From “Optimizing Deposit in Any Rate Environment,” a webinar presented by Curinos in partnership with FIS on July 11, 2024, that presented the capabilities of Deposit Optimizer Basics and featured Adam Stockton, head of retail deposits and lending, Agusta Patton, managing director of Client Solutions, and Nathan Kinser, vice president of Platform Sales.
Just as rapidly rising market rates may have come as a jolt to many institutions endeavoring to manage their deposit costs, so too may falling rates test institutional memory and result in higher interest expenses than necessary. Depository institutions will need to be prepared for any rate moves and not assume that rates, if and when they do fall, will do so as rapidly as they rose. In Curinos’ view, two things are evident: Deposit betas won’t fall as fast as market interest rates, and the near-zero-rate environment of the past several years is unlikely to return.
In these uncharted waters, optimizing deposits through the data-fueled analytics of Deposit Optimizer Basics will be especially valuable for FIs that are looking to maximize retention and minimize cost. Here are five key takeaways from the webinar:
1. Deposit volume volatility has brought unprecedented dispersion.
Until now, the difference in deposit growth by branched institutions has been predictable and reasonably narrow – from 1% to 3% growth on the low end of the spectrum to about 10% at the high end. Today, the dispersion is twice that – almost 15 percentage points between the bottom and top quartiles. Part of the reason for this yawning gap is pricing. The difference between the lowest- and highest-priced quartiles is more than 160 basis points – significantly higher than the norm – which can have a profound effect on profitability. The conversations among bank CFOs revolves around whether they’re willing to withstand, say, a 7% runoff if it means deposit costs can be under market by 1% or if deposit growth is so important that it’s worth 100 basis points of increased costs. Clearly, this is where optimization fueled by the right data and analytics can make a difference.
Some FIs have grown, but it’s typically taken lots of rate
CONSUMER DEPOSIT GROWTH
All products, Dec '22 -Dec '23
CONSUMER INTEREST EXPENSE
All products, through the cycle to Feb '24
Source: Curinos Consumer Deposit Analyzer
2. Your customers may be more indifferent than you think.
Even as market promotional rates have approached and even exceeded 5%, many FIs have been able to keep their overall deposits costs at half that, or less. That’s because a wide swath of customers and members reside in what Curinos calls the Area of Indifference, where it takes more than marginally more attractive rates to dislodge them from their current savings products. They may value their relationship with their institution enough to overlook the opportunity to receive a higher rate elsewhere, or they simply may not be paying attention. Or perhaps they haven’t been the recipient of an event-driven payment, such as a bonus or tax refund – which would otherwise make them what we refer to as situationally elastic. To depositors in the Area of Indifference, there may be no need for an FI to raise their rates by 25 to 50 basis points to keep them happy.
So what has worked to drive value as rates rose?
3. Financial institutions that optimize deposits through Curinos optimizing tools consistently outperform.
No matter what the rate environment, Curinos clients that have used its deposit optimizing tools have outperformed non-users. As rates fell during the pandemic, these clients experienced a deposit pricing advantage of 10 basis points. As rates then rose, they not only experienced a pricing advantage of 15 bp, but their deposit volume contracted less than non-users by two full percentage points. By Q2 ’23 that resulted in $1.5 million dropping to the bottom line for every billion dollars in balances, on books that were 2% greater than they otherwise would have been. Curinos Deposit Optimizer Basics can help determine the tactics for both these kinds of cost savings and volume growth.
FIs that optimize deposits consistently outperform
CURINOS CLIENT PERFORMANCE
YOUR BENEFITS
4. A Fed plateau and prospects for lower market rates doesn’t mean we’re out of the woods.
Historically, the direction of interest rates on deposits has lagged Fed rate actions, and this past year has been no exception. Portfolio rates have increased 54 basis points since the Fed stopped raising rates in July ’23. That’s $5.4 million in costs for every billion dollars on the books. The remixing continues because CDs that had looked pretty good to depositors at 3% are renewing in an environment of rates up to 5%. And a sizable portion of checking and savings balances are causing churn within the book by migrating to CDs and money market demand accounts. Finally, there’s attrition – balances that leave need to be replaced. What had been a 1.6% cost of funds may now cost a replacement average of 3% or more. The dynamics are likely to continue even as rates start to come down.
5. Three principles for success for when rates eventually do fall.
Rates are bound to moderate, so the key is to be prepared. First, divide the customer base into segments from less rate-sensitive to more rate-sensitive. Identify different products and balances where you‘re already a little lower than top–of–market rates, and keep in mind that the more CDs renew, the more likely they’ll be to stick around. Second, go with the flow. In a rising rate environment, moving first was a big advantage. As rates fall, the opposite is true. If you’re lowering your rates aggressively and none of your local competitors are, you’re likely to see a higher degree of outflows. Third, have a backup strategy, because you probably won’t be 100% accurate in your rate segmentation and you’ll want to save some of those rate-sensitive balances. That may come from a retention offer on savings or money market, an odd–term CD that might be advertised or simply a retention offer. It may even come through exception pricing for customers you’re keen on retaining.
When rates do fall, three principles for success
Lower Less Elastic First
Go with the Flow
Have a Backup Option
Identify less rate sensitive products, tiers, and consumer segments to make lower risk moves first
- Lower balance tiers
- Non-top of market rates
- Multi-renewal CDs
In a rising rate environment, moving up first brings an advantage; as rates fall, the first movers may see outflows
- Move high visibility rates with the market, not before
- Digital first FIs have disproportionate risk
Rate sensitive consumers are likely to need an option to switch into as rates are lowered
- Savings retention offer
- Odd-term CD
- Exception pricing
