Breakthrough deposit rate pricing: From blunt force to surgical precision

Deposit account pricing is often a hit-or-miss endeavor for banks. Learn how KPMG helped a large U.S. bank client develop a customer-focused, analytics-based approach to setting deposit rates.

Confronted with more data, regulation, competition, cost-pressure and technological change than perhaps any other time in history, organizations are under pressure to grow, optimize key operational areas and become more efficient, effective and agile. At KPMG, we have helped many of the world’s leading companies tackle these challenges and drive business value across the enterprise. This post is one of a multi-part series that highlights our leaders’ views from KPMG’s client success stories.

With federal rates rising, albeit gradually, interest in the interest paid by retail deposit accounts is high—among both bankers and customers.

The art and science of deposit rate pricing is well known among banking executives. There’s the art of balancing the regulatory environment, the moves and non-moves of the competition, and how it all impacts customers.

The ultimate effect on customer behavior is where the science comes in. One large U.S. bank recently came to us with a challenge to help them improve their existing process for setting deposit rates—a primary source of profitability for consumer and business retail banks. The bank quickly recognized that an analytics-based approach was in order.

Optimize deposit pricing to optimize customer relationships

Deposit account pricing is often a hit-or-miss endeavor for many banks. Without benefit of a strategy grounded in advanced analytics the exercise is akin to a surgeon operating with a large, blunt object. The results are often messy and always unpredictable. Our U.S. banking and financial services advanced analytics professionals worked to develop a tailored, data-driven solution that equipped the bank with a customer-centric, precision instrument.

The goal was to provide the bank—front office and back—with a clear picture of its customer base, both from an absolute perspective in the moment, but also in terms of how those customers could be expected to evolve and how they might respond under different macroeconomic conditions. Considering the profitability implications deposits represent in the retail banking space, getting this right was a major priority for the bank.

We started with the premise that pricing deposits by product, customer balance or competitor dynamics is inherently flawed and without predictive viability. Rather, our search for a pricing optimization model focuses on a suite of behavioral measures:

  • Share of wallet
  • Rate sensitivity
  • Customer value (current and future)
  • Attrition risk

At a high level, these predictive analytics, paired with a spectrum of pricing scenarios, yield an optimized deposit pricing model that informs and simplifies the efforts of the bank’s customer-facing team. Not only can they now have productive product-related conversations that are relevant for the present, but also for the future as the customer’s financial objectives change.

This is real breakthrough in customer-focused pricing optimization, with rapid—and real—results. In fact, shortly after roll-out, the bank saw a significant reduction in net interest expense, as well as a downtick in balance attrition and upticks in share of customer wallet and overall balance. There’s a lot of customer data out there in the banking world, much of it dark. We can help turn on the light and make it meaningful.

Learn more about how KPMG helps banking clients transform their customer relationships with next generation deposit pricing solutions.

For more on how KPMG can help you use targeted data to change the game visit our analytics page.