Why Banks’ Deposit and Savings Strategies Must Change
Regulatory pressures and waning trust are among the factors forcing banks to better meet customers’ needs - here are some best practices
In 2024, according to a recent Forrester report, approximately 30% of customers are expected to shift their deposits away from their primary banks. This movement is driven by the existence of persistently high interest rates, which continue to exert financial strain on consumers. Banks, which benefited from higher interest rates on loans in 2023, are now facing criticism for not offering competitive savings rates to their customers. As a result, regulators are stepping in to address these disparities.
In the UK, the Financial Conduct Authority (FCA) has implemented a 14-point action plan to ensure fair value in the cash savings market. Their review found that while interest rates on savings accounts have been rising, this increase has been slower for easy access accounts. The nine largest UK savings providers passed on only 28% of the base rate rise to easy access deposits between January 2022 and May 2023, compared to 51% for notice and fixed-term deposits.
The FCA's Consumer Duty mandates that firms offering the lowest savings rates must justify how those rates offer fair value. Financial entities failing to comply will face regulatory action.
The FCA’s initiative as well as initiatives coming from the European Central Bank aim to create a more competitive market where interest rates are reviewed promptly following base rate changes, and banks proactively encourage customers to switch to higher-yield accounts.
In today's dynamic economic landscape, it is crucial for banks to develop and implement a robust deposits strategy. With evolving customer expectations, financial institutions that design optimized pricing strategies and swiftly execute them using agile decision engines like FICO Platform can gain a significant competitive advantage over their competitors.
The Impact of Apple Card's High-Yield Savings Account
The market's response to consumer needs is illustrated by Apple Card's high-yield savings account, which has drawn in deposits over $10 billion since its inception in April 2023, with a 4.15% annual percentage yield (APY), which is far higher than the average for the US. The savings account is automatically credited with all daily cash incentives obtained using the Apple Card. Additional money can be deposited by users from their Apple Cash balance or through a linked bank account.
Apple Card's savings account integrates seamlessly into the user's digital financial ecosystem, giving Apple a significant competitive edge by putting an emphasis on both financial health and customer experience.
Annual global consumer spending today sits at over $50 trillion. According to Michael Abbott (Senior Managing Director and global head of Accenture’s Banking industry group) since the majority of those transactions are going through a screen or a card, he envisions a large potential value of “sitting in front of all those transactions and influencing that spending behavior“.
Recommendations for Banks' Deposit and Savings Strategies
Implementing compelling strategies allows banks to better meet customer needs, comply with regulatory requirements, and maintain a competitive edge in a rapidly evolving financial landscape. Here are some recommendations for enhancing deposits and savings strategies:
- Offer fair interest rates: Ensure that savings account interest rates are justified as fair value to comply with regulatory requirements, such as the FCA's regulation in the UK. The assessment of what's fair should go beyond simple market comparisons and should include data relating to an array of factors including margins, product use and previous customer outcomes.
- Optimise your deposit pricing strategies: Use analytic and optimization models to ensure you maximise the trade-off between fair value pricing and market share. This approach also allows you to ensure real-world constraints are captured within your decision making, and to quickly understand the potential impacts of any number of other pricing strategy options.
- Regularly review and adjust rates: Implement agile decision-making processes to quickly adjust savings rates in response to market changes and customer needs. FICO's optimisation solution can support this.
- Personalize offers and communication: Leverage data analytics to provide tailored financial products and services. Personalized communication, informed by individual customer behavior and preferences, enhances engagement and fosters customer loyalty.
- Develop niche financial services: Create specialized financial products personalized to specific customer segments, such as young professionals, retirees, etc. This helps attract and retain a diverse customer base.
- Stay informed: Regularly analyze market trends and competitor offerings to maintain competitiveness. This includes monitoring high-yield savings accounts offered by non-traditional financial institutions like Apple.
- Innovate: Foster a culture of innovation within the bank to develop new products and services that meet evolving customer expectations and leverage emerging technologies.
How FICO Can Help You Compete for Customers’ Deposits
- Read Bill Waid’s article from The Journal of Digital Banking, “How Financial Services Leaders Are Using Enterprise Intelligence to Optimize Efficiency Ratios”
- Read the blog post, “9 Success Factors for Improving Your Bank’s Efficiency Ratio”
- Explore FICO Platform capabilities
- Watch videos of our customers talking about their success with FICO Platform
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I further broke this down by looking at the characteristics of the youngest 15% in each group, which occurs at age 29 for the 750-799 group and 43 for the 800-850. We used FICO<strong>®</strong> Score 9 for our analysis, and examined typical variables of the categories that go into the make-up of the score.</p> <p><a href="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png"><img class="alignnone size-full wp-image-29367" src="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png" alt="fico-score-high-achiever-table" width="715" height="747" /></a></p> <p>Since there’s a lot to dissect in this chart, I’ll highlight a few findings that struck me: <ul> <li><strong>Credit history.</strong> Higher scores are undoubtedly associated with a longer time on file. What’s striking is the higher average time on file for the 800+ group, both overall and for revolving accounts (the most common trade line). Clearly, it helps to start credit use early in life – but that’s not the sole determining factor for high scoring. The younger cohorts in both the 800+ and 750-799 groups have time on file medians significantly less than their older counterparts.</li> <li><strong>New credit.</strong> High credit scorers do, in fact, pursue new credit. We see little variation in months since last trade line opening and last inquiry among all groups observed.</li> <li><strong>Pay on time.</strong> As you might expect, the further in the past the delinquency, the higher the score – and that’s <u>if</u> a delinquency ever happened. 95% of the 800+ people and 72% of the 750-799 group have never been delinquent, which is a striking contrast to the 57% for the total population. The percentages for the younger groups are even higher, especially so for the 750-799ers. Collection items are also scarce for these high scorers. 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It ain’t rocket science!</p>
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