This Quarter in Canadian Banking
Rates are increasing more rapidly in this cycle than in previous ones, putting significant pressure on customer betas. With the Bank of Canada poised to slow rate increases (and perhaps decrease rates this year or next), bankers may be hoping that relief is on the horizon.
Unfortunately, Curinos analysis of prior cycle data shows the pressure is likely to continue as customers churn from low-rate savings to higher yields and term, and GICs mature into higher rates. Indeed, portfolio yields are likely to increase even as the Bank of Canada slows down.
The question facing bankers, then, is how to grow or retain deposits while minimizing increases to portfolio yields as rates flatten, especially in an atmosphere where seemingly all customers have become attuned to higher interest rates. Historically, the use of promotions presented a short-term fix, but led to a price war. Critically, Curinos analysis shows that not all customers are as rate sensitive as bankers often assume – offering real alternatives to balance growth and cost objectives.
While there are certainly chronic shoppers in any book, there are ultimately a higher proportion of episodic shoppers – customers who will look for rate at key life events and/or influxes of cash (tax refund, bonus, etc.). Once in the door, these customers can be retained with rates that are fair, but not top of market. Identifying the chronic versus situational shoppers allows financial institutions to continue to offer top of market rates where it is needed, while also allowing for increased cost discipline on the rest of the book.
Additionally, deposit retention campaigns can be costly when executed broadly – and often wind up paying rates broadly when only some customers would leave. By keeping these campaigns more targeted, though, there is more effort required to execute them. The highest rates are focused on those customers who need it most, meaningfully decreasing cost and improving efficiency.
Beyond rate sensitivity, customer-targeted treatments can be used to identify other underlying customer preferences. As rates plateau and the yield curve becomes shallower or inverts, the premium offered for term over savings will decrease. Managing renewing term customers into a new GIC at a lower rate can be a challenge, and Curinos experience shows some will prefer a savings product. Identifying the right customer and offering strategies to retain balances in the product of choice can significantly increase retention and customer satisfaction.
Ultimately, meeting the customers with what they need can be a win-win for both bank and consumer.