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Does 25bps change the world? Absolutely not.
We at Nomis do believe that today’s Fed action is significant, and we’d like to explain why we think so.
The first rate rise was a non-event. After the second biggest recession we’ve ever seen, the Fed was just testing the waters with a rise that barely appeared as a blip for anyone. Could the economy take any financial metering or were we still so fragile that continued financial life support was necessary? The answer was we were well enough to continue to grow despite huge sector shifts in jobs, an anemic Europe, and multiple forces that continued to suppress lending.
Today though. That’s a big deal. The cast is off and we’ve returned the crutches. The Fed put in place the breaking mechanism that is one of the standard controls of our economy. Pull the break and inflation and the stock market moderates and bond prices down favoring long term money with their now higher yield and adding stability to the froth. In other words, it’s how we always cool our overzealous jets.
So what is so magical about rate rise numero duo? It’s a signal. It’s a sign that we are looking at an economy that is sufficiently healthy to require more upside activism from the Fed. Should we roll out the “Happy Days are Here Again” banners. No, not yet, but we better start paying really close attention. We like to think of rate changes as a flywheel because that is how they behave, once they get rolling, they continue at pace with momentum. Some reading this will remember just how meaningful these words were from 2004-2006 when rates rose 425 bps continuously and significantly. If you prairie dog around your cube or your office, take a mental note of just how many folks were at the bank at that time, especially in the pricing department or leading your key portfolios. If your bank is like most, you are part of a whole new cast of characters, many of whom have never known a rising rate environment.
You might now be saying to yourself, “Yah, so what?” We believe that the “so what” is the profound shift in the world and the world of banking. In the post financial crisis, the rich as they do, have gotten richer and wealth consolidation to is almost unprecedented in the western world. The world has also gotten way more interconnected.
We’ve covered the topic of the “Overbanked” extensively – the highly sought after HENRYs (High Earners, Not Rich Yets) who have three or more bank accounts and have a household net worth of at least $950K. These people are your best future customers and they are unfortunately treating you like a transaction mechanism and will fluidly move their money between their interconnected accounts to get the best rate. They also love the functionality they are getting from Fintechs and they don’t view banks as the only place to park their money as previous generations did. Banks are faced with the proposition of getting to know these folks really well or waving goodbye as they leave you.
Rate changes are the siren call to the financially switched on to consider moving their money. Your smartest competitors know this and they’ll do everything in their power to steal away your book to fuel their growth. Cheap loyal money, the kind of funds that are Basell III gold in checking accounts and long term savings, are at risk if you aren’t smart about your next moves.
Price Optimization is the science of determining who wants what price and providing mechanisms to give it to them. Not everyone is an attentive HENRY. Some people love you just because you are you. Maybe they like your pens, those mints in the bowl, or that cheeky teller. Smart banks are betting real money on the notion that you better know who is who. They have already invested in solutions that tell them who is price sensitive for a given product and who isn’t and they’ve put in the technology to better live negotiate so they can better direct the frontline and determine what offers are working and what aren’t.
In the era of robust big data software solutions, we believe there just isn’t an excuse for being surprised by customer attrition or revenue leakage. And furthermore, your competitors aren’t as stealthy as they think they are. As Molder and Scully used to say, “the truth is out there.”
If you’ve been watching the big data and advanced analytics revolution in banking from the sidelines, now is your time. It’s not only safe to get in the water, its damn necessary.
We are such believers in this approach that we went ahead and built a simulator to show you what it would be like to work in a world where you had a systematic way to assess what to do next. Nomis Index takes portfolio data for each of the top 150 banks and gives you a glimpse as to what could happen to your portfolio as rates rise and competitors respond. While these numbers won’t match yours and given that fact that it is a simulation, might not line up with what you would do in every instance, we believe you’ll agree that it is directionally correct and a breath of fresh air to have this kind of competitive horsepower at your fingertips. Today Nomis Index models savings portfolios, but watch this space. We’ll be adding more simulators soon.
Take Nomis Index for a test drive over the holiday break.
We believe your bank and your career will thank you, and we hope you’ll agree that this approach is key to managing what comes next.