Is this unpredictable market causing havoc on your deposit portfolios? You are not alone my friend. To help ease some of that tension here are a few key things to remember to maintain your course for the remainder of the year.
The Fed has been steadily raising rates since 2016, and although deposit rates have been slow to keep pace, intense competitive forces have once again taken hold of deposit portfolios. Margins are being squeezed, and strong signs of a falling rate environment compound the difficulty of managing deposit products and pricing.
Below, we see the evidence of price wars and increased pricing aggression throughout 2018, in contrast with Fed rate expectations in 2019 H2.
The key question for portfolio and product managers is how to negotiate tradeoffs between balance growth or maintenance, net interest margin, and the interactions between financial products in a falling rate environment.
Reactionary or follow-the-leader pricing can lead to broad-stroke price execution without an understanding of how different segments or microsegments of the portfolio will respond. Robust data and analytics to support pricing decisions is key, and although most banks continue to rely on traditional product and tier based strategies, we see some innovative banks practicing more granular strategies (examples in figure 2).
The value of employing a surgical approach to pricing is that pricing decisions and execution can support the best wholistic outcome for the bank and its customers. Executing pricing at a more granular level requires a broader ecosystem of management and delivery competencies, but is a worthwhile effort when managing portfolios in highly competitive markets or volatile economic conditions.
We live in an unstable market, no secret there. What the real secret is for financial institutions, specifically deposits, is understanding the market and then knowing how to react and execute at the right time.
Need more insight? Check out my interview below and then watch our latest on demand webcast with CBA.
Sri Gowd is senior director of services at Nomis Solutions, where he is responsible for managing all aspects of consulting, project delivery, advisory services, and ongoing support for several of the top retail banks in the US and Canada.