Managing deposits in the new interest rate environment

As interest rates have returned to more conventional levels, deposit accounts have become an attractive option to those looking for return on their money with minimal risk.

The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

Understanding deposit flows has become critical as savers are more informed than ever of their choices, and Fintechs are challenging the status quo by taking a holistic view of the customers’ needs.

So how should banks upgrade their deposit strategies and stay competitive?

Understand and segment your customers

  • Modelling deposit flows

To develop effective deposit strategies, banks need to understand their customers’ deposit behaviours. “Flow-of-funds” models provide insights about how money flows into, out of, and between customer accounts, offering valuable information on customer saving and spending behaviour. By mapping deposit behaviour over time, banks can anticipate customer behaviours in the changing economic and competitive environment and adapt their responses accordingly.

  • Measuring price elasticity

Scientific measurement of customer reaction to different price levels is key to optimising business goals. It allows banks to fine-tune pricing strategies to optimise for business goals and is also useful to mitigate operational and liquidity risks arising from prices falling too far outside market norms.

  • Taking a thoughtful approach to segmentation

Banks need to look beyond traditional demographics and segment their customers based on factors such as saving needs, objectives, preferences, channel usage, risk tolerance, and price sensitivity. A nuanced approach that considers the unique needs and preferences of each customer segment will result in higher customer satisfaction and better business outcomes.

Creating the right products and propositions

With interest rates back to conventional levels, we believe that banks need to differentiate their product offerings. Customer insights, at a segmented level, should guide the development process.

While some customers prioritise easy access, others will prioritise yield, and for them fixed-rate deposits will now represent a viable alternative to stock markets. However, to fully capture the opportunity, banks need to offer a suite of products with varying durations and accessibility that will allow customers to select the product that best matches their needs.

Banks can also consider flexible alternatives combining the benefits of fixed and accessible deposits. Rolling tranches, for example, provide quick access to subsets of the deposit while the remainder earns a higher rate.

Engaging customers and helping them to save

Banks also need to think beyond product to the overall saving journey. Providing tools, guidance, prompts, and encouragement will enable customers to save more.

Leveraging behavioural science and technology, Fintechs are promoting positive savings behaviour allowing them to win market share. Companies such as Qapital in the US, Plum in the UK, and Monkee in Austria offer various savings rules allowing customers to automate saving while gamifying the overall experience.

Summary

In summary, with rising interest rates and intensifying competition, banks need to be customer-centric and employ innovative approaches to succeed in the deposit market. The most successful banks will be those that understand their customer needs, create suitable deposit products, price them effectively, and meaningfully engage to drive positive saving behaviours.

For further information visit Simon-Kucher’s website or contact the author.