When will big banks pay more for deposits?

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Transcription:
Penny Crosman: (00:03)

Welcome to the American Banker podcast. I'm Penny Crosman. The Federal funds rate is now above 3%, its highest level since 2008. Forecasts show that rates could reach 4.6% next year. But the national average interest rate for savings accounts is 0.13%, according to bank rate. Bank of America and Wells Fargo are paying 0.01% and JP Morgan Chase is paying 0.02%. In a meeting of the Senate Banking Committee with big bank CEOs last week, Senator Jack Reed of Rhode Island sharply criticized large banks for this. "I'll cut to the chase," he said. "Interest rates are going up, but deposit rates, which you pay for your deposits, are really stagnant. Very, very low. It raises the question that since you're making substantial amounts of money on these increased interest rates, why are you not beginning to raise interest rates on deposits?"

So the question is how much should banks be paying on deposits? And when will we see the large banks start to pay more for savings accounts? We're here today with Betty Cowell, a senior advisor at Simon Kucher and Partners and Rohan Shah, senior director at Simon Kucher and Partners, who are both experts on deposit pricing. Welcome Betty and Rohan.

Betty Cowell: (01:19)

Thank you, Penny. Thank you, Penny.

Penny Crosman: (01:23)

So Betty, what have you seen in the past? We've had cycles in the past where interest rates have risen overall, the Fed funds rate has risen. What has happened? How have banks reacted in the past and what can we learn from that?

Betty Cowell: (01:39)

Oh, Penny, that's changed a lot over the course of my career, but I will tell you that when I managed deposits, largely there was like a 60-day lag before you started increasing your interest rates. And then it would be about 60% of the increase. A lot of that, though, will be determined on how liquid banks are. And as you know, right now, the liquidity in the banking community is super, super high. So banks don't really need deposits. And so they don't feel compelled to raise deposit rates right now because they have so many deposits. Now that's going to change. As the Fed begins to manage its balance sheet down, which they're already starting to do, you could actually see negative deposit growth rates, but they have a lot of liquidity. So I'm not surprised. I will tell you that they can't lag too long when you have American Express and Ally Bank. And some of these of savings only focused pricing machines. American Express is already at like 1.60%, I think, for their money market accounts.

Rohan Shah: (03:03)

I think they're close to 1.90% actually, Betty.

Betty Cowell: (03:06)

Okay.

Rohan Shah: (03:07)

Yeah.

Penny Crosman: (03:09)

So is there a danger of aggravating customers by not raising their savings? I know you you're saying they don't need deposits, but you know, some customers have multiple relationships with a bank. Is there a danger of people walking?

Rohan Shah: (03:26)

Yeah. I mean, it hasn't happened yet, but there's absolutely all chances of that happening pretty soon now if these banks don't raise their rates as well. I mean some of the larger banks in the country, I think because of the fact that they're full service banks and customers have a stickier relationship with them, they might be able to get away with having rates that are slightly below the online only, savings only banks that Betty mentioned. But I don't think they can get away with offering 0.01%. They're definitely going to have to raise rates at some point.

Betty Cowell: (04:01)

Yeah. And another comment I would make about that: when interest rates in the eighties and the early nineties were so much higher than what we've experienced in the last two decades, we knew as a bank what that tipping point was for customers and it tended to be then, which is hard to imagine, a hundred basis points. So if you were a hundred basis points behind your competitor, you could lose a deposit for sure. And if you wanted to attract new deposits, a hundred basis points over your competitor was about the right amount to attract new deposits. So if you can imagine, we used to have promotions back then for seniors on CDs, because CDs were really where you played the game back then, it would be rate plus age. So if you were 80, you'd get an 80 basis points bonus rate . And of course we haven't done anything like that in many, many years. But it was very different back then.

Penny Crosman: (05:05)

Well, you make a good point because I feel like there was a time when banks set their rates by looking out the window at what the bank across the street was doing and then offering X amount more as you were just saying. As you were talking about, they look at to what extent do they really need deposits? How much liquidity do they already have? Are there other factors that are going into the equation these days?

Betty Cowell: (05:35)

So what I would say there is that pricing has always been an art, but it's turned much more into a science. But when I was early in my career, I would say it was much more of an art. And you tended to look at the competitive set you had, who was advertising, who wasn't advertising, and you would pick your spot on the rate sheet based on what your particular strategy was given the parameters of your competition and perhaps their market share and what their spend looked like. Nowadays people are much more in tune with their customers because of technology. And they understand elasticity, often all the way down to the customer set, whether that's in a segment, an individual or a region. And so they have more tools to help them pick that spot, if that makes sense.

Penny Crosman: (06:38)

And where do you see technology playing a role in these decisions?

Betty Cowell: (06:43)

Well, I think before you can use price elasticity tools, you have to have operational price flexibility. And for many years we didn't have that. We were statewide organizations. We didn't have regional pricing, let alone pricing differently for different segments at different product levels. So that has changed largely for the banking community over, I would say, the last 20 years. And because we've gotten nationwide now, we have to have so many more price points than we used to with pricing regions, with segments that operate differently than other segments, as well as pockets of customers in different product portfolios that may have different elasticities. So being able to use technology and tool sets today, to identify those things, allows you to go to a different level of granularity for setting price. And you may have your back book priced one way and your new product book priced another way to attract business. And that would be very common.

Rohan Shah: (07:58)

I agree with everything you said. And I think the way technology's enabling the way pricing works today and the conversion of pricing into a science more than an art is I think a couple of different ways. One is the ability now for banks and financial institutions to actually be able to collect a lot of data information around how their customers are behaving, how the customers are interacting with the banks or of the usage of their products and different personas. All the money movements in and out of the bank. The technology also now allows you to be able to actually analyze these vast swaths of data, where you can now sort of very quickly be able to uncover insights and then be able to measure price sensitivity and price and and things like that at a very, very granular level.

Rohan Shah: (08:50)

So just like Betty said, not only at a portfolio level, not even just at a region or segment level, but actually at the customer level. And then the third part is the price execution capability, where now these tools and technologies actually allow banks to be able to really differentiate prices, a lot more than they used to be able to. Right. Again, in my experience, Penny having worked with banks large and small in the U.S., I've seen, for example, some of the smaller banks and credit unions that are actually working on older core banking systems where they don't really have the ability to even differentiate prices at all, to even have more than two price points per product, where are some of the larger, slightly more technologically sophisticated banks now have either started to upgrade their core banking systems or install those middleware tools or layers that sit on top of core banking that then allows them to offer differentiated pricing by product. So multiple price points for the same product, whether it's differentiated by in branch versus online, it could be differentiated by region. It could even just be differentiated by customer segment with regards to price elasticity, where they're trying to give customers that are not very elastic or stickier customers a slightly lower rate than the others. So I think these are some of the ways in which technology is helping move, pricing into a more sophisticated science.

Penny Crosman: (10:22)

Is there any danger, Rohan, of people talking to each other and saying, well, I got this rate and the other person saying, well, I didn't get that rate.

Rohan Shah: (10:33)

Yeah, no, that's a, that's a good point. And yes, there is a little bit of that. And we see that, especially amongst sort of the younger, more tech savvy population we see a lot of these folks kind of move their money into the online banks to get high interest rates while still maybe maintaining some sort of relationship with their primary bank with, with the, with the checking and saving and all of that. But, but moving a large bulk of their savings into, into an online money market product or something like that. But on, on the flip side, I think we, we see that finances are something that's, they're not typically discussed very openly as well. So, I think this is a less of a danger than for example, a consumer good where people may more often than not discuss kind of how much did you pay for your car? That's a conversation, whereas how much interest are you making or what's the mortgage rate you're paying is less of a conversation, I guess.

Penny Crosman: (11:37)

Hmm. So Rohan, you mentioned that banks are looking at more and bigger data sets to make these decisions. Is all of this data internal? So they're looking at the customers they have, and who has a propensity to walk if rates aren't competitive? Or are they taking data from other sources? Is there something new happening here with data sources?

Rohan Shah: (12:03)

It's a great question. And I think the answer is that it's definitely a mix of both. I think to Betty's point, banks have always collected a lot of information, for a long, long time. But what we are now seeing is that they're actually able to, again, for lack of a better term, weaponize some of that data. Actually able to use that data to derive insights. They're now storing that data in, in ways that it's easy to understand and analyze and all of that. So they're definitely using internal data, but where possible, especially some of the larger banks definitely work with third party providers to get sort of comparative intelligence to get data around marketing spend by competitors, rates offered by competitors, how customers may be behaving outside of their banks and things like that.

Rohan Shah: (12:53)

So wherever possible, yes. Banks definitely try and use external data, even social media. For example, right now, again, this may be a little bit less relevant to deposit pricing. But when we talk about things like loan originations and loan underwriting and things like that, I've heard of a lot of banks, I've seen a lot of banks use actually social media information for like small businesses, for example, reviews and things like that to come up with an understanding of what future cash flows may be and things like that. So it's definitely using a combination of internal data that was being collected already, but now is analyzable and then tactically adding in external third party data where they can,

Penny Crosman: (13:35)

So if a small business had bad reviews, you might give it a lower rate?

Rohan Shah: (13:40)

We've seen that happen. I was talking more from a loan point of view, so you'd actually charge them a higher rate just because they're they're riskier. But yes.

Penny Crosman: (13:52)

Interesting. I hadn't heard that before, so that's, that's interesting. I know I'm belaboring this, but is there any danger of being perceived as, you know, lack of equity?

Rohan Shah: (14:07)

I think that, that, yeah, no, there definitely is, Penny. I mean, we've seen some examples of that in the past as well. I think regulations is one definitely. So you have to be very careful of not blindly following the numbers and the data as well. I think there always needs to be some sort of human intervention before you finalize your pricing grids and kind of execute on those. We've seen, for example, cases where the numbers may tell you, and I'm just making this up, but just as an example, certain segments are more price sensitive than other segments and it might not be right to charge that segment a higher price or a lower price and things like that. So you always have to kind of incorporate business judgment on top of what you see through your data and through the numbers. But once you do that, I think that is low risk. If you are just blindly trusting numbers and models, yes. There's all chances of things going wrong.

Penny Crosman: (15:01)

I know you guys have talked a lot about how, how things are being done. Do either of you have any other sort of advice or recommendations for how banks should look at this and think about it and make these decisions?

Betty Cowell: (15:17)

Well, I just, as an experienced practitioner managing deposits for decades in the banking business, I would say, there was a long period of time when we didn't use a lot of tools to do pricing at a more granular level or to understand customers' elasticities. But I would tell you if you're not doing that today, it's a problem for your portfolio because most of the large banks, the top 25 of FDIC total deposits, they are using very sophisticated tools. And they've created technology to offer price at the right time to the right customer to help retain deposits and also to win new deposits. So your tools have to be pretty sharp. and if they're not, then I would just encourage individual banks that may not have those tool sets to look for some help and support in that. I mean, that's something certainly Simon Kucher can help with, but there are lots of providers in that arena. And I think it's a very important thing when you're facing rapidly rising rates and you're trying to figure out again where to put your spot.

Penny Crosman: (16:35)

Okay. So given all that we've talked about, when do you think we will see the big banks start to raise their deposit rates?

Betty Cowell: (16:44)

I think you'll see them start raising, but maybe you won't see the full 25, 75 basis points. I think you'll see them gradually begin to increase their rates. And I want to say that I saw that Chase maybe even had started to raise, but it was maybe 10 basis points on their whole portfolio. So it wasn't a lot, but it was some. So I think they're already starting, but they're just edging up ever so slightly because they're very, very liquid. When you have a 50% loan to deposit ratio, which is what B of A has, Chase might be a little closer to 60%, that means you have your loans well funded and they don't need the deposits. And that's what the interest rates tend to do is bring more in. But I think they will, out of equity for customers, start to bring up their interest rates. But they're probably following rules that I'm not as in touch with anymore.

Rohan Shah: (17:54)

Betty, I fear that you might not see them actually raise rates at the portfolio level at all. I mean, I'm sure that some of the larger banks have actually figured out some of the more stickier customers and those guys may never see a rate in fees at all. So I don't necessarily think we'll see a portfolio level increase. I think they're already doing it tactically to the price sensitive customers, to customers where they've seen large movements of money out of the banks. They probably already offered higher interest rates and things like that. You'll see them do more of that with other customers as well. But I don't think you'll see them doing at a portfolio level.

Betty Cowell: (18:29)

I'm going to tell Rohan that I will just agree to disagree on this one. But I understand exactly why you're saying what you're saying, Rohan, and I think it's possible that they could behave that way, but I don't think they will. There's too much pressure on the equity issues and our culture now. And for that reason, I think they will raise their rates some

Penny Crosman: (18:54)

All right. Very cool that we have two perspectives here. And I wonder if the Senate and congressional pressure could be a factor, too. I know it's not part of the models that Rohan was talking about, but it is part of the world that they have to live within.

Betty Cowell: (19:14)

You know, Penny, one of the thoughts I had about that too, and one of the reasons they may not be eager to rapidly increase their deposit rates when they are so flush with cash is because there is so much revenue that they've given up this year on the whole overdraft front. And everybody's done it a little differently. So it's cost them different amounts at each of those banks, but all the big banks have changed. I mean, B of A went to $10, some of them eliminated overdraft fees, like Cap One and Citi, and then they've all introduced new products and that's cost the banks in the retail area a lot of money. And not to say that it's not the right thing to do. I personally think we've probably as an industry gone way overboard on that fee income. So I do think there's on the deposit side reasons it might not happen as quickly because they are trying to catch up a little bit from that.

Penny Crosman: (20:11)

Sure. That makes a lot of sense. Well, thank you both for these insights and to our audience, thank you for listening to the American Banker podcast. I produced this episode with audio production by Kellie Malone. Special thanks this week to Betty Cowell and Rohan Shah at Simon-Kucher and Partners. Read us, review us and subscribe to our content at www.americanbanker.com/subscribe. For American Banker, I'm Penny Crosman and thanks for listening.