Interest rates have returned to more conventional levels, and deposit accounts are once again emerging as a viable and attractive option for those looking for a return on their money with minimal risk.
Understanding deposit flows has become even more important as savers look to make informed decisions to maximize their returns whilst also worrying about the safety of their savings.
At the same time Fintechs are continuing to innovate by taking a more holistic view of the overall savings proposition and gaining an edge over traditional banks by offering more personalized and flexible savings options and leveraging technology to provide a superior customer experience.
So, how should banks respond to upgrade their deposit strategies and stay competitive in this new environment?
STEP 1 - Understand and segment your customers
Modelling deposit flows
Understanding customer behavior is crucial for developing effective deposit strategies, and "flow of funds" models are a fundamental tool for analyzing deposit behavior.
These models provide insight into how money flows into, out of, and between customer accounts, offering valuable information on customer saving and spending behavior.
By observing deposit behavior over time, analytical models can identify trends and patterns in response to changing circumstances, such as economic conditions, changes in interest rates or competitive moves. This information can help banks fine tune their pricing strategies and develop more effective deposit products and services that meet the evolving needs of their customers.
Measuring pricing elasticity
Pricing plays a crucial role in deposit flows, and banks need to understand how prices impact customer behavior. This understanding requires elasticity modelling for different customer segments and consideration of other variables influencing deposit flows.
Scientific measurement is key to fine-tuning pricing strategies and optimizing for specific goals, such as profitability or market share or trading off between the two.
This approach can also help protect against the operational risks of significant deposits inflows or outflows when prices fall too far outside market norms.
Taking a thoughtful approach to segmentation
Traditional demographic factors like age, income, and wealth are just some considerations when segmenting customers for deposit strategies.
To develop effective segmentation strategies, banks must also consider a range of other factors, such as savings needs, objectives, preferences, channel usage, long-term vs short-term goals, tolerance for risk, and price sensitivity.
Taking a "one-size-fits-all" approach to segmentation will likely result in outcomes that are not optimal. Instead, banks should be adopting a more nuanced and thoughtful approach.
By considering the unique needs and preferences of their customer base, they can develop deposit products and services tailored to each segment's specific needs, ultimately leading to higher customer satisfaction and better business outcomes.
STEP 2 – Creating the right products and propositions
In the low-interest rate environment, many banks simplified their product offerings. However, with rates back to more normal levels, there is a need for more significant differentiation.
One key step to achieving this is the customer segmentation discussed above, but then taking that insight and developing the right product and customer propositions.
For example, fixed-rate term deposits are becoming increasingly important for customers seeking a higher return and are viewed as a viable alternative to volatile stock markets.
However, a single product is unlikely to capture the complete customer opportunity, with banks needing to offer a range of fixed-term deposit products with varying durations and accessibility. This allows customers to select the product that best matches their preferences and needs.
In addition to fixed-term deposits, banks can consider more flexible alternatives combining the benefits of fixed and accessible deposits.
For example, rolling tranches can be offered where a portion of the customer's deposit is accessible relatively quickly while the rest earns a higher rate. This is examined in further detail by Simon-Kucher Partner Christoph Bauer in our How to Optimize Deposits in Light of Interest Rate Hikes article.
STEP 3 - Engaging customers and helping them to save
When it comes to savings, it is important to consider the entire process and what the customer wants to achieve.
Rather than just focusing on the product attributes, providing tools, guidance, prompts, and encouragement can also be beneficial to help customers save.
New entrants are leading the way by offering digital propositions that use insights from behavioral science to promote positive savings behaviour. Companies like Qapital in the US, Plum in the UK, and Monkee in Austria offer various savings rules that customers can choose from to automate the saving process in a way that works for them and can even make it enjoyable!
Further insights can be found in our How Banks can succeed in ‘Save Now, Buy Later’ article with Simon-Kucher Partner Rohan Shah discussing the responsible alternative to Buy Now Pay Later.
As interest rates rise and competition intensifies, staying attuned to customer needs and employing innovative approaches will be key to success in the deposit market.
Banks must understand their customers' needs, preferences, and behaviours to create suitable deposit products and propositions, price them effectively, and meaningfully engage to drive positive saving behaviours.
This will require segmenting customers beyond traditional demographic factors, building flow of funds models, and developing segment-specific price elasticity models
Additionally, it's important to focus on the whole savings process and provide customers with the tools, prompts, and encouragement to help them achieve their savings goals.
By combining these steps, banks will be well positioned to manage customer and business needs in the new interest rate environment.
For over thirty-five years, Simon-Kucher has been a trusted advisor to banks of all sizes; why not reach out to see how we can help you stay competitive in this new interest rate environment?