As detailed in this month’s issue of American Banker, as reported by Wolfstreet, banks aren’t offering higher rates to all of their customers.

Instead, they’re using big data to segment their customers. American Banker explained:

Over the past two quarters, at least two of the nation’s biggest banks – Wells Fargo and Bank of America – have tinkered with the way they set deposit rates, carving up a handful of key states into smaller markets…

Some banks are getting even more sophisticated:

Other banks, meanwhile, are exploring new ways to use data and analytics to adjust rates for lucrative customer segments. For instance, some are offering promotions to affluent millennials who may be tempted to open higher-yielding accounts at online banks, observers said.

According to American Banker, “the moves illustrate how the industry’s biggest players are becoming more precise and tech-savvy on setting deposit rates.”

For banks, the rationale for segmenting depositors, existing and new, is simple: there are literally billions upon billions of dollars of profit at stake.

Put simply, banks now want to grow deposits while minimizing the margins they have to sacrifice to do so.

Since the Great Recession, when the US Federal Reserve cut interest rates to near 0%, the vast majority of Americans have been paid next to nothing – and sometimes nothing – for their deposits.

Inviting controversy?

But with interest rates rising and the Federal Reserve signaling that it will continue to hike rates in earnest despite recent volatility in the stock market, the days of banks being able to get away with this are numbered.

Thanks to the technology and the Big Data revolution, large banks, in theory, should be more capable than ever of engaging in what is, effectively, personalized dynamic pricing for deposits. In fact, some might even be able to create a segment of one.

Dynamic pricing, of course, has become increasingly common in retail and will probably be ubiquitous at some point. That, however, doesn’t mean it isn’t controversial and the potential source of backlash.

While it’s widely known among consumers that those who have more money tend to get better deals and service from financial institutions, for large banks, some of which are still not seen favorably thanks to ongoing scandals, the application of Big Data and sophisticated algorithms to offer personalized rates could also produce scorn.

After all, we’re not talking about charging a customer $5 more for a product based on the customer’s location or the time of day. We’re talking about how much an individual is paid to keep his or her money deposited at a particular financial institution. 

If a bank depositor learns that a friend is getting a much more attractive interest rate on a savings account or certificate of deposit based on factors such as those associated with affluence, it might not go over too well in today’s environment.

The importance of transparency

For this reason, it’s important for banks to consider just how clever they get with their segmentation and dynamic interest rate determinations.

While in theory extreme optimization could offer a financial boon, from a brand and customer experience perspective, banks should balance this with the virtues of transparency. Those that help existing and prospective depositors better understand how the interest rates they’re being offered on their deposits have been set are probably more likely to gain the trust of consumers and less likely to come under fire for their practices.

And if competition for deposits really heats up, a really bold bank might even consider flipping the script and adopting a Priceline-style model that allows existing and prospective customers to name their own rate. Using its data and technology, including AI/machine learning, such a bank could conceivably determine whether the proposed rate was acceptable and, if necessary, counter with the rate it could offer.

Although such a radical approach would certainly present challenges, it plays into the growing consumer demand for control and transparency and even if banks can’t go this far, as they seek deposits, they would be wise to think more like depositors and less like banks.

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