How to Significantly Impact Profitability in a Rising Rates Environment with Strategic Pricing

strategic pricing

We’re entering a new era of banking. Rates are rising, customers are eagerly exploring new banking frontiers, and established financial institutions are categorically trying to remain profitable. This disruptive environment creates a faster moving target in your customers, distracted by shiny-new digital objects. To compete with the flavor-of-the-month or the latest local offer on the street, established banks must explore what is, in my opinion, the most under-leveraged strategy in the industry — strategic pricing.

Brick and mortar banks in the US have had a good thing going for a while now. Since 2015, the Federal Reserve has embarked on a rates-hiking cycle increasing interest returns. But banks have only passed on a small portion of that yield to their customers — turning a handsome profit in the meantime.

But the good times are just about up for brick and mortar banks, and about to begin for savings-concious bank customers. The Federal Reserve recently hiked rates an additional 0.25%, forcing banks to more seriously consider raising rates for retail depositors.

It’s always struck me as a short term strategy to refrain from raising rates for customers. I mean, we all knew the rates couldn’t stay low forever! And even though this strategy turns a profit for now, it’s doing absolutely nothing for customer loyalty, who might get annoyed when they find they’ve been missing out. If banks are going to want to exist in a rising rates environment, they’re going to need to look towards strategic pricing to remain profitable.

The Domination of Digital Banking

There’s another factor forcing traditional financial institutions to seriously consider raising their rates — digital banks. The disruptors are bursting onto the scene, offering extremely competitive interest rates on savings accounts, driving an increase in deposit rates. And if digital is what customers want, it looks like the big banks are willing to play ball.

Citigroup announced that on the next couple of years it plans to launch a nation-wide digital bank to compete head-to-head with the interlopers and other banks are following suit. People have found the way they want to bank and save — and it’s digital.

While details are vague right now regarding pricing strategy, there has been framework laid out by financial institutions like Barclays and MUFG Union bank, both of which have launched digital platforms to appeal to the shifting market interests by offering top-shelf interest rates for customers looking to deposit and save.

This is leading to what Greg McBride, Chief Financial Analyst at described as an “arms race” to boost rates, and entice another wave of consumer deposits. Naturally, moving to a digital-based environment is going to help big banks keep overhead down (compared to brick and mortar), and — in theory — pass these savings onto their customers.

The benefits of this are twofold. Naturally, more attractive rates will encourage new customers drawn to the potentials for increased saving. But it will also foster loyalty among existing bankers who may have been tempted away by the better rates of competing digital banks. The rates arms race begins to make a lot of sense — it’s a win-win for banks and customers.

At the big banks, institutional depositors have already been realizing the benefit of the Federal Reserve raising rates. Their higher balances were more a priority. But the comparatively small balances of regular savers have yet to be rewarded in a similar fashion — so far.

As noted in the Financial Times:

“Annual interest rates on instant-access savings accounts at the top four US banks by deposits, for example — JPMorgan Chase, Bank of America, Wells Fargo and Citi — presently average less than four basis points, or four hundredths of one per cent, according to Informa data cited by Goldman Sachs. That compares with 1.5 per cent at Marcus, Goldmanʼs online bank; 1.5 per cent at Barclays; and 1.6 per cent at PurePoint Financial, the predominantly online business launched by MUFG Union just over a year ago.”

Based on this, the value of moving savings to a digital bank is evident for the average consumer. As of yet, most of the big banks (like J.P. Morgan) haven’t responded in any profound way. But as the Federal Reserve continues to hike rates, average bank customers are going to wise up to the better options that exist for them elsewhere, and the banks will be forced to respond — or lose out to the newcomers.

Why Strategic Pricing Is the Solution?

What are the two problems banks are facing in this rising rates environment? One, they’re having to pay customers more as they become wise to the rising rates. Two, they’re battling digital banks who are able to offer extremely competitive interest rates due to their low overhead. How is a big bank going to profit in this environment?

If encouraging deposits and retaining customers are the goals, then implementing dynamic, customizable pricing is essential. By customizing the fees customers pay, and offering them individualized rates based on their banking profile, customers will receive a unique, personalized banking experience they wouldn’t be able to get by switching to a digital financial institution.

Here’s the rub — I’m willing to bet building this at a bank would cost millions, and take years to implement, all while rising rates are already cutting into bank profits. That’s where third-party technology solutions come in. Zafin focuses on creating solutions for banks that keep them nimble, and allow for strategic pricing at a fraction of the cost and time of in-house builds.

Our products allow banks to customize fees and rates at the individual customer level, without affecting core systems. This helps maximize profitability, without compromising the loyalty of your customers. In a rising rates environment, it’s just what you need to remain competitive.

Want to learn more? Get in touch with us today and learn more about pricing innovation.

About Zafin

Zafin (@zafin) is a leading financial technology provider that enables banks to form richer, more personalized client relationships. Built from the ground up for financial services, its platform empowers banks to enhance revenue and operational efficiency. Founded in 2002, Zafin sits among North America’s top FinTech companies, and is trusted by retail and corporate units at some of the largest banks worldwide. Headquartered in Toronto with global offices, Zafin has a proven track record with a 100 percent client retention rate as validation.

Adam Nanjee

As a member of Zafin’s executive management team, Adam is responsible for Zafin’s digital banking platforms that span across retail and commercial banks globally. Adam leads Zafin’s digital technologies and corporate development initiatives. His team is responsible for Zafin’s banking and FinTech partnerships, global marketing, platform product growth, and new growth opportunities for the company. Follow him on Twitter @adamnanjee