Last week (HERE) we looked at how deposit account tiering is used, some of the objectives that banks might employ and the effectiveness of tiering in total. As discussed last week, many banks tier without objective, without data, and without supportive marketing thus rendering the methodology worthless and possibly hurtful. We challenged several commonly held assumptions and presented data that would indicate that tiering accounts may not be all that it is cracked up to be. Today, we want to explore what other methodologies we might employ in order to meet the objectives of better marketing and managing account balances.
The Correlation of Balance, Rate, and Geography
It turns out, that if you correlate account balances with rate, the relationship is weak at best. What other factors might be predictors of deposit behavior that banks can leverage? Geography is one that can make a difference. Banks already take advantage of this behavior by posting different rates for different zip codes or areas. Whereas balances explain about 12% of rate-sensitive behavior, geography can explain as much as 15%. As you might expect, the rise of the Internet has dramatically reduced sensitivity between geographies so we see more and more areas reacting the same way. Over the last ten years, banks have reduced the differences in deposit rates between different areas and now with the rise of mobile, we expect geographical pricing largely to go away over the next ten years.
Tier By Age of Account?
There are still other influences at work. Next to account balances and geography, the age of the account has the next largest influence. As you might expect, the older the account, the less rate/balance sensitive the account is. This brings up the question of whether banks should be tiering by account age? There is strong evidence to suggest that if you can market an account that is less than a year old and offers a higher rate if they increase their balances by 10%, you would be more successful than just tiering regardless of age.
Tier By Number of Products or Customer Segment
The number of products also has about a 3% influence on rate/balance deposit behavior. The more products a customer uses, the less sensitive they become and the more open they are to building balances. Thus offering rate, waived fees or a special gift to open up another account may be more effective than tiering.
It also turns out that professionals in general are less rate sensitive than non-professionals. With the exception of medical doctors, lawyers, accountants and other professionals tend to be less rate/balance sensitive. Here it makes sense not to employ tiers (except for doctors) for many professions, as marketing will be ineffective and only serve to teach the account to be more rate sensitive.
Of course, the best answer to all of this is for banks to move to dynamic pricing. Banks already have enough data to optimize rate/balance down to the individual account level. Every customer, be it individual or business, faces their own balance/rate sensitivity curve. Understanding each customer’s behavior and then offering a special incentive that may not be rate (and probably isn’t) will be commonplace among community banks in the next ten years. Some banks are already doing this and achieving about 30% better performance as judged by the value of accounts. Deposit balances are larger, interest sensitivity is lower and lifetime value is greater.
Our advice is to not put too much effort in tiering – particularly not now when rates are low, but maybe not ever. In general, tiering increases complexity which jumps operational cost and causes confusion for both the customer and employee. Take a look and consider doing away with your tiers entirely unless you are committed to marketing and you have some evidence that the tiers are helping.
Your deposit data is readily available from your core system. If you are willing to analyze the data, plus run some experiments, then you may find excellent reasons to tier. If done the right way, tiering can serve to increase balances, drive down your cost of funds and best of all, decrease interest rate sensitivity.
If you are looking for the fastest way to build franchise value in your bank, investing resources in your data and deposit marketing without using rate is one of the best investments a bank can make. This is an excellent time to do this – all it takes is a little work and a little creativity to unlock double digit value.