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Curinos (F)insights: Better Deposit Pricing For Smaller Banks And Credit Unions

Agusta Patton, Head of Markets Client Solutions at Curinos, discusses today’s challenging deposit-pricing environment and explains how data-driven insights generated by Curinos’ new Deposit Optimizer Essentials solution, launching October 18th, can help smaller institutions price right and increase profitability.

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Hello and welcome to the Curinos (F)insights podcast. Today my guest is Agusta Patton, who is head of market client solutions here at Curinos. Welcome, Agusta, to the podcast.

Thank you. Excited to be here.

Before we dive into talking about deposit optimization, can you share with us what your role at Curinos entails?

So at Curinos, I run our client solutions team for our deposits and loans products. So essentially what that means is every day we are delivering our product capability to our client base, but really the heart of what we do is supporting our clients in the use of data and platforms, making sure they’re getting value out of the analytics. So working with clients day to day and partnering with them.

Now with the rapid increase in Fed Funds rates over the last year, the deposit industry has changed dramatically from a period of near zero rates. What trends do you currently see in the market and how does this impact community banks and credit unions?

There’s been huge changes and I’m sure everyone that is listening to this knows. Banks and credit unions have had to shift away very quickly from not needing to worry about deposits at all to needing to grow deposits in a high-rate environment. In this high rate environment, we have direct banks that have high rates, they’re front and center in front of consumer faces. The regulatory environment has changed. And generally we’re seeing financial institutions that need to flex muscles that they haven’t flexed in a while, understanding what rate competes best in this market, what product, what term, how am I going to manage term renewals? So it’s a very different position than everyone was in even a year ago, and we’re working with clients, boots on the ground, working through those every day.

Now, how have community banks and credit unions historically managed their deposits runoff and in the current environment should they be thinking about doing it differently?

Historically, community banks and credit unions, the ones that we’ve worked with, a lot of times they’ve been white knuckling their way through it to date. So it’s often a just-in-time exercise of how to gather deposits. So “Uh-oh, I need X million in deposits, let’s look at where my competitors are priced, the ones around the corner from me. Let’s throw a rate out there that’s maybe just in line with that or a little bit better and cross our fingers.” And in this market, we’re seeing a new focus on profitability in the face of rising rates, and typically those two strategies are at odds with one another.

From working with many financial institutions, large and small, and through different interest rate environments, what has Curinos learned that can be useful to support community banks and credit unions to make decisions around their deposit-pricing strategy?

That’s a great question. I think probably the biggest learning in working with clients, not just in this rate environment but previous ones, is that the importance of elasticity-based pricing decisions. So we’ve worked with many institutions over many years and, on our analysis of the data, we’ve seen that throwing out a deposit rate, a rate for a short-term CD or a money market or something along those lines, throwing out a rate in middle of the pack, which is a strategy that a lot of institutions that we’ve worked with were doing previously, is often the worst decision that you can make. It’s often like the worst point on the elasticity curve. You’re not necessarily at that point of inflection where you’re beating the market to bring in additional deposits, and oftentimes you’re in an area of indifference where you’re paying up for the deposits that you are getting, but not necessarily getting all that you could be with a little bit extra in rate. Really understanding how the elasticity curves look for different products and rate environments I think is probably the number one learning. The second one I would say is making sure that you are considering your own institution’s performance within the context of what’s happening in the industry. Context is so key here. You might see a performance anomaly in your own portfolio, and that’s talking about that with your leadership is a very different conversation if you can say, “And actually the rest of the industry is seeing this as well” or “It’s not, and this is something that’s specific to us.” And then it’s a different conversation to have that context around the performance.

When you have a large amount of data like Curinos does, there is a risk for a smaller organization with limited analytical resources to become overwhelmed in the analysis of that data. Is that something you’ve heard when you’re speaking to the industry? And if so, what do you say to these institutions about how they can manage that data and avoid analysis paralysis?

I think when we’re working with community banks and credit unions, the folks at those institutions are wearing a lot of different hats, especially leadership. They are very busy people. One thing that we hear over and over is, “Please don’t just send me more data. I don’t need data. I need insights, targeted insight. I don’t have the bandwidth to go and mine a data set to figure out what’s important.” And so we have, when we’re working with community banks and credit unions, make sure that our analysis and our solutions are really designed for those institutions. Make sure they’re targeted, make sure they’re cutting through the noise and bringing the most important stuff to the forefront. “These are the four most important things I need to look at every single week in my deposit portfolio and making sure that those are highlighted. This is how I’m going to scenario-plan around my deposit goals.” Doing that from scratch every single time is incredibly time-intensive. Having a playbook there is critical.

The Deposit Optimizer Essentials model is built off the large data set that Curinos has access to, not just the data from each community bank or credit union. How does this approach provide the right answer for each financial institution and what are the benefits of this approach?

The beauty of the optimization model being built off a wide selection of industry data is that we don’t need to rely on a single institution’s experience. So, for example, if you want to hit a deposit goal and you’ve never run a 5%, six-month CD, if we only used that information, we wouldn’t know what would happen if you ran that promotion. The odds are that someone in our industry consortium has run that, so we can use that information and we know what’s going to happen in the market when you offer that type of product at that rate. It’s going to save really expensive testing and learning exercises at each individual institution.

Now when applying this more data-driven approach, leveraging the Curinos solution, what can community banks and credit unions expect in terms of value? So maybe you can talk about the value for, let’s say an institution in dollar terms, let’s say they have an $8 billion portfolio?

Typically, we capture the value of a deposit management or deposit optimization platform in terms of interest expense savings. So “Am I efficiently able to hit my deposit goals?” And we’ve worked with many, many banks and credit unions over the year, and we actually just recently refreshed our analysis of this. So I can say for the second quarter of 2023, the clients that we work with on deposit management optimization saw 15 basis points lower cost of deposits than the rest of the market. Fifteen basis points. If you apply 15 basis points to an $8 billion portfolio, that’s $12 million in annualized interest expense savings. And let’s say you apply even a really conservative portion of that, let’s say five basis points interest expense savings, that’s still $4 million annualized savings. So the benefit is huge compared to the investment of getting an analytics platform up and running.

So that’s the reward side. Now let’s look at the same question for the risk side. What is the risk of not applying this type of data-driven analytics approach to the problem of deposit runoff given the current market dynamics?

First of all, you’re leaving that money on the table from the benefits. The second part, as I would say, there’s a huge risk in not hitting your goals if you don’t have some sort of analytical and optimization capability. Our expectation at Curinos is that branch-based FI deposit growth will be flat to slightly down next year. That’s what we are anticipating in the market. Almost every bank and credit union that we’ve talked to expects to beat the market and grow. Everyone can’t beat the market, right? That’s going to be really hard to do, especially with a business-as-usual strategy on deposits. We think that betas are going to continue to increase. You’re going to have CD maturities to deal with, which folks haven’t dealt with in a while. So there’s going to be a lot of headwinds for these institutions to hit these goals. And so I think that’s the biggest risk, if you don’t have the foundation in place going into a year like ’24. I see that as a big risk.

Does the Deposit Optimizer Essentials platform cover both CDs as well as liquid deposits?

It does. It does. It would need to, right? Almost 20% of deposits today in the market are in CDs, which is up substantially from where we were 18 months ago. With the Fed expecting higher-for-longer rates, we expect CDs to continue to be a core strategy for most players in the market. That means that these CDs are going to continually come up for renewal. It’s not one bubble that we’re looking at. This is going to be a product that will need to be managed for the next few years until we see rates start to come down. So yes, the Essentials platform will absolutely cover CDs. And really we like thinking about it for, there’s some very specific metrics that you need to look at when you’re thinking about CDs, both acquisition and on the renewal side. For example, you want to be cutting your maturities by first versus multiple renewals. CDs at their first renewal are much more likely to attrite. You want to be looking at what auto rolled versus what switched into a different product. Did it switch into a term product or a liquid product of yours? Did it leave the institution entirely? So the role metrics around CDs are very specific. Do you want to manage them correctly and yes, will be central to Essentials platform.

Now, how will the use of this solution change the cadence of rate changes users put into the market, and what will that do for their overall results? And how will it support any scenario planning that they’re doing?

The goal at the end of the day is that the Essentials platform is going to allow the users to react more quickly to anything. So the market moves, great, let’s figure out what’s going on. Let’s rerun our optimization. If you are not hitting your deposit plan, let’s adjust quickly. You’re going to have the platform in place. You’re going to have the analytics. You’re going to have the framework in place so that you can quickly iterate through decisions. You know the process that you’re going to go through. You have everything at your fingertips. It’s the same idea for scenario planning. You can quickly move through, “What if I need to do this, and what if I need to do this X, Y, and Z? I have these three scenarios I need to run through.” You’re going to use the same process for each one of them. That’s why we named it Deposit Optimizer Essentials. We really feel like it’s everything that you need and nothing of what you don’t need to work through those deposit planning exercises.

Well, that was very insightful. Thank you very much for joining us today, Agusta.

Thanks for having me.

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