Between 2022 and 2023, the U.S. witnessed record-high interest rates to combat rising inflation. This was followed by a drastic 50-basis point reduction in interest rates in recent months as the Federal Reserve attempted to address the possibility of economic slowdown, particularly in labor markets. This volatility in the interest rate environment is a serious challenge for banks as lower rates will inevitably impact deposits, a mainstay of banking income over the last few years. As the Fed signals further cuts, banks worldwide must reassess their revenue models and develop innovative strategies to drive new deposits growth and profitability in an increasingly unpredictable economic landscape. Banks across the globe, facing similar rate fluctuations and economic uncertainties, can adopt these strategies to sustain profitability.
5 Ways in Which Banks Can Boost Net New Deposits
Deposits have always been a key driver of banking revenues. They are a low-cost source of funds that banks use for loans, for meeting regulatory requirements, and for operational needs. Falling interest rates have an immediate impact on net interest margins (NIM) even though borrowing increases because there is an immediate fall in the difference between the cost of funds and interest charged. While banks focus on strengthening other business lines, they must also revamp their approach to attracting the right customers for net new deposits – getting new customers or existing customers beyond their ongoing holdings. This is crucial for them to increase liquidity, fund loans, and enhance their balance sheet strength, particularly in a low-interest rate environment.
What can banks do to improve net new deposits at this juncture? Here are some ideas:
- Understand the Customer and Leverage Relationship-Based Sales Strategies:
To improve net new deposits, banks must start with a deep understanding of their customers’ needs, spending, and saving patterns. By analyzing customer behavior, banks can tailor products, services, bundles, and rewards that meet specific needs at various life stages. This personalized approach must extend beyond just product offerings to relationship-based sales strategies. Relationship managers, equipped with insights from customer data, can engage more effectively, offering personalized pricing, incentives, and solutions that provide value. With their expertise, these managers can identify cash-rich customer segments—whether demographical, geographical, or industrial—and offer tailored deposit options and investment solutions to capture and grow net new deposits. - Incentivize Net New Deposits:
Banks can offer higher interest rates on net new deposits to attract both existing and new customers. For example, they can offer 50 basis points more for new deposits after a specific date. This way the incentivized rates will be applicable to only new deposits and not existing ones. They can take this a step further by deploying advanced analytics to understand customers’ price sensitivity and tailor the incentives accordingly. By doing this, they can boost revenues by 3-12 percent.1 - Improve Visibility into Deposits:
Corporate banking customers want better visibility into their liquidity to ensure better cash forecasting.2 And banks can only benefit from having real-time information on their deposits, inflows, and outflows. A modernized account analysis function can provide both parties with the visibility into deposits and liquidity that they need. As competition for net new deposits increases, this can prove to be a key differentiator for banks, attracting new customers, and motivating existing ones to increase their deposits in the bank. - Targeted and Localized Campaigns:
Banks can tailor specific deposit campaigns for specific regions. For example, if they are looking at improving market shares in a certain region, they can offer higher rates only for customers from that area. Focused marketing campaigns coupled with tailor-made offers and pricing can drive deposit growth in those regions. For example, a leading North American bank runs location-specific promotions offering extra basis points on deposits for customers in certain regions to focus on growing business in those areas. This strategy enables the bank to attract fresh deposits without increasing interest rates on existing deposits. This helps to optimize deposit growth without compromising on profitability. - Conditional and/ or Timebound Offers:
Banks can offer special pricing based on certain conditions or qualifiers. For example, they can offer higher rates for a fixed number of months provided customers maintain a certain balance in their deposit accounts or use a credit card for a pre-determined number of transactions, or even carry out a certain number of transactions. These qualifiers ensure that the bank benefits from increased engagement while offering competitive rates. Banks can also consider running time-bound offers and promotions to drive net new deposits. Offering higher interest rates for a limited time or providing additional perks for deposits made within a specific period can encourage immediate action from customers.
Several banks are already running qualifier programs to attract new deposits. One North American bank requires customers to maintain a minimum monthly balance, deposit a certain amount every month, and spend a minimum amount on their credit cards. If the customer meets all these conditions over a pre-determined period, then they are rewarded with incentives like iPads. This strategy ensures customer engagement and deposit growth while incentivizing regular banking activities.
Technology Transformation Amidst Disruption
Banks must be able to manage the special pricing, rates, bundles, and offers effectively to run a profitable net new deposit growth strategy. For example, a bank can offer higher interest rates against some customer commitments like minimum deposits, or credit card usage, or even for a specified period to bring in additional deposits. But if they cannot accurately track whether commitments are being met or end the offers after the stipulated time is over, then they run the risk of revenue leakage and losses. They need a robust technology platform that can not only help them devise innovative, personalized deposit growth strategies, but also monitor, and track them.
Fortunately, banks don’t have to embark on a long-drawn, expensive, and risky transformation of their banking cores to roll out innovative net new deposit strategies. They can just work with an experienced partner to deploy a powerful, cloud-native, and microservices-based revenue management platform that can be deployed on top of various back-office systems including core systems. This platform can integrate seamlessly with the existing systems to roll out, manage, and track innovative deposit strategies.
Interest rates are likely to continue to evolve rapidly, as the economy continues to be impacted by developments in the global socio-political and economic environment. Customer-centric and technology-backed innovation is crucial as banks strive to improve net new deposits to ensure continuing revenue growth and profitability.