Case Study: Strategic Deposit Pricing

	Impact of Deposit Pricing Changes:
	Strategic repricing by tiers resulted in a 12 basis point increase in Spread Revenue, an increase of $665,000/yr.

The Challenge:
BankAtlantic, is known as Florida’s most convenient bank. The bank prides itself on its long operating hours and customer service commitment. While employing an advanced customer-centric service strategy, BankAtlantic’s deposit pricing practices were not as strategic. Like many other banks of their size, BankAtlantic simply priced deposits by adjusting rate prices according to the latest local market competition offers.

Executive management knew that a more scientific approach to pricing could yield significant improvements in bottom-line margin and deposit gathering efficiency as well as improve the overall pricing governance.

“Large banks utilize teams of high priced analysts with statistical degrees to build their pricing models, but community banks generally do not” says Doug Freeman, executive vice president and chief corporate banking officer. “We needed a system that could leverage BankAtlantic’s own talent pool and systems by providing the market and competitive data to price more scientifically.”

The Opportunity:
BankAtlantic and Novantas worked jointly to define the potential benefit of pricing models for community banks. According to Sherief Meleis, Novantas Managing Director, “Even in this low interest rate environment, deposit rates can vary from as much as 50 percent above the local market to 80 percent below the local market. Managing those differences can be worth a lot of money. Banks are trying to eke out every basis point they can out of the deposit book.”

Typically, there is a range of lower deposit rates that is not competitive. As one goes up the pricing curve, he reaches an area of “customer indifference” where changes in price will not lead to changes in deposit levels, Meleis says. If a bank is paying near the top of this range of indifference, it can reduce deposit rates, cutting costs without any loss in customers. “Understanding this area of indifference across a book of deposits is a gold mine,” Meleis says. “There is substantial money being left on the table with banks that are unable to identify these areas of indifference.”

From its research, Novantas estimated that a portfolio of $4 billion in deposits, similar to the levels of BankAtlantic at that time, could yield as much as $1.5 to $4.5 million in annual improvements in net interest margin. Given the pressures on bank fees, this type of potential net interest margin improvement is significant and important to maintain profitability.

The Solution:
BankAtlantic teamed up with Novantas Solutions, a division of Novantas which develops and delivers technology solutions to national, regional, community banks and credit unions.

“We wanted a solution to help us understand customer/account demand by market; build elasticity-based demand curves and product segments; measure responsiveness of customer demand to price changes,” Freeman says. “We needed a tool that would deliver easy to understand charts, cut down on wasted data gathering time and improve the effectiveness of our team.”

BankAtlantic implemented the firm’s PriceTek solution to provide analytical support and help them make better pricing decisions. Novantas delivered PriceTek through a hosted solution, which met the bank’s need for ease of use and cost of implementation. Although, the PriceTek ASP solution is new for community and regional banks, it has a 10 year proven track record helping some of the nation’s largest banks improve their deposit pricing.

Working with Novantas, the bank defined the necessary monthly data flows including balances, rate history and other operational aspects of the deposit portfolio as well as the competitive rate activity.

Results and Benefits:
“Using PriceTek, BankAtlantic was able to classify different markets and products as growth (‘cheap’ and elastic) or harvest (‘expensive’ and inelastic) opportunities,” says Laurie Guary, BankAtlantic vice president and manager of financial analytics. The bank then created three pricing regions across central and southern Florida.

“In the inelastic markets, where spread changes wouldn’t lead to loss of deposits, rates were cut, with the spread reallocated to other markets with more elastic demand in order to grow volume,” Guary says.

In one of the first major regional pricing roll-outs, BankAtlantic changed rates according to the PriceTek’s recommendations, including 10 to 20 basis point reductions in certain deposit tiers in selected markets, according to Guary. This ultimately resulted in a 4 percent increase in deposit balances and a 12 basis point improvement in spread revenue on product.

Though regional managers were reluctant at first to change their traditional way of setting rates, the evidence in the PriceTek deposit pricing system quickly convinced them to adopt the new deposit pricing strategy.

Additionally, by automating pricing, BankAtlantic saved on resources and improved the process of managing deposits in the pricing committee. More specifically, according to Guary:

• Reporting package preparation time was cut from four hours to one, enabling the bank to reallocate staff.
• Pricing committee strategy meetings were reduced from weekly to monthly, eliminating three hours of “down” time every month for three executive vice presidents, seven senior vice presidents and three vice presidents.
• Automated data feeds reduced the information gathering by 70 percent, allowing the team to focus on analytics and strategy instead of data gathering.