Over the past few months we’ve complained a lot about how banking has become just another commodity, how financial institutions do a horrible job of differentiating themselves, and how consumers care about their bank or credit union about as much as they care about a can of peas. All this deriding of banking isn’t really fair, because we are living in unusually boring times:
Low interest rates and a poor economy mean that banks have lost their most important differentiator, price, and also that banks have been more timid both in lending and in deposit account marketing. If you’re not feeling very risk tolerant, and you’re not earning much on your loans anyway, chances are you’re not going to waste much time trying to create a new product or offer a special promotion. If you’re already overcapitalized, you’re probably not going to try to launch a bring-the-house-down checking account campaign to acquire new customers or members. Your best option is probably just to sit tight, and play monopoly to pass the time. Yawn.
But just because banking is boring now, doesn’t mean it’s going to be boring forever, because…
What goes down, must come up.
Since Janet Yellen was nominated as Ben Bernanke’s successor in October, there has been a flurry of speculation about where she’ll steer the Federal Reserve once she takes office. Some people say she’s a dove, and others say she’s not, but regardless of her personal inclinations, one thing is certain: there is only one way that interest rates can go, and that’s up.
Can you even remember what rising interest rates feel like? (Disclaimer: I can’t. I’m a child of the recession, through and through.) Common wisdom says that rising interest rates will be bad, because they will choke demand for loans from businesses and consumers, and make the aforementioned overcapitalization crisis worse. But if Yellen plays it right, confidence will already be on the rise when the FOMC turns contractionary, and rising interest rates will moderate enthusiasm, not stifle it.
The way I see it, rising interest rates could be a beautiful thing for banking, because…
When interest rates rise, consumers switch.
Consumers are constantly bombarded with financial institution advertisements (I loved Navy FCU’s World Series spots) but as everyone in banking knows, it’s really, really, hard to get consumers to switch, especially when you can only offer a few palsy basis points for their effort. But when the tide starts rising, consumer’s will start seeing rates that significantly higher than what they’re earning, or less than what they’re paying, in their Facebook sidebar. Suddenly essentially the same offer looks a whole lot better: rising rates give it bite.
Don’t get me wrong, interest rates aren’t the be-all end-all of customer acquisition strategy. Life events, like moving, graduating, or starting a new job, are almost certainly most important. Customer service, and, increasingly, the availability of digital services, like mobile banking and remote deposit capture, play an important role, as do intangible things like trust and, say, how the consumer feels about the colors in your logo. But interest rates are certainly going to make the game more interesting.
When consumers start to switch, bankers are going to knock over that game of monopoly and start playing for real. Like in any line of business, times of rising demand are exciting. Rates will matter, and so will all of the other factors: customer service, mobile technologies, brand reputation, etc. The competition will be stiff, and if you want to have any chance of winning you’re going to need to…
Interest rates probably won’t rise for at least a little while (because economic indicators are still lagging and Yellen is, mainly, a dove) so you have time to make a solid plan about what you’re going to do when the regime change does arrive. What products are you going to promote with new rates first? Where are you going to make your offer; online, through social media, or through traditional channels? And, most importantly, how are you going to get interested consumers to actually open an account, or apply for a loan?
One of the most important contributors to Andera’s early success and the rise of online account opening was the high demand for new ways to acquire new customers in the last period of rising interest rates from 2004 to 2007. Our first clients were savvy institutions who were looking outside of the box for ways to take advantage of their environment. 10 years later, online account opening is no longer a niche solution, and many consumers have begun to expect it. However, it is a significant project, so if you want to be able to open accounts or offer loan applications online in 2015, in time for a rate hike, you need to start planning now.
Overall, I’m optimistic. Rising interest rates really could be the best thing to happen to banking in years. At the very least, they’ll make it a little more interesting.
Melanie is a member of the first class of Venture for America, a two-year fellowship that seeks to revitalize American cities through entrepreneurship by matching recent college graduates with start-ups.You can reach her at email@example.com or on twitter @mfriedri.