Driving Retail Deposits With an End-to-End Product and Pricing Framework

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By Zafin Editorial


Introduction: The retail deposits landscape

For decades, the business of banking was relatively straightforward – almost to the point of being boring. Financial institutions would take money in at one rate in the form of deposits, lend money out at another (higher) rate in the form of loans and turn a profit on the difference. However, in the years following the financial crisis, today’s retail deposits business is an entirely different beast.

Rising interest rates. Recently interest rates were at historical lows, which meant retail banks were battling with compressed margins and an environment that offers very little incentive to deposit customers. This is all changing as rates begin to rise. With an uncertain global economy and risk-averse customers looking for liquidity, we see a potentially unhealthy buildup of short-term deposits. With deposit guarantees, some clients may also be more inclined to spread their savings over multiple banking relationships.

Regulation. As most retail bankers can confirm, regulatory requirements also have a direct and significant impact on retail deposits. Figure 1 below highlights a few current examples, many of which focus on the stability of deposits. As the depth, breadth and pace of regulatory action continues to increase, financial institutions will need to be both nimble and proactive in their efforts to comply with whatever comes down the pipe.

Figure 1: Regulation emphasizes the importance of retail deposits

Basic approaches to deposit pricing. In many cases, we’ve seen a general lack of advanced deposit pricing techniques. For example, consider the following:

  • Does your bank have a deposit pricing strategy in place?
  • What are your bank’s objectives for deposit pricing? Growth? Margin? Market share?
  • How does your pricing approach align with your bank’s value proposition?
  • Are you overpaying on deposits?
  • Are your product and pricing decisions based on data and analysis, rather than opinion?
  • Do your product management and asset liability management teams disagree on pricing?
  • To what degree are your processes manual and spreadsheet-driven?
  • Is your deposit pricing transparent to customers?

So we know that retail deposits are important, but we also know that a strategic approach is required. What do we need to do to create the necessary conditions to effectively drive deposits? There are two key capabilities that are crucial to your retail deposit toolkit: pricing optimization and pricing execution.

Figure 2: Effective deposit pricing strategies take two to tango

Source: Zafin

Build a game plan: Pricing optimization

Do you truly understand your customers’ behaviour around deposits? Do you know why you offer the rates you do? According to Nomis, a pricing optimization technology provider, 75 percent of deposit accounts are mispriced relative to underlying price sensitivity. Pricing optimization platforms use comprehensive analytics to help determine what the optimal rate should be:

  • Analyze customer behaviour, transaction activity, competitors’ prices, deposit inflows/outflows, etc.;
  • Identify how customers respond to different pricing characteristics, including preferences and elasticity;
  • Develop a demand curve to identify at what point a customer will leave the bank for a better rate;
  • Help group customers into distinct segments based on their deposit behaviour;
  • Anticipate the impact of price changes on profitability and balances before they are executed; and
  • Evaluate the overall effectiveness of the bank’s pricing actions.

In the U.S., banks like Fifth Third have dabbled with deposit optimization as a way to apply an analytics lens to deposit pricing.

Novantas has uncovered three separate segments, each with distinct behaviour around the elasticity of deposit pricing.

Segment 1: Situationally Elastic. These customers are strongly oriented to their current bank when maintaining balances, but shop market rates when deciding where to place new balances. This is a good opportunity to attract balances that will remain after promotional pricing expires.

Segment 2: Rate Shoppers. These customers base their deposit decisions solely on price alone, choosing to park their money only where they can receive the top rate. In addition, they actively shop maturing balances and leave when rates fall.

Segment 3: Convenience-Oriented Savings. These customers are strongly oriented toward their bank for all deposit decisions. Primarily looking for fair rates, they build and maintain long-term balances on the strength of factors other than price, such as convenience and service. They are not always responsive to rate-based offers, but represent a good source of long-term funding.

Figure 3: Sample behaviour-based segments for deposit products

Source: Novantas

Execute the game plan: Pricing governance

Now that pricing optimization has equipped you with a clear understanding of deposit behaviour, customer segmentation and the optimal rate for each segment, it’s time to make it happen. This is often a highly manual, spreadsheet-driven process.

With a technology platform like Zafin’s miRevenue, you can automate the execution of the rate strategy and create a rules-based governance layer to manage it. Best of all, you can leverage all of the products and services in the customer’s portfolio to incentivize certain deposit behaviours.

Figure 4: The inputs and outputs for deposit pricing governance

Source: Zafin

To help illustrate how pricing governance/execution works, think of a deposit product as comprised of a series of interchangeable Lego blocks. Each Lego block represents a particular product attribute. As per Figure 4 below, you can create as many Lego blocks as you need and combine them in different ways to create truly customized products. You can offer these customized deposit products at the segment level or right down to individual customers. This level of flexibility and customization unlocks a whole new level of creativity around product design – if your Product Managers can think of it, an execution platform can bring it to life.

Figure 5: Combine product attributes to tailor deposit products for each segment

Source: Zafin

You may recall earlier that effective deposit rate management also utilizes another key lever – the customer’s entire product portfolio. Figure 5 below outlines a few examples of how to create and execute innovative approaches to driving deposits rates using a pricing governance engine.

Figure 6: Examples of deposit pricing execution/governance in action

Source: Zafin

Key takeaways

  • Retail deposits are integral to your business.
  • As key regulations focuses on the amount and stability of liquidity, retail deposits represent a good source of stable funding.
  • There are two key levers to drive retail deposits: Tailored rate strategies and leveraging other aspects of the customer’s banking relationship.
  • Pricing optimization (e.g. Nomis) and pricing execution/governance (e.g. Zafin) complement each other in a holistic retail deposit solution.


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