Most consumers are keeping their money in low-yielding savings accounts even as rates climb ever higher and competitors try to woo them with sweeter deals.
Is there a way to keep these customers happy without paying more?
In a sea of banks that all look the same, this is the time for creative institutions to retain and acquire customers with new programs that target savings goals and habits. A differentiated savings proposition takes creativity and a deep knowledge of the customer, but it can go a long way in making a bank stand out from the rest.
A SEA OF SAMENESS
In today’s rising-rate environment, the low-yield savings account is a big winner for the balance sheet. While leading direct-bank players currently offer 2.25% (and rising nearly every day), the low-yield savings account at most institutions is still sitting at less than 0.15%. (See Figure 1).
And what do consumers get in return for the dearth of interest? Not much.
Savings accounts and money-market deposit accounts (MMDA) represent more than 70% of balances across the industry, but no real differentiation exists between accounts other than rate. The average savings account has full digital capabilities and connections to the checking account, sometimes with overdraft protection. With so little differentiation for non-price levers, it is somewhat surprising that most banks aren’t paying competitive savings rates.
And there’s good reason that many banks don’t want to raise rates. The industry would rack up about $100 billion in interest expense if it re-priced the 75% of savings and MMDAs that are now earning less than 0.50% to market-leading rates, according to estimates from Novantas and the FDIC.
This re-pricing would cause net interest expense to more than double and would cause margins to compress by 10-20%.
Raising rates can’t be the only answer, anyway. Not only is it expensive, but there’s no guarantee that it will build loyalty for a customer who receives an even better offer from another bank next week or next month.
SAVINGS+CHECKING MAY NOT BE GOOD ENOUGH
If rate isn’t the main reason for people holding the balances, what is driving the willingness to maintain the balances at a low interest rate? For most customers, it is the convenience of the tie to the primary checking account.
Roughly 80% of savings accounts earning less than 0.50% are tied to checking accounts, according to data gathered by Novantas Comparative Deposit Analytics. These dynamics make sense as consumers historically have wanted to be able to save money and quickly shift money over to their cash-management account if needed. But new digital offerings are changing that connection, making a savings account less important for cash-management services. (See Primacy article).
GOING ON OFFENSE WITH SAVINGS
Differentiation in savings requires re-invention of the concept of a savings account. To do this, it is important to dive into the reason why people are saving. Novantas has found a number of different “reasons to save” that can open the door for targeted strategies to drive growth in non-rate-based approaches.
The primary bank usually holds the majority of balances across non-rate savings, but there is an opportunity for a disruptor to take a large share. This type of player can build products that are based on specific customer needs and then target these customers in marketing efforts. That said, it is more difficult to find non-rate-oriented customers than those who are searching for rates by scouring sites like Bankrate and NerdWallet.
For example, customers like the ‘Young Family Accumulator” (see Figure 2) are typically increasing their savings over time — perhaps for a large event like buying a house. A bank that builds a product around the concept of setting up a customer to buy a house in two or three years will represent differentiation for these customers.
Similarly, if a product was built to help the “Retired Safety Net” group more effectively draw down retirement savings over time, it could entice new retirees who want to park $30,000 or $50,000 by providing a unique fit for that purpose — such as a discount if the customer uses a certain broker.
A DEFENSIVE STRATEGY FOR SAVINGS
For many banks, the easiest path to build a differentiated product in the near-term is to strengthen the tie (and value of the relationship) between the checking and savings account. Since the majority of these customer relationships are tied to the checking account, there is a logical strategy to help customers save better. After all, the bank has all customer transaction information and can drive savings behaviors even as they spend from their checking account.
One caution on using the connection to the checking account as the basis for differentiation is that the dynamics are still evolving. Customers can maintain the checking side of the relationship without necessarily continuing forward with the savings side of the relationship. Some fintech companies, such as savings provider Digit, are facilitating the same capabilities without necessarily having the checking account itself.
It isn’t clear, therefore, if this would be a sustainable long-term strategy as the ability to move money gets easier and more efficient.
FILLING A VOID
The Federal Reserve cited a troubling statistic about savings in a report earlier this year when it found that 40% of adults would have to either borrow, sell something or be unable to pay if they were faced with an emergency expense of $400.
Banks can and should help consumers save for the future. The creation of specific savings strategies not only helps the customer, but can make the bank stand out in a sea of competitors.
Managing Director, New York