From Reducing Interest Expense Isn’t Easy! How to lower rates without losing deposits, and why you might need to pivot, a webinar given by Curinos’ Adam Stockton, Managing Director, Retail, and Dan Otto, Senior Project Manager, on April 3.
At this webinar, Adam and Dan offered insights into how smaller FIs can attract and keep the right level of balances at an acceptable cost using optimization tools like Curinos’ Deposit Optimizer Essentials. They shared their data-founded views about the current market, what to expect in the coming year and how data and analytics can assist community banks and CUs find their sweet spot. They also emphasized that qualitative scans of competitive activity and educated guesswork are no longer viable options and that, more than ever, retail deposit managers will need to stay flexible and nimble. Here are their five keys to market success from the webinar:
1. Understand price inelasticity because some cuts have more impact than others.
It’s axiomatic that higher rates will generally attract and retain deposits and lower rates will not. But the relationship between price and volume is hardly linear. A wide swath of depositors falls within what Curinos calls the Area of Indifference (AOI), where customers display little or no change in their deposit behavior despite a change in rate. They may be perfectly happy with the rate they’re receiving, haven’t thought about alternatives, overlook the need for a higher rate because they value their banking relationship, or all three. Banks are well-advised to apply data and analytics to define the breadth of their AOI and then price deposits accordingly. To maximize margin, price with the market—to the left side—but avoid falling off the cliff because reacquiring those deposits can be inordinately expensive. To emphasize growth, price competitively but not top of market (to the right), perhaps with one offer of a savings/MMDA product or CD (not both) to allow rate-sensitive customers to switch.
Typical Deposit Price Elasticity of Demand​
Source: Curinos Analysis​
2. To stay competitive, track rates weekly.
Acquisition rates for term savings products can be highly dynamic and require frequent monitoring. This can be seen clearly in the behavior of market rates of CDs by term in 2024. In this illustration, rates for the three terms above six months were identical in March but widely divergent only a month later. The 13-15 month term CD was more than 50 bp less than the 7-9 month term, which stayed flat. Not knowing the direction and speed of that downward movement could have meant significantly overpaying of rate. A month after that, rates on these same terms converged again before diverging again, and by yearend, they had crossed. Being a step behind competitors, then chasing them, can be frustrating—and unnecessarily expensive.
Branch Bank CD Acquisition (New Money) Rates by Term​
Source(s): Curinos Consumer Deposit Analyzer, Curinos Standard Rate Data. | Note(s): Online banks excluded. Simple averages displayed | Includes all bank CD term offerings, regardless of rate​
3. Monitor attrition—of relationships as well as balances.
Attrition exhibits a long tail. It’s bad enough to lose balances, but the worst case is losing relationships. They’re hard, and really expensive, to regain. FIs that are pricing too far down from the Area of Indifference run the risk of losing checking relationships, the very foundation of primacy that earns banks and CUs the right to raise deposits in the future and to cross-sell. Yes, most customers and members value other parts of relationship over rate, but many also have a point at which they don’t feel valued, and even taken advantage of. In 2024, attrition for the bottom quartile of providers was more than 11%, almost twice that of the those in the top quartile. Making up for those one in nine lost customers would be a daunting task the following year.
Full Relationship Attrition
All products, Calendar Year 2024
Source: Curinos Consumer Deposit Analyzer​
4. Know the longer-term impacts of decisions you’re making today.
One effective way for banks to establish the long-term value of a customer is to price a first-time renewing CD competitively so it’s retained. That’s because at the second maturity, the customer is anywhere from 6% to 18% more likely to renew, depending on how deep their relationship is with the bank. If, for example, a renewing CD customer also has a checking account, the chances of a second renewal shoot up 10 percentage points, from 82% probability to 92%. This behavioral phenomenon can make it easier for a bank to relax its pricing the second time around. And perhaps contrary to some thinking, CDs are relationship products. Nearly half of all CD balances are held by customers with the full suite of deposit products. Not only are they more likely to renew, they exhibit less than half the attrition of CD–only customers and members.
Curinos Deposit Analyzer
5. Have a plan to pivot—to volume growth or margin management depending on market dynamics.
Look no further than the first several days of April as a cautionary example of why staying flexible and nimble is so important. Tariffs were roiling equity markets against a backdrop of stubbornly high interest rates and gnawing inflation. While Curinos forecasts a return to normalcy in deposit growth this year and next, forecasts are just that, forecasts. It’s best to consider a range of environmental scenarios and be prepared. Here are three parting takeaways that may help:
- Analytics matter: Have the tools needed to understand how customers and members are behaving.
- A static strategy won’t work: Track competitors regularly and adapt to changing market dynamics.
- Think longer term: Be sure to account for the full and future value of customer or member relationships.
Curinos Consumer Deposit Forecast
Source: Curinos Analysis, Forecast as of January 2024​
