Banks 7-Year Itch: When Deposit Pricing Matters Again

Addressing a group of financial service executives at the just completed BAI Retail Delivery program in Las Vegas, FICO’s Matt Stanley commented, “At some point, interest rates will rise. When they do, the market will become somewhat destabilized after over five years of historically low, stable rates. This will afford a fantastic opportunity for the best-prepared banks to achieve better portfolio outcomes through precise pricing.”

Indeed, since rates have been almost cryonically frozen for years, he argues that many banks have been lured into a state of inertia around deposits as customers have shifted from CD holdings to liquid. “The question is whether you’ll be ready to capitalize on it. I would argue that very few banks are. They are not in a position to do the kind of dynamic pricing this new, competitive environment will require.”

To illustrate what has changed in the world while rates have remained stable since 2008, Matt gave the FinTech Forward Program audience a brief (and funny) Pop Culture refresher, focusing on the evolution from flip phones to smart phones, Facebook users (100 million then vs. 1.5 billion now) and even TV reality shows (compare John & Kate Plus Eight vs. today’s Keeping Up with the Kardashians).

Even though rates have held steady, banks have witnessed dramatic changes practically everywhere else, from regulatory requirements (think BASEL III liquidity and capital requirements, and regulatory stress tests such as CCAR/DFAST) to customer preferences (e.g., new banking channels and churn resulting from new online-only players). Hampered by limited analytics, labor-intensive compliance efforts and silos that hurt interest expense and margins, most banks are poorly positioned to profit from the expected rising rate environment when it happens.

The good news, per Matt, is that “technology exists today that solves all of these problems simultaneously. And we’re not talking about a complex implementation that will turn the company upside down and take years to implement. We’re talking about software packages on the market today that have you up and running in a few months.” He then outlined how an easy-to-implement, automated advanced analytic deposit pricing solution has proven to improve deposit margins 10-30% with strong governance and integration.

Indeed, for banks that are feeling the “7-Year Itch” to energize their deposits business, now may be the time to make a break from the past. If you weren’t at BAI, check out the following for more information on this topic:

• White Paper: The New Normalization: Three Keys to Gaining an Edge in Deposit Pricing
• Product Sheet: FICO® Optimization Solution for Deposit Pricing