"Taking the Bounce out of the Elasticity of Demand"

For Banks and Credit Unions, the post-recession environment has been a time of retrenchment and reinvention.  Those institutions still standing after the collapse of our economy have dusted themselves off and surveyed the new landscape of the industry, an industry that was rocked to its very core.  The insolvency and failure of the big banks and investment firms is still a vivid memory in the minds of the public.  More importantly, the public’s confidence in the American financial system has been jaded for an entire generation.  The job of winning back depositor loyalty is especially challenging for Community Banks and Credit Unions as we emerge from the shadow cast from the Big Banks’ demise.  So, how do we do it?

In order to capture market share, we first have to define what segment of the market we want to develop.  Seniors have some wealth, but want higher rates and more costly means of deposit.  Millennials place a premium on technology and are generally less concerned with price so long as they receive the convenience they desire.  In the middle of the spectrum, we find a broad assortment of potential depositors who have assets, want convenience, demand personal service, and are price-sensitive.  This middle portion of the bell curve has the potential to be the most profitable, but is also the most difficult to figure out.

Generally speaking, the pricing for financial products is relatively elastic.  In other words, a slight change in pricing can significantly impact demand.  A primary contributor to this elasticity is the abundance of available alternative options in the market.  Step outside your institution and the odds are you can see a competitor along the street from where you stand.  If not, you probably have half a dozen within a few miles.  We all know that banks and credit unions have to fight tooth-and-nail to keep current depositors, while continuously trying to attract new ones.  How do we find that balance, that “sweet spot?”

At Ceto and Associates, we use a market-based approach to pricing.  Our approach is to survey the market and group products by type.  In the world of deposit products, you generally have recurring primary themes; Free Checking, Interest-Bearing Checking, and Premium or Rewards Checking are typical.  If your liquidity is short and you need to grow deposits to fund loan demand, you are going to want to be closer to the low-cost-leader end of the spectrum.  If you are swimming in cash, you have the ability to set your pricing a bit higher, but you must provide features commensurate with that pricing.  Depositors will accept slight increases to fees if they feel they are receiving the product features and service they want.  However, most consumers will react to significant changes in pricing without a similar enhancement of service.  When re-pricing services, you must consider your competitive position relative to the market.

Pricing is sensitive.  Change too much and you will have attrition.  Change too little (or not at all) and your profitability will suffer.  In order to find the “sweet spot,” assess the market place and realign yourself within the gaps of your competitive positioning.  Incremental increases will translate to higher returns and take the elasticity of demand out of the picture.