Could Your Deposit Pricing Strategies Today Impact Your Brand Image in the Long Term?
June 28, 2023
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6 minute read – Most financial institutions have, for many decades, utilized a strategy of lagging deposit rate increases when market rates rise. However, with the increased competition for deposits at a time when it has never been easier to move funds, this strategy could potentially prove costly in the long run. When determining your pricing strategy today, it is important to consider the effect on your brand image and how that might impact your business in the future.
Decision-makers may want to consider a page out of Goldilocks’ approach with the three bears. When trying to make decisions, consideration was given to options that were “too hard, too soft, and just right.” Applying that same approach to deposit pricing in today’s environment might lead down a path with cost of funds perhaps being drastically higher, stable, or moderately higher. The near-term financial implications of changing current deposit rates can be simulated in ALM models relatively easily. However, it is imperative to consider the longer-term implications (Note that modeling the longer-term financial implications is critical, but some ALM models do not capture customer behavior well when modeling the longer-term implications. See our recent blog posts on this topic here).
It is important to dig deeper beyond the near-term financial ALM implications of any potential rate moves. This includes understanding how your deposit pricing strategy potentially impacts your brand image and value proposition. For many financial institutions, their value proposition has been heavily tilted towards offering more value on the loan side of the balance sheet. This was part of a protracted effort to attract loans during times when it seemed relatively easy to attract deposits which tended to stick around with little effort. With rates up significantly, back to the highest we have seen in 15 years, the tables have turned making it much more difficult to attract and retain deposits. This is particularly true as higher rate offers are abundant, and technology has reduced the friction and time required to move funds elsewhere.
Going back to the Goldilocks analogy, keeping deposit rates low perhaps requires the least amount of effort and may help to keep your current cost of funds low, but could also lead to driving a portion of your customers away in search of higher rates elsewhere. Provided the portion of those leaving is relatively low, this may be a financially attractive path. However, it is also important to think about the potential longer-term impact on your brand image, if your customers think of your organization as having below average deposit rates. On the other end of the spectrum, if you elect to increase non-maturity deposit rates rapidly and significantly in response to market rate movements, it might do wonders for your brand image, but will drive your cost of funds higher and hurt your earnings more quickly.
Much like Goldilocks experienced, the challenge is to find that “just right” path. This requires offering a solid deposit value proposition to your customers that helps to retain them while managing your cost of funds in a manner that maintains sustainable earnings levels. This may require a trial-and-error approach to test different deposit strategies to find that “just right” path.
Most financial institutions haven’t had to dedicate much strategic thinking to the subject of deposit pricing and its impact on their brand image in over a decade. It’s time to reinvigorate those skills. As any good marketing executive will tell you, brand image is an extremely important factor in the business world. A strong, favorable brand image can create a resilient client base that chooses to conduct business with you, even when better rates might be available elsewhere. There are, however, limits to the potential impact that a favorable brand image will provide. An equally important consideration is that if that brand image is tarnished, it can be very difficult to recover from. The process of restoring a damaged brand image can be extremely costly and time-consuming.
Problem: Your brand image could suffer because of a poor deposit pricing strategy. According to Harvard Business Review, there are many factors that influence brand building/maintaining, and some important aspects include: functional benefits, experiential qualities, regard, and value proposition. Some of these factors may take an adverse hit if the approach to offered rate levels is well below member (customer) expectations.
Ask yourself:
- How might our value proposition to different segments of our key target markets be impacted by our deposit pricing approach?
- If we elect to maintain very low deposit rate levels, how could that influence the “regard” aspect of our brand image?
- If the functional benefits of our deposit products fall materially below market expectations (e.g., low rates), are the experiential qualities of our financial institution strong enough to sustain the strength of our brand image?
- How significantly might our approach to deposit pricing impact current and future liquidity?
- How significantly could our cost of funds be influenced in the short and long term?
This blog only covers some of the initial considerations that financial institutions are facing in today’s environment. Please refer to our blogs and podcasts on decay rates, deposit migration, and liquidity for more ideas.
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