Who ever thinks about the boring old savings account?
Long one of the most under-appreciated and least understood categories for banks, the role of the savings accounts may be on the brink of change due to the industry’s widespread disruption from technology.
It is time for banks to start thinking about how to better manage the savings account — or risk losing it altogether.
LARGE AND IMPORTANT
There is nearly $7 trillion parked in U.S. retail savings accounts, including money market deposit accounts (MMDA) and other non-timed savings products. Savings represents half of the industry’s total deposits and is re-emerging as a critical profit driver. Novantas estimates that savings account for an estimated 20% or more of industry revenues, and an even higher share of total pretax profits and contribution to stock price performance. That’s because, in part, savings carry no credit risk and have very low operating costs compared with other bank products.
Those estimates could be even higher for banks with a large and stable portfolio of savings that are paying low rates to consumers back book of savings.
IMPLICATIONS OF A SHIFTING LANDSCAPE
Retail saving’s profitability has been muted for the last decade due to a host of factors: very low interest rates; ample sources of alternative lower-cost funding, such as brokered CDs and commercial non-operation balances, and lethargy on the part of savers. For many institutions, the lack of attractive lending and other reinvestment opportunities has led to very low competition for savings deposits. As a result, savings has been an overlooked product category that typically is considered as just a “bolt-on” to the more valuable primary checking account.
This is rapidly changing, however, due to a multitude of factors.
First, technology is making it simpler for people to move money at low cost and with relative ease. Remember the days when people had to take time off work to go to a branch to close an account, withdraw funds, get a check and then go to another branch to open an account? Now, the entire process takes a pajama-wearing customer just minutes on a cell phone.
Second, there is the steady growth in customers who are increasing comfortable with direct banks. They are willing to fragment their longer-term savings balances to these providers whose rates in many cases are materially higher than those offered by the primary providers. (See page 12 for related article on direct banks.) This trend continues to accelerate due to online pricing information that can be found within seconds, and advanced technology that makes it easy and fast to move funds. Some of these banks are also differentiating themselves by creating unique ways to help the customer, such as guiding them to the best ways to maximize FDIC insurance coverage on their accounts.
Third, there is the “nationalization of deposits” in which money-center banks are capturing a disproportionate
share of primary consumer and small-business checking accounts. And the savings account often tags along for the ride. In most cases, these banks are winning because of their perceived conveniences, digital and other capabilities, and marketing prowess — despite continuing to offer low rates on savings.
Cyclical trends are also accelerating the secular trends. Rising rates are triggering consumers to move savings accounts that have been lingering at the same institution for years. In many cases, this rate competition has been across both MMDA and savings products. This is especially true for time deposits which has resulted in valuable savings dollars flowing into fixed-term accounts like CDs. (See page 29 for recent CD trends.)
Novantas doesn’t anticipate that any of these forces will subside in the near future. In fact, we expect core savings balances to increasingly move and disperse, creating pricing pressure that will squeeze the longer-term value of the category as a whole.
WE HAVE SEEN THIS MOVIE BEFORE
This isn’t the first time that technology disrupted an important product in the banking industry. Commercial banking experienced a similar transformation in the 1990s when the explosion of sweep accounts, new products and enhanced access to information weakened the traditional link between commercial payments and deposits.
Armed with better information about the opportunity costs of their transaction deposits and the convenience of new technology-based products, corporate treasurers reduced their bank deposits and found better alternatives in the money markets. That trend only slowed when the U.S. government extended FDIC insurance to all deposits during the financial crisis, but it has never reversed.
HOW IMPORTANT IS SAVINGS TO YOUR BANK?
Novantas believes that banks must start thinking about the saving account’s future role in the institution. That starts with developing a deep evaluation of the customer and the drivers of savings behaviors. For some, this could mean thinking about the savings account as a primary vehicle to attract new customers versus the traditional approach that views savings as an adjunct product to checking. For others, it could result in the emergence of a digital-only savings bank.
The point of action will depend somewhat on the current standing of the savings account at each institution. For example, banks that have offered rates near the top of the market in an attempt to increase their savings portfolios and fund loan growth will find themselves under pressure as rates and savings’ betas rise rapidly. Such banks may need to determine how to back away from their “best price” mantra.
Banks at the opposite end enjoy lush margins in their savings books, but haven’t experienced any growth in new-to-bank primary customers who typically bring along their savings accounts when they open a checking account. These banks may want to consider a differentiated savings offering in combination with other strategies to increase acquisition and protect current spreads.
Regardless of one’s starting point, banks need to better analyze, understand and manage the needs of the retail savings category.
The good news is that outside of the current “bolt-on” to checking and “higher price” strategy, the range of other innovations around customers’ primary drivers of savings is wide open to conquer.
Managing Director, New York
Managing Director, Chicago