Six Reality Checks Banks Face With Today’s Historic Rate Increase

What will today’s historic Federal Reserve interest rate increase mean for America’s banks? Banking experts from the fintech company Nomis Solutions are on hand to provide insight into the impact of a rising rate climate on American retail banks and the new risks that have emerged over the past nine years. Nomis works with 10 of the top 30 banks in North America to manage $1 trillion in transactions annually.

“Over the next days and weeks, more than 6,000 US banks will react to today’s interest rate increase,” said Frank Rohde, CEO of Nomis Solutions. “As much as these banks will closely watch competitive rate moves, deposit balance trends, and loan originations in their portfolios, the majority are unprepared for a rising rate environment and a wave of new risks, especially understanding customer behavior as it relates to price. ‘This could be the first rising rate environment where banks go out of business,’ as one of our customers put it, as a bank’s more sophisticated competitors take share.”

Brian Buckingham, Vice President of US deposits at Nomis and a former insider with Union Bank, Wells Fargo, and Washington Mutual shares six realities that banks are facing in this new landscape of rising rates:

  • Consumers are now digitally empowered to comparison shop, move deposits, and change loan/mortgage providers with significantly less effort. This trend has increased price sensitivity to interest rates.
  • Banks have lost brand equity and loyalty through the credit crunch, also increasing the price sensitivity of customers. As interest rates go up, low-loyalty price shoppers will switch banks.
  • Balances will move in search of higher yields at a faster rate. Because of the extended low rate environment, banks have ‘excess’ deposits sitting in zero-interest checking or low-interest savings accounts that customers will look to deploy elsewhere.
  • Liquidity Coverage Regulations have increased the value of retail deposits.
  • New competitors are entering the market. Direct banks and fintech startups in search of returns will become more aggressive in courting bank customers.
  • The majority of the top banks in the US are implementing sophisticated price optimization technology to navigate the next interest rate cycle. To compete effectively, banks will need to invest in better pricing analytics and technology.

These trends point to a vastly more competitive playing field where the most prepared reap the most benefit.