“Why pay more than necessary?” asks Mike Schoeffler, founder of Profitdesk Software. The Piscataway, NJ-based company uses sophisticated models in Microsoft-based SmartRate deposit pricing software to find banks' most profitable rates. Schoeffler believes a typical bank will see 10 basis points of improvement – a $100 billion bank could add $100 million to earnings.
Schoeffler said he is talking to both banks with 12 branches and banks that span the continent.
The trick to profitable deposit growth is reducing rates for customers or account types that don't respond to rate, said Schoeffler. The interest savings can be reinvested in higher rates for customers that care more, or in better service and branching.
"Knowledge about customer behavior comes from deep statistical analysis of the bank's core deposit system. When carefully combined with information from today's competitive environment, banks can project into the future and choose better rates," he said.
An asset liability manager of a mid-Atlantic regional bank that is rolling out Profitdesk to try to save basis points on its deposits says attracting new deposits without cannibalizing existing low-cost business is a challenge. The executive asked not to be named because the implementation is still underway.
To test the software, the bank will have to set an interest rate it thinks will attract new deposits and then advertise it. But will the new business result from the attractive rate, or from the additional advertising?
“We will do promotions. Then it takes a month or two to see what we have accomplished, and that is hard to sort out because we don’t have the best reporting,” he said.
Whenever the bank does offer a deposit promotion, it has to confront customers who take money out of their existing accounts and redeposit it in the new account.
“I am now going over the history to see what rates are and try to find correlations to determine if we can expect a 10 percent increase in CD deposits if we raise rates by a certain percent,” he added. “Mike is trying to get the whole concept of pricing and discipline to a new level.”
Older customers who live on the interest from their CDs are the most sensitive to interest rate increases, he added. But other customers seem to ignore shifts in the interest the bank pays.
“We have customers who still have a lot of money in passbooks under 1 percent. I don’t want to wake them up to liquid savings that pays over 3,” he explained. “We have never raised rates above 5 percent. When the Fed dropped, we dropped and when the Fed raised interest rates, we stayed where we were. Some customers will wake up, or their kids will inherit the account and seek a higher rate of return. We realize that, but at the same time we don’t want to jeopardize the money sitting there at 75 basis points.”
Offering targeted rates is a large part of the magic. But targeting has to align with the real world. For example, the best approach for regional pricing, said Schoeffler, is to price by state – customers can understand offering one rate in New York and another in New Jersey, or North Carolina. But if a bank tries intra-state rates – one in New York City and another upstate – it invites confusion. Commuters don't understand why they get one rate in the city and another at home in their New York suburb. Customers abhor the fine print in newspaper ads. Branch managers don't like seeing better rates for customers banking down the road.
“If you split pricing by areas that don't make sense to people you wind up with hassles for the customer and within the bank structure itself,” Schoeffler said. Similar real-world issues intrude on other segmentations. These complications should be considered in using traditional pricing strategies like rate exceptions or off-term CD specials.
Price is often not the customer's top concern, said Schoeffler.
“Most people sign up for an account and that's it. From that point forward, they are told the rate they will get,” he explained. “They compare rates when they are looking to open a new account or get a new CD, when they might look in the Sunday ads.”
For most bank customers, the key concerns are convenience of branches and good service, he added.
“When it comes to deposit pricing, if I do my job right, no one on the front end will notice anything happening. Banks become a lot more profitable and customers get the rates they really want – not the highest rate. If the customer doesn't care about rates, they care about something else, such as more branches, or seven-day service. And the bank making great money on deposit accounts will provide that something else,” he said.
Banks that focus on gathering deposits enjoy a higher price-to-book ratio, although most bankers don't make the connection because bank executives tend to come from the loan side of the bank.
“Banks are often run by ex-loan officers, and they assume the money is coming in from the loan side. They have biases, but they are no dummies. When we talk, the conversation turns. They have always looked at interest as a cost center but now see a powerful profit center instead. The engine of bank profit is coming from the deposit side. There is a huge amount of margin between interest paid to the customer and the riskless reinvestment rate – that difference is where banks harvest profits.”
Ultimately, the problem may not be one of focus but of taking control, Schoeffler said. Top bank officers on the deposit pricing committee typically meet a few times per month. “Over and over again, when I ask how pricing is decided, I get the same response: 'We wet a finger and stick it up in the air.' This is the oddest area of the bank – these executives are powerful enough to handle any problem, but have not had enough information to optimize rates and gather up the profits,” he said.
www.profitdesk.com