The Seven-Year Itch


How are banks using data to better

A seven-year span is far more than anyone expected for the financial crisis that struck most developed economies. Although we are currently experiencing historically low interest rates, as signals indicate, rising interest rates are an inevitable outcome in the future.

At the start of the crisis, the world was a different place. Facebook had around 50 million users. Uber, the largest taxi group in the world, did not exist. And peer-to-peer lending was a casual trade between friends and family.

While banks have been engrossed with general survival: raising capital, repairing balance sheets, and growing P&L, the world has changed dramatically. Today, Facebook has around 1.5 active billion users. Online purchases have quadrupled on a global scale. And peer-to-peer lending is disrupting the banking industry globally. As a result, consumer values have evolved and consumers are utilizing services in a very different way. They are seeking instant gratification, simplicity, and transparency across all services (including banking).

Central to these changes are a number of key mega trends:

  • The rise of social interaction
  • The evolution of value beliefs
  • Enhanced service expectations
  • Constant connectivity
  • The explosion of data usage

It is the last trend that drives an extensive amount of the changes we see.

How are banks using data to better understand their consumers? Deposits management has changed fundamentally over the last seven years. Initially, deposits managers focused on plugging the liabilities gap in balance sheets due to institution deposits flowing out of many banks and wholesale funding markets closing. Then, rising deposits rates and falling market rates created an unsustainable negative jaw. As rates subsequently reduced, in a bid to repair P&L, banks were required to improve stability and reduce outflow costs as a result of Basel III. Over the past 2 years, market rates have been low and relatively stagnant.

Is this a good time to be looking at data driven portfolio optimization strategies? Some banks believe that it is not the right time, given that rates are low and the outlook for rising rates is on the horizon. However, forward-thinking banks see that this is the optimal time to implement such strategies.

Why? Firstly, banks have spent the last seven years focusing on core balance sheet and P&L management. They have invested little time in real data driven solutions that will drive business over the next seven years. This is the right time to invest in such solutions, while interest rate markets remain benign and there is time to implement changes.

Secondly, consumer values, beliefs, and experiences have changed. For example, today, depositors in most markets value online and mobile functionality over a competitive rate. This customer understanding is key in generating more granular segments to develop strategy, pricing, product design, and channel selection.

Thirdly, while downward rate trends can allow banks to understand rate sensitivities and segment differentials, test and learn strategies in a flat environment allow them to constantly test the validity of assumptions.

And lastly, when interest rates do rise, forward-thinking banks using data driven pricing strategies will have the most effective rate strategies. They will know when to react, where to react, how to react, and to what extent to react. This precision will add real value to their bottom line. Deploying a data-driven comprehensive deposits portfolio strategy takes time, but allows banks to be prepared for the next cycle in the market, while still improving the current cycle.

What has your bank done to deploy a data-driven comprehensive deposits portfolio strategy?

Learn more about price optimization.

About The Author

Damian is a career banker with more than 25 years of experience. He spent most of his career with Bank of Ireland where he held a number of senior roles, including Head of Deposits and Current Accounts, Head of SME Banking and Head of Customer Management and Customer Analytics. At Nomis, Damian is Managing Director responsible for the APAC region.