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Fed Rates Pegged to Near Zero Through 2023. What’s a Bank to Do?

At the end of last week, Federal Reserve Chair Jerome Powell committed to holding interest rates low—likely at record-setting lows—through 2023.


Fed rates aren’t the only record-setters doing the limbo on the low end. Banks’ net interest margins have also bottomed-out, nearing an all-time trough as well. Layer over the top (which is easy because the high point is so low) a Treasury yield curve that’s as flat as it has ever been, and then cover the whole mess in special sauce—the highest mortgage delinquencies since 2011. (Not to mention commercial loan delinquencies waiting in the wings.) It is no wonder bankers all around the globe are questioning whether they’ve chosen a career in the wrong industry. Some banks are planning to cost cut a path to prosperity. On the chopping block? Branches, branches and more branches. And, of course, the folks who once staffed those shuttered locations.


This move is arguably reasonable, even independent of the pandemic. Why? Across all banking segments and geographies, customers are exhibiting a rapidly growing preference for banking via digital channels. The pandemic simply hastened a behavior change already underway.


Process automation is another expected source of savings. Given banks’ legendary knotted yarn ball of archaic and disconnected processes, pushing forward in all directions towards straight through processing wherever it might be achievable seems like a good way to go not just for the bank, but also its customers.


And then there’s this. All this cost-cutting creates an opportunity for the contrarian who elects, instead, to invest.


Here are six ways banks might beat competitive benchmarks by investing instead of cutting on the retail side.


  • Expand relationships with current customers using incentives designed to encourage consolidation. Banks talk about relationships, but to what extent do they walk that talk? For example, are mortgage holders incented to grow deposits? Are checking and savings customers rewarded for picking up a lending product or two? Mostly not.
  • Reward cost-conscious spenders for putting your bank’s card top of wallet. Particularly for customers who have demonstrated loyalty and preference for your bank by depositing their payroll with you. Incentives might include incremental rewards for using your bank’s card (credit or debit) for groceries, gas and more, reduced rates or double points for multi-product customers, and more.
  • Tap into consumers’ new-found interest in financial wellness. Give them budgeting tools alerts when pre-set balance and transaction levels are crossed (or in view), the ability to consolidate information from other financial services providers, automatic sweeps from checking to savings, and more.
  • Make your bank relevant to younger people. Go beyond millennials to Generation-Z. Gamify financial wellness. Create rewards for customers to increase their financial knowledge. Give them tangible reasons to exhibit healthier financial behaviors.
  • Help folks expand their emergency savings or rainy-day funds, because now more than ever consumers are motivated to build a buffer between themselves and financial distress. Sub-accounts are a good tool for this, as is gamification. When a customer achieves a savings milestone, reward them.
  • Give customers an opportunity to align their finances with their values. Among younger consumers, multiple surveys show a demonstrated preference for brands that support positive social change, including climate, economic justice, community investment and more. Plus, these consumers state that they are willing to switch providers to better align their commercial activities and personal beliefs.

And here are another four ideas for banks to grow their book of business on the commercial side:


  • Review and renew current agreements. In the process, ensure your customers’ behaviors match their contractual commitments. If the two are misaligned, adjust contracts accordingly. This is a great opportunity to encourage your customers to bring more of their banking business to you.
  • Create meaningful incentives for clients to consolidate with your institution. Cross-product relationship pricing is a powerful lever to motivate loan-only customers to choose your bank for their cash management and depository needs, and to incent merchant services customers to bring bigger deposit balances or choose your bank for a revolving line, and more.
  • Get a tourniquet around that revenue leakage (finally). Externalize pricing execution for core processors so that even the most complex conditional commercial pricing terms are executed accurately and automatically, with full traceability for audit and compliance purposes—down to a segment of one.
  • Take back cross-border payments from digital challengers, tapping into what is projected to be a continuously growing revenue stream. Invest in flexible, dynamic pricing capabilities that enable differential pricing by customer segment, currency corridor, relationship balances, payment volumes and more.

Now is the moment to put one-size-fits-all pricing in your bank’s past. Personalization is no longer on the horizon. It is already here. If you cannot execute using your current technology stack, there is no time like the present to make a change. And no, you do not need to replace your core. Progressive modernization, which leaves legacy cores in place, is often initiated by externalizing products and pricing into a separate product and pricing management layer which gives your bank the power to innovate freely and serve fully. Once you center your customers, you will inevitably grow your bank.