Rising To New Rate Challenges

By Marilyn Kennedy Melia

After a long—and seemingly endless—period of ultra-low interest rates, an upward path is looming.

Still, even if three hikes proceed in 2018 as many Fed watchers expect, rates will still be “low by historical standards,” notes Mary Beth Sullivan, managing partner of Capital Performance Group.

But since rates are as central to banking as flour is to baking, every notch up after the unprecedented post-Great Recession lows has big implications for marketers.

In fact, said Sullivan, “There is some price competition [on rates]right now.” She noted that “especially the non-banks have been more aggressive.”

However, the sprinkling of offerings on higher yield accounts can hardly be considered a rate war. According to Sullivan, “It is not the case that the competition is out of control.”

Control. When experts talk about how banks should approach a rising rate environment, that’s a central theme.

Marketers will want to have a grasp on which customers might be lured away by higher yields, and what offerings and relationships could win customers’ loyalty.

While a new rate environment presents a challenge, it’s also an opportunity to boost earnings. Already through much of 2017, bank shares have been on a bullish track. The run-up is at least partly due to banks being able to lend at increased rates, while still paying less on deposits.

It’s a balancing act, to be sure. Here, a look at some of the issues that will be rising to the top of marketers’ minds as rates tick upwards:

Defining who’s rate sensitive.                                                        

In the retail sphere, wealthier consumers have a much greater incentive to pay attention to rate. It simply isn’t worth the bother to move $3000 for a quarter point more, but it could be for a $75,000 account.

Indeed, in late October, The Wall Street Journal ran a front page piece on how more affluent bank customers are moving money, citing stats from Autonomous Research that large U.S. banks averaged paying 0.4% on interest-earning deposits in the third quarter, the highest level since 2012.

“Bank account rates will probably need to reach at least 3% before the typical bank customer starts thinking about rates,” said James Miller, senior director, banking services, JD Power. “At that rate, more customers will consider moving excess balances that are sitting in a non-interest checking account to a money market or savings account.”

But most customers also think of the yield they earn in the context of their total banking relationship, including convenience, services, and fees.

Moreover, believes Miller, a generation has grown up largely oblivious to bank rates. “Millennials have spent most of their adult life in a low rate environment so they don’t even think about making money off their deposits,” he said.

Looking at commercial customers’ concerns.

The total relationship with a bank is also a top consideration for business customers, says Jeff Glenzer, vice president of the Association for Financial Professionals, a group for corporate treasurers.

For one thing, a relationship with a banker “with knowledge of the industry a business is in—and of the company—has a potentially immense value,” Glenzer noted.

It’s only when a bank is used as “simply a depository for cash” that yield is a primary consideration, he added.

Using analytics to target offers.

Back in the 1980s, a period when rates were unusually high, banks advertised their best offers on certificates of deposit. “Rate shoppers would look at newspapers ads to decide” where to place their savings, Sullivan explained.

She pointed out that such a scattershot approach isn’t as effective as today’s approach of employing customer data analytics.

It wasn’t really an effective strategy either, notes Frank Koechlein, president of Empower Your Analytics, LLC. “The deposits that came in was hot money,” he explained, referring to how customers would tend to purchase one CD and move it on expiration.

Today’s approach: Using data analytics to target customers likely to respond to products that fit in with an overall bank strategy.

Most large banks have sophisticated data analytics that can segment customers based on their value. The programs can help predict which products and customers “are at a propensity to be at risk” in a rising rate environment, said Sullivan.

Using a multitude of metrics to proactively predict customer behavior, these analytics programs are typically only used by big banks with the budget and staffers necessary to manipulate the data.

Looking at what data is there.

While big, expensive analytics are out of reach for smaller and mid-size institutions, Sullivan points out that most marketers should be able to find answers to questions like:

  • Are we the primary bank of this household?
  • Which customers have multiple and sticky services with us?
  • Looking at balance history, which customers responded to price moves?

Koechlein, whose firm offers what he terms a “starter” data program, said that his approach is to segment customer households by age, income, profitability, and other factors. Then, marketers have the opportunity to “look at the behavior of some customers that you want to encourage in other customers [with similar profiles],” he explained.

Rising to the rising rate challenge.

While rate competition was a relatively unskilled battle decades ago, today it brings marketing acumen to the forefront.

Marketing officers will find themselves sitting in meetings with the CFO, investment managers, and others responsible for overall bank profitability. “They’ll hear things like, ‘We will be holding mortgages in our portfolio, and we want a certain number to be variable rate,’” Koechlein predicted.

Selling various products at various price points will require a good grasp of exactly which customers will be amenable to the offers.

Traditional sales, advertising, and promotional acumen will also still matter. It may be possible to compete on rates by bypassing rate with other perks.

Some banks, Miller said, will draw loan business not strictly on rate but “by providing a fast and simple loan application and approval process.”

Or, it may be possible to incentivize customers to keep long-term deposits with features other than rate, offering holiday savings or reward points checking, for instance, Koechlein suggested.

Luckily, it looks like rates are not heading up quickly. But it’s time to prepare.

Marilyn Kennedy Melia is a banking and personal finance writer based in Chicago. Email: [email protected].