The tides are slowly beginning to turn back toward profitability, however, and maintaining that momentum is key. As banks seek to hold onto existing customers and attract new ones by inching up deposit rates, it is important to do so strategically. THE STAKES Failing to offer competitive deposit rates could further erode existing deposit bases as customers seeking higher rates route their money to other institutions. On the other hand, banks engaging in deposit rate increases need to be careful with their approach. Many of the industry’s largest banks have been offering higher rates solely to new customers and even limiting the geographic region that new account holders must reside in. This “new money only” approach can increase the risk that existing customers will feel slighted and may spur them to move their business elsewhere. Another way that banks have dealt with deposit rate competition is by taking a passive approach, hoping that the number of customers who depart in search of higher rates is minimal. In some cases, banks wait to offer higher rates to customers in search of greener pastures only when those clients make noise about switching banks. While it would be troublesome enough for banks if it were only the largest depositors who are motivated enough to switch banks, smaller depositors are equally focused on deposit rates. FLIPPING THE NARRATIVE As the saying goes, information is power. Establishing optimal deposit pricing requires not only knowing what deposit rates your peers are offering but having a firm grasp on how rate increases will impact your overall customer relationship profitability. Simply increasing deposit rates to match those of competitors is a risky move that can result in a compressed net interest margin (NIM) as deposits become more expensive, and holding onto existing customers INDEPENDENT REPORT | 23
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