At the end of January 2018, the Federal Reserve Bank announced that it would not be changing the interest rate from its current range of 1.25% – 1.5%. This move marked Federal Reserve Chair Janet Yellen’s last meeting before handing the reigns over to the new Fed chief, Jerome Powell.
The decision during January’s meeting was surprising to some analysts, expecting the Fed to increase rates. It is becoming clear that Yellen’s outlook on the American economy and Powell’s outlook are quite different.
Powell has made it clear that he personally sees the economy as strengthening over the past few months, and that the new tax-cutting law has allowed fiscal policy to become “more stimulative.” All of this adds up to the Federal Reserve aiming to increase interest rates to a target of 2 percent by the end of 2018.
Marketers, this brings up new challenges as our rate environment changes.
- How do we market deposits, again?! Many banks and credit unions have been routinely marketing low loan rates for so long that it has become second nature. With a lack of competition and consumer interest in hoarding deposits, there has been no need to aggressively target deposits with marketing. This is going to change.
- Changing consumer perception of what a “good” rate is. We have been operating in a “historically low” rate environment for so long that consumers have come to expect mortgage rates between 3-4%, auto loan rates around 2%, and so on. With a changing rate environment, consumers are likely to experience a period of “rate whiplash” where they have a hard time accepting that perfect credit earns them 4% on an auto loan.
As the Fed interest rates rise, and subsequently, our own, it’s important that our customers don’t feel as though they are being gouged by community financial institutions. While many will welcome the higher Certificate, Money Market and Savings account rates, there will not transfer to the loan side. And we still need to sell loans to survive!
This is where one marketing practice will become particularly useful: segmentation.
- Price Sensitivity Segmentation. This is not a new concept, but one that warrants repeating with the changing rate environment. Segmenting your customers based on how sensitive they are to price (read: rate versus payment) can help soften the blow of rising loan rates and improve the sales success rate.
- Loyalty Segmentation. Knowing how loyal your customers are to your particular institution can help build a pricing strategy that caters to those more likely to continue to do business with their community financial institution. Start with a mix of active accounts and longevity as a customer.
- Market Segmentation. If your bank or credit union’s footprint spans over a large geographic area, it makes sense to segment your messaging and pricing based on the market. More profitable markets mean that fewer adjustments are necessary when considering pricing loans.
How does your community financial institution anticipate tackling the upcoming changes of increased rates? Do you have a strategy and marketing plan in place to begin executing? Whatever your approach, anticipating consumer reactions and marketing toward them will lead to continued loan volume.