Good News for Banks and Customers, It’s No Longer a Zero-Sum Game!

Good News for Banks and Customers, It’s No Longer a Zero-Sum Game!

Welcome to 2017, folks! The year is half over and it’s been full of, well, uncertainty. Whether you’re questioning what will come from our current political climate or the fate of foreign relations, one thing you can count on is the Fed raising rates. For the first time in the post Great Recession era, the economy has proven it can withstand the effects of reversing the Quantitative Easing (QE) practices that began back in November of 2008.

Ignoring some of the mechanics of how it works, here is a simple explanation of what is most likely to come:

Since 2008, the Fed has purchased trillions of dollars of assets (mortgage backed securities, government bonds, etc.) from investors to keep the economy out of a freefall. While achieving the Fed’s goal of maintaining low interest rates, investors have supplied banks with massive deposits estimated at $2.5 trillion by JP Morgan.  Banks were able to lend that extra cash to businesses and consumers at lower rates to stimulate the economy back to growth. Nearly a decade later, it is time to reverse QE, and the Federal Reserve will stop replacing those securities as they mature and will likely begin selling assets back to the open market. The increase in supply will drive down the price of the securities, thus increasing market interest rates. As rates go up, banks could begin to see attractive and profitable options in lending and other asset purchases. However, with investors purchasing those assets vs. the Fed, it is estimated that deposit outflow from banks of $1.5 trillion will occur over the next few years. (Side note- It is worth noting that we are just at the beginning of the QE reversal process, and currently short term rates are rising while long term rates have remained historically low; this means short term challenge for banks facing net interest margin compression.)

What does it all mean for banks? The competition for retail deposits is about to intensify, with mid-market banks leading the way. While historically mid-market banks have been successful in commercial lending given local knowledge and personal attention to local businesses, their consumer deposit gathering capabilities, particularly with the younger generation, have been lagging vs. the large banks which lead in digital customer experience and brand.  As the CEO of a regional mid-market bank told me: “my daughter refuses to bank with us; she is 100% digital.”

Mid-market banks are responding in several ways. Firstly, a number of new digital online savings accounts have recently launched or are in the works adding to an already crowded space. For example, Union Bank launched, under a separate brand, PurePointTM Financial as its online savings offering. This trend is good for customers as newcomers tend to compete on price offering increasingly higher interest rates, with current leading rates at 1.25%-1.3% on liquid savings accounts (as of June 2017). Banks are likely to start looking at their value propositions beyond rate as competition intensifies, again, a good development for customers.

Secondly, mid-market banks are increasing focus on digital technologies in conjunction with their retail branch network. From online account opening to enhancing transaction and servicing digital capabilities, in-branch and remote. Mid-market banks are quickly looking to enhance these capabilities to address both customer acquisition and growth of existing relationships.

Lastly, mid-market banks are understanding that customer experience based on real customer insights is the key to any customer strategy, it is not just about implementing digital tools and satisfying a ‘checklist’ of digital capabilities.

The end of QE is producing an interesting dynamic of increasing profitable opportunities for banks, and improved propositions for retail customers. We like this win-win situation!


Phone: 312-602-4000
222 W. Adams
Chicago, IL 60606
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