A long time ago, in a financial services environment far, far away, people once received measurable interest on their savings accounts — and often, even on their checking accounts.
That environment offered consumers incentive to save, and gave financial institutions ample liquidity to fund loans, a pathway to improve margins, and a tool to leverage loyalty.
Happy days might not yet be here again, but the Federal Open Market Committee’s decision to hike the Federal funds rate range by 25 basis points in December — the first rate hike since 2006 — indicates a desire to return to historic interest rate norms, at a pace to be determined by the state of the economy and the political climate.
While that initial rate increase is probably too minor to significantly alter the playing field, it’s time to review, refine and ready your plan to thrive in a rising rate environment. And one key element of that plan involves managing deposits through comprehensive data analysis.
Advanced analytics software enables credit unions to segment deposits by categories such as dividend type, branch, rate, product name, open date, average monthly balance, and maturity date.
Using this segmented deposit data, credit unions can:
- Understand the full customer cycle by combining deposit data with loans and applications;
- Calculate the cost of funds;
- Anticipate and strategize for the varied maturity dates of certificate accounts;
- View deposits granularly;
- Analyze deposit concentrations;
- Monitor deposit trends.
To position your credit union for success in a rising rate environment, it’s helpful to reflect upon what elements of deposit management strategy caused financial institutions to win or lose in the most recent climate of this type, the period immediately preceding the Great Recession.
According to Novantas, seven elements stand out as most influential to outcomes:
- Deposit pricing strategies –– or whether the financial institution had any strategy;
- Products/services that allowed the financial institution to prevail without having a clear pricing advantage;
- Caliber of analytics that informed the strategy;
- Discipline and willpower to stick with its approach;
- Ability to identify and fence off truly core customers;
- Exception governance; and
- Ability to forecast loan balances (funding needs).
Use this information to set funds transfer pricing (FTP) assumptions, which influence member targeting, pricing, and product design.
Industry analysts predict rising rates will prompts consumers to re-evaluate their banking relationships, creating opportunities to sway competitors’ customers while underscoring the importance of retaining your current members. Regarding the former, develop strategies that avoid rate-jumpers while attracting what Novantas deems “situationally elastic” consumers– those who shop for price but prefer stability. Over time, this group can bring two to six times the value of rate-jumpers.
Ultimately, credit unions should aspire to be nimble. Continually test your strategies and adjust to leverage strengths and shore up weaknesses. Develop pathways to obtain contingency funding. Construct products that align with market pressures and member needs.
And don’t fall into a rut when it comes to analytics. Closely study changes in market conditions, keep close watch on member behavior trends, and evolve your data reports and analytical approach accordingly.