Deposit management has always been important to banking, but the industry’s digital transformation is impacting the liability side of the balance sheet far more than the asset side. The tectonic changes will inevitably result in more customer- and relationship-level pricing of deposits.
The current rate environment only highlights the need for customer analytics that evaluate retail customers at a more granular level than ever before.
Falling rates in the U.S. present major opportunities for banks to manage their deposit portfolios. Among other things, banks can surgically reduce rates to increase margins and start shaping portfolios for the next rising-rate cycle.
The practice of scoring customers according to anticipated behavior has long been used for credit, but Novantas believes that banks can save as much as five basis points, or 6-8%, of retail and wealth deposit costs, by scoring those deposit customers. Such savings can be particularly valuable now as the pressure to reduce costs intensifies across the industry.
WHY USE BEHAVIORAL DEPOSIT SCORING?
Deposit scores help banks understand customer shopping behavior, price sensitivity and balance duration. They allow banks to forecast the value of the deposit relationships and categorize customers by profile, such as engaged savers or chronic shoppers.
Banks used to be able to win when the Fed cut rates by simply taking advantage of market dynamics in different geographies; a bank would have more flexibility to cut rates in regions or cities where there were few competitors. Those that lowered rates in a targeted, slow fashion maintained better balance growth and ultimately had lower interest expense the next time rates rose. Banks that aggressively cut rates across the board experienced higher costs when Fed rates eventually rose because they had to pay up to re-acquire lost balances.
These simple strategies from prior rate cycles won’t be as successful in a new world where ‘perceived convenience’ drives balance growth and customers can easily shop for the best rate. Furthermore, today’s customers are routinely flooded with offers from institutions that either previously didn’t exist in the last cycle or have expanded their geographic reach since then.
That’s why banks need to better understand deposit behavior to offer the right treatment to the right customer. (See Figure 1.)
Deposit scores provide similar benefits as their credit-score counterparts, measuring the marginal cost of funds (mCOF) to rank customers based on their probability of moving balances at a specific rate or maintaining balances at a bank for a much longer time. These insights allow banks to understand which customers will accept a lower rate or which, if rate-sensitive, are likely to keep their balances at the bank for a much longer time. This allows the bank to improve margin with minimal balance loss. Conversely, they also learn which customers demonstrate no loyalty and only require higher rates to keep their balances at the bank.
Ultimately, scores can help identify which of those customers to keep. Why pay up for a customer who will move money as soon as a promotion ends? Scores identify which price-sensitive customers are worth keeping, and which should be allowed to run off.
VALUE ON DAY ONE
Such surgical treatment of customers is a challenge for most branch-based banks.
Coordinating customer-level treatments across hundreds of branches and thousands of staff is logistically difficult. But there are actions a bank can take in the meantime to realize the value of more granular customer offers. By first focusing efforts on existing customers with simple actions, banks can realize value even within constrained operational systems. (See Figure 2.)
For example, lower rates can be immediately deployed to the back book in a targeted way for quick margin savings. The objective: keep those customers who aren’t rate-sensitive and who are likely to have long duration balances. These are the bank’s most loyal customers.
Scores can also be used for post-promotion strategies, identifying which customers should receive retention offers and which should fall to posted rates. Finally, scores can be simply incorporated into marketing initiatives by creating a “no-fly” list that removes customers who have poor deposit value, including those who have shown poor balance duration in prior campaigns. (See Figure 3.)
In addition to realizing the value of quick wins with low operational complexity, banks must invest in programs and systems that are needed to fully integrate scores into deposit management. Effective programs take advantage of the scores’ ability to rank customers by least-to-most expensive, allowing deposit managers to target low-cost growth as measured by mCOF. This prevents cannibalization of existing balances at higher costs.
By integrating these insights with direct-to-consumer marketing programs (including digital and mail), banks can spend their budgets more efficiently with more precise ad placement.
Also on the longer-term agenda, scores can empower interactive customer experiences, including informed exception pricing for commercial customers and better management of wealth relationships.
For example, a bank could offer specific customers 1% above the typical relationship rate if the customer brings an extra $100,000 to the bank. While such treatments often require building out more complex offer-management and fulfillment systems, they help banks deepen relationships and invest rate in the most efficient way.
As banks face an uncertain rate environment, deposit managers need to better understand customer behavior. By deploying deposit scores that measure shopping behavior, price sensitivity and duration, banks build powerful analytics that help them set pricing when rates change.
Director, New York