Deposit Pricing Strategies: Increasingly Sophisticated, Precise

In a recent article, “Best Online Savings Accounts in February,” experts from Bankrate.com listed the most competitive offers, where several went as far as to exceed or match the current federal funds rate of 2.25%. These included CIBC Bank USA offering 2.39% Annual Percentage Yield (APY), and Marcus by Goldman Sachs offering 2.25% APY on online saving accounts with minimum balances of just $1. For customers able to deposit at least $100 and make $100 monthly deposits or maintain a $25,000 minimum balance, CIT Bank offers a very competitive 2.45% APY, according to the article.

Traditional brick-and-mortar banks are facing stiffer competition from challenger and online-only banks willing to offer higher yields for savings and deposits. However, even as challenger and online banks spar over deposits and savings through a price war, incumbent banks can be smart about picking their battles.

Selective when Extending High Rates

Using sophisticated deposit pricing and management practices, incumbent banks can identify key customer segments and be more selective when offering higher rates to attract deposits. This can help control deposits costs, prevent attrition and grow deposits in a more sustainable way. For example, Citigroup recently launched Citi Accelerate Savings, an online savings account that pays a highly competitive rate of 2.36% APY with no minimum balance required. This is substantially higher than the FDIC's national rate, the average of rates paid by banks on a savings account of 0.09% APY. However Citi’s attractive offer is only available in 41 states, areas where Citi wants to expand. The account must also be opened in conjunction with one of Citi’s wealth or retail banking relationship packages. The big bank hopes this offer will motivate some of its 28 million credit card customers to initiate a retail banking relationship with it, according to an American Banker article.

Court the Price Indifferent

While some customers are extremely price sensitive and will always make decisions based on price, there are a group of customers where small changes in price have an inconsequential impact on their perceived value of the bank product. These customers are price insensitive and they would need a substantially higher rate offer before they would consider moving their funds to a competitor bank. It is helpful here to identify and segment these customers and their respective zones of price indifference where incremental changes in deposit prices have minimal impact on their decision to shift funds.

Banks can focus on retaining these sticky customers using non-price measures. These can include bank loyalty programs, personalization and a better customer experience. On a recent call to large bank about an overdraft fee, a partner at Simon-Kucher was pleasantly surprised when the automated customer service algorithm not only narrowed down why he was calling, but was able to automatically waive the overdraft fee. By leveraging AI, machine learning and natural language processing, this big bank was able to address a common pain point – overdraft fees – of its most valued customers. These encounters remind customers that the bank is working to serve them and goes a long way to make them feel comfortable in continuing a relationship.

Compete on Price

Banks that compete on price including Marcus by Goldman Sachs can use an umbrella pricing strategy where the bank increases or decreases the APY on its entire online savings account portfolio in an effort to fund its loan book. However, while this approach might work for a bank like Marcus by Goldman Sachs that needs liquidity to fund other higher margin businesses, the burden of a rate increase on an entire deposit and savings portfolio is an expensive and inefficient retention strategy for most banks.

With large amounts of data available today, banks can develop the analytical capabilities to enable a deeper understanding of customer’s behaviors to detect deposit-pricing sensitivities and tailor promotional offers to reach those customers most at risk of attrition.

By closely monitoring the movement of funds both internally within the customer’s deposit portfolio, and externally to accounts held outside the bank, banks can also derive customers’ deposit price elasticity. Deposit price elasticity can help predict how customers will response to price changes across the portfolio and to external competitive offers. Certainly, customers banking choices are also influenced by the bank’s market visibility. Attributes like marketing spend, number of branches and market share can influence a customer’s decision to move money outside the existing banking relationship, and therefore should be used to calculate a competitive rate spread to the market.

If a bank can better anticipate balance flows, optimize deposit pricing to account for regional or local competitive environments, and leverage a deep understanding of its customers to determine their elasticity for deposit, the bank can personalize and better target promotional deposit offers to grow deposits without sacrificing its profitability and margins. 

Wei Ke, Ph.D. is a managing partner, Rohan Shah is a senior consultant and Kartik Vyas is a consultant at pricing experts Simon-Kucher & Partners