• Aligning, Designing and Pricing Deposit Products to Meet Objectives

Though it’s a common cause for hesitation, financial institutions need not fear fees as they price their deposit products with the goal of growing revenue and profitability. While they must consider customer’s sensitivity to price changes, they should not be consumed by this concern. Contrary to popular belief, our professional experience has consistently shown that customers are generally tolerant of changes in deposit product pricing, and often aren’t aware of incremental pricing increases.

Many financial institutions assume their customers will be very sensitive to changes in fees and interest rates for deposit products. In reality, their customers prove to be far less reactive. The reality of this resilience allows for more flexibility to price products, in relation to the current market climate, in a manner that will help reach the organization’s goals and increase revenue and profitability without risking widespread customer attrition.

Through working with hundreds of community-based financial institutions, we have found that few customers actually leave their bank as a result of changes to deposit product pricing. For instance, checking account customers tend to be very loyal as long as a tangible value proposition exists. The key components of the proposition usually include convenience of service delivery (such as branch and ATM locations, as well as digital delivery capabilities), quality of service, and building relationships with customer-facing personnel.

Customers are generally willing to balance certain product features when considering the continuation of a financial institution relationship. For instance, when shopping for a CD, customers will not only consider the interest rates offered but may be willing to accept a lower rate to get the term that best meets their needs. For savings products, many customers will accept a lower annual percentage yield as long as the product meets other desired factors, such as linking to a transaction account for overdraft protection.

As financial institutions routinely evaluate deposit product pricing, they must balance their customers’ sensitivity to price changes while ensuring first and foremost they align with the goals and objectives of the organization. All deposit product pricing decisions should be part of an overall strategy aimed at achieving a specific set of objectives. The most frequently cited objectives include increasing core funding and balances, while growing revenue and product profitability, and also attracting new relationships.

When designing pricing structures to promote the goal of improving average balances and stabilizing core funding, it is important to incentivize growing relationships. Packaging multiple products and services into an overall relationship product will appeal to a more affluent demographic, who should see value in consolidating their financial relationships.

One of the most popular strategies for building relationships is considering balances from multiple products when determining fee assessment and interest rates paid. Caution must be exercised when it comes to advertising “special rates”. When you advertise a “special rate” for one product, other products may become more interest rate sensitive. Relationship pricing is an important tactic in growing both balances and accounts.
Pricing should also be structured to drive customer acquisition and differentiate products that attract new market segments. For example, attracting the attention of the millennial generation is critical as they are already the largest demographic in the current workforce. Pricing products that increase the use of digital delivery channels - channels that millennial customers are accustomed to using - will be key in growing this significant segment. A pricing structure that allows customers to avoid fees through the use of digital payments, mobile deposits, and electronic document delivery naturally complements how these customers prefer to transact.

As financial institutions learn to let go of their hesitations and better manage these trade-offs, they will find that their customers will be less sensitive to pricing changes and pricing strategies than they initially fear, while they craft a product menu that better aligns with the organization’s goals.

Harry Brammell

Hometown: New Orleans, Louisiana
Alma Mater: University of Mississippi
Enjoys spending time with family, Following the Saints and Pelicans, Working out, and the occasional golf outing.