After three years of near-zero interest rates, the U.S. Federal Reserve is forecasting at least three rate hikes for the year ahead in an attempt to fight inflation, with the first rate hike potentially appearing in March 2022. As a consequence, governments around the world are being told to prepare for the impact of rising rates and a host of industries – from housing, auto and construction – are bracing for associated ripple effects. 

In response to these anticipated rate increases, financial institutions will need to consider when and how to raise rates, including which customer segments to target. Striking a balance between Deposit stability, profitability, compliance, and customer retention is now more important than ever before.

Here are five factors that influence Bank deposit pricing strategy in a rising rate environment:

1. Greater Price Sensitivity, More Choices in Digital Banking World  

In many ways, COVID-19 has forever altered the business of banking. Prior to the pandemic, branch banking remained a strong channel for consumers; shopping around for competitive rates required effort, and switching banks was not as easy as a few clicks of a button. Since the onset of the pandemic, the adoption of online and mobile banking has skyrocketed, with no signs of slowing down or reversing. The branch is no longer a location where banks can offer back-pocket offers to customers who threaten attrition. Furthermore, consumers are far more empowered to compare prices, negotiate offers, move deposits, and change providers easily and quickly. This ability has increased price sensitivity to interest rates as well as spurred rate competition, threatening banks’ previously secure grip on retail deposits to disruptive competitors.  

2. Competition Kicks Up To Match Rising Interest Rates

Banks must offer up products customers truly want in the way that they want them. Banks that fail to account for the broader value of a multi-product customer relationship may find themselves unable to stem the outflow of customers during times of rising rates. Depositors who have had to grit their teeth through years of depressed rates will soon be motivated to shop around. Customers may look to deploy their savings away from banks that have excess deposits sitting in low-interest savings accounts. For those that end up maintaining their accounts, the ease of online rate shopping will undoubtedly spur rate competition.

3. Customer Segmentation in Pricing Matters 

Regional deposit pricing strategies, which were less critical in lower-rate environments, will regain relevance. Banks will need the flexibility to react on a market-by-market basis. They must also be able to deploy differentiated and personalized offers at the point of sale, regardless of channel used. In order to do so, banks must be able to quickly segment customers based on their relationship with the bank, including short-and longer-term transaction behavior across all products and services. Such segmentation offers banks the ability to better determine and respond to price elasticity.

4. Pricing That Responds to Individual Scenarios

Ideally, banks must develop and test field capabilities across various regions, distribution channels and customer groups prior to a rise in interest rates. However, with intense competition and changing consumer expectations, banks must be prepared to respond to a variety of scenarios immediately. Banks that have invested in customer level pricing analytics and delivery capabilities will be well placed to deliver interest rate offers within the bank’s overall deposit pricing framework with ease. Those that have not may struggle to respond quickly and effectively to its customers and the market at large.

5. (Not so) Risky Business Required 

Since the last rate rise, strengthening regulatory requirements require that banks ensure fair and equal outcomes for customers while ensuring alignment with liquidity ratios and policies. For some banks, adhering to compliance requirements may be a significant, added burden, especially when it comes to providing visibility between offered product pricing and what is delivered to customers. Banks that are able to track and analyze customer deposits should deploy a responsive rate management mechanism to meet regulatory requirements for transparency.  

We’ll be keeping a close eye on the impacts of the interest rate hike on financial services providers. Follow us on Twitter and LinkedIn to stay tuned, and don’t forget to sign up for our newsletter at zafin.com