Don't Overpay For Deposits
A predictable phenomenon of every rising rate cycle is a paranoia among bankers about repricing existing deposit balances. This is understandable in the current cycle as 0% interest rates for over 2 years resulted in an unusually high percentage of deposits piling up in non-interest and nominal interest rate buckets. The mistake bankers often make, however, is to overpay for “new money” in an attempt to avoid repricing risk. The fundamental error in this scenario is not recognizing that attracting new money requires more aggressive rate pricing than expanding the deposit wallet of existing customers. In fact, the data consistently shows that the additional interest expense to attract new money overwhelms the actual costs of repricing when more modest pricing is used to expand an existing depositor’s savings wallet. But overpaying doesn’t just squeeze net interest margins in the short-term, it also creates retention stress downstream as large tranches of premium priced deposits mature in compressed periods of time.
So, what is the alternative? How do I set my pricing to achieve my funding needs?
It is helpful to think about an equation where propensity to buy and rate-offer are key variables. The higher the propensity to buy, the less you have to rely on rate for growth, the lower the propensity to buy, the more rate is needed to fill the gap. By using proven analytics to identify and quantify your high propensity buyers, you can model scenarios for volume growth based on particular rate/term combinations and get more or less aggressive with your pricing based on volume needs at points in time.
Once we get clarity on our pricing strategy, there remains one final challenge – a rate card that no customer sees will not impact your portfolio. Marketing must become your rate card as the measurable vehicle for sharing deposit price points with particular audiences through multiple channels based on proven data modeling. Then you are able to measure the impact within those audiences in terms of point in time purchase activity, retention and net new funding generated.
The aggressive nature of the rate increases in the current cycle increases the risk of overpaying but also creates opportunities for increased profitability for bankers smart enough to let the data guide them.
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Blog: The Battle for Deposits: Firepower Through Data and Digital
Case Study: HarborOne Bank
Posted on Thursday, December 1, 2022 at 10:00 AM
by Tim Keith