. Driving results through the front line has been ineffective, but there must be a replacement that works both in branch and digital channels.

Fourth, build consistent multi-channel delivery. Nothing will stop forward progress faster than branch staff who effectively work against the bank by offering customers a higher rate than are available online — and earn sales incentives in the process.

Finally, staff must be retrained or realigned. Bankers have been conditioned to behave in a certain way and banks need to help them understand how to behave differently — and why. It is human nature to avoid difficult conversations, so bankers must be armed with the right data about customer elasticity and profitability.

Understanding true value-added sales and focusing the networks on the future of these activities are critical to driving profitability value through in-person channels. The retail banker who discusses rate with the customer will play a critical role in that equation during this unusual period.

Subscribe

Stay up to date on the latest banking news