Curinos was pleased to welcome executives from 15 financial institutions to its Retail Deposit Optimizer Client Forum for 2023 in New York, June 6 and 7. Guests were treated to insights and, through lively discussion, traded ideas on essential topics such as managing deposit portfolios, customer primacy, pricing strategies and product innovation. We have distilled the forum’s presentations, observations and give-and-take dialog into five timely themes that resonated throughout the event, which we present here.
1. Managing deposits effectively means emphasizing the quality of customer relationships.
Net interest margin has peaked because deposit rates will continue to rise amid increasing competition even as the Fed Fund rate plateaus and loans won’t continue to reprice. That means FIs increasingly will need to go beyond simply rate, which can be expensive even when applied surgically, to improving the quality of their new and existing customer relationships, an approach that can be more powerful and efficient. Strategies that were discussed:
- Refresh, or even reimagine, the customer growth strategy. Go on offense with programs that spur the acquisition of primary customer relationships and foster primacy among existing customers. Hone the value proposition to be more distinctive and invest in marketing and product innovation, such as digital delivery. And with commercial deposits increasingly up for grabs, rethink what it means to win them.
- Refresh or reimagine the balance sheet strategy. Sustainable value creation by line of business and segment has changed. Double down on the consumer but pivot toward small business, where funding costs are lower, and rethink use of credit to drive stickier deposits. Consider a direct bank as a funding play and adjust FTP to align more with the entire customer relationship rather than by product.
- Use fast-track precision pricing and analytics. With competition intensifying for deposits, apply analytics at the customer level for precision pricing. This requires understanding the daily movements and weekly benchmarking. And extend data and benchmarking to all LOBs including commercial, small business and wealth.
- Defend customers and balances as the definition of the market changes. New entrants are laser-focused on customer segments that transcend traditional geographic markets. FIs need to understand their performance and margin not only by geographic market, but by age, wealth and income segments as well.
2. The idea of primacy, and how to achieve it, is a moving target.
Previously, when financial institutions (FIs) dominated a consumer’s entire wallet by capturing checking accounts, direct deposit and transactions, it was predictive of an engaged relationship that could grow over time. Today, with wallet fragmentation, the relationship between direct deposit and customer value is murkier. It’s not surprising that nearly half of FI respondents to a recent Curinos survey indicated the current definition of primacy was unclear.
In addition, primacy may be becoming more elusive. In another recent Curinos survey, this time among bank customers, more than a third (35%) of respondents expressed a preference to spread their money across multiple FIs rather than rely on a single provider for their financial needs. This is especially true among younger cohorts and for holders of high-yield savings and money market accounts, and increasingly of CDs. Not surprisingly, this growth trend in diversification correlates with the decline in the importance of branches – the one-stop shop for all products – for account acquisition. Since 2015, the importance of branches in acquiring new accounts has declined from more than 58% to less than 36%. Taking its place is the importance of marketing and branding, up from less than 25% to almost 44% in the same time period. Meanwhile, branch-centric factors as drivers of convenience have plummeted, from 50% in 2014 to a mere 24% today.
The counterweight to the diminution of the branch as an acquisition source, however, has been its ability to deliver superior customer quality. Balances after one month are still five to seven times higher in accounts originated in branches than those generated through digital means, and customer retention after 12 months is more than twice as high. Marketing dollars, meanwhile, are having to work harder in all channels. Breakeven for new-to-bank relationships now occurs in year 4 – up from what had historically been year 2. For digitally generated accounts, it’s now beyond year 5.
As the definition of primacy evolves so will the best means to achieve it. Curinos believes, however, that there are three elements that are tantamount to success in growing sustainable customer primacy:
- Consider product innovation beyond the traditional product chassis to drive market differentiation.
- Look at primacy from a segment perspective to enable dynamic pricing, marketing and journeys.
- Given the fee environment and rising rates, use personalized treatments and engagement to foster longer and deeper relationships.
3. Double down on small business.
Although most small business banking relationships tend to start and center on the lending relationship and operating account, financial institutions would be well advised to pay close attention to deposits as well. As interest rates on consumer deposits have risen steadily over the past year and wealth and commercial deposits have been volatile and susceptible to rate moves, small businesses have been the bright spot in deposit gathering. As of the end of last year, the average portfolio rate for these deposits was a mere 23 bp, just over one-half the rate of consumer deposits (42 bp) and less than one-quarter of that of commercial deposits (102 bp). Three-quarters of all small business balances are earning rates below 10 bp.
To be sure, acquiring new deposits is far more expensive than the portfolio rate – in the case of small business, five times more expensive, at 116 bp – but that’s still about half of the rate paid for new consumer deposits (223 bp). That’s consistent with Curinos research that shows small businesses are not especially price sensitive. About 84% of them report that they don’t mind paying fees if they’re receiving commensurate value, and their highest reported attribute of importance that a bank can offer them is “superior products and services,” which scores a third higher than their institution being the “low-cost provider.”
4. Wealth deposits are on the move.
Rising rates and bank failures have transformed deposits held in wealth management, brokerage and private banking from perceived as mostly stable to unnervingly volatile. While they’re still a source of significant value to financial institutions, assumptions that many professionals have held about them are eroding.
After a runoff of 10% in 2022, wealth deposits this year are down 15% year over year, mainly from existing accounts, because of perceived risk mitigation of uninsured balances and rate seeking through money market funds. Meanwhile, the cost of attracting and retaining these balances has risen significantly higher than that of consumer deposits in general. As of this past March, total portfolio rates were up to 1.54%, and rates paid on new wealth deposits topped 3.00%. Some of this disparity reflects an increase in exception pricing among this well-heeled segment that is intended to both reward past loyalty and safeguard it going forward.
But what’s striking is the barbell nature of rates being paid. While 40% of wealth balances enjoy rates of more than 300 bp, fully 27% are receiving less than 10 bp. This dynamic illustrates the need for banks to better understand their wealth customers by subsegment and to hone the accuracy of their forecasting and valuation. In addition, distinctive product and service features where there is still white-space opportunity, such as targeted lending offers and offering advice, can make a greater portion of wealth deposits stickier.
5. Customer-level pricing needs to start with segmentation based on behavioral characteristics.
Effectively managing deposit pricing means being surgical. Otherwise, wide swaths of the back book can reprice, saddling the institution with an often huge expense that’s entirely avoidable. And being surgical means segmenting the depositor base by their behaviors.
Curinos has identified these four distinct segments, each of which displays attitudes and behaviors toward saving that are both materially different from one another and actionable:
- Chronic Shoppers: These people are rate-driven and move balances when a promotional rate expires. They’re fast to come and fast to go.
- Situational Shoppers: These savers shop when they come into enough money to prompt them to seek rate, from sources such as bonuses, tax refunds and windfalls.
- Engaged Savers: These depositors maintain stable or growing balances tied to a deep and engaged relationship with the institution.
- Unengaged Savers: Even though their relationship with the institution tends to be shallow, these savers maintain stable balances.
Not surprisingly, the rates and offers made to each segment can vary substantially, and should. Keep in mind that while certain providers, particularly neobanks, are currently offering north of 5.00% on savings accounts, a significant portion of consumer deposits – about half of them at present – are still receiving less than .50%. Clearly, the holders of these deposits are not easily swayed by rate. They are either content to know their balances are safe and stable with a provider they trust or are unaware of what they may be missing, or both.
Because of their deep, engaged relationship with their institution, Engaged Savers, for example, display a history of renewing even when the rate offered is below the maximum. In fact, they’re likely to stick around and even grow their balances even when rates are well below what they could receive elsewhere. Chronic Shoppers, on the other hand, display no history of renewal. Because their relationship with their institution is shallow or virtually nonexistent, they’ll jump at the next attractive market rate. If a provider is looking to retain their balances, it will need to offer a premium rate.
Fair enough, but the question then becomes how to identify these differing segments and act on their behaviors and preferences accordingly. This is where AI comes in handy. Amid the nearly limitless permutations of offers, messages and touches that can be presented, AI, through a platform like Curinos’ Amplero, can determine who to touch, what offers to make and the cadence required to elicit favorable action, all relatively quickly. Its ability to adapt marketing experiences and effectiveness to each recipient is sharpened by continuous learning. With AI, there is never an “ideal” path, as may have been the case in the past – only the ideal for each individual.