The Imperative for the Rising Rate Environment

Relationship
Pricing and
Bundling: The
Imperative for the
Rising Rate
Environment
Proprietary and Confidential to Novantas, Inc.
Agenda
1. The Challenge of Rising Rates
2. The Relationship Imperative
3. Relationship Pricing and Bundling
4. Operational Implications
Page 1
Proprietary and Confidential to Novantas, Inc.
When rates rise, they tend to rise quicker
than what the market is indicating today
Monthly Federal Funds Effective Rate
12
10
Percent
8
????
6
4
2
0
Page 2
Source: Federal Reserve (historical data)
Proprietary and Confidential to Novantas, Inc.
Industry costs of interest bearing deposits moved
at 46% of Fed Funds Rate in the last rising rate
cycle
Nominal COD Increases: 2004-06 Rising Rate Cycle
5.0%
Labels indicate %
Responsiveness to
Fed Funds Target
Rate over 20042006 Cycle
Nominal Rate Increase
4.5%
4.0%
3.5%
3.0%
57%
2.5%
46%
2.0%
34%
1.5%
1.0%
0.5%
0.0%
Fed Funds
Page 3
Int-Bearing Dep
Savings+MMDA
Source: St. Louis Fed Reserve, FDIC, Novantas Analysis
Proprietary and Confidential to Novantas, Inc.
CDs
Deposits have surged and moved strongly away
from time deposits – the surge back will be costly
US Banking Industry Deposit Mix: 2004Q2–2014Q2
$12
Industry deposit balances ($T)
Total 2008Q3–2014Q2 CAGR: 6.2%
$10
$8
Product
CAGRs:
‘08Q3–’14Q2
Checking
12.1%
Savings/MMDA
10.8%
Time
deposits
-8.4%
$6
$4
$2
$0
2004Q2 2005Q2 2006Q2 2007Q2 2008Q2 2009Q2 2010Q2 2011Q2 2012Q2 2013Q2 2014Q2
Page 4
Source: FDIC Deposit Data; Novantas Analysis
Note: Domestic deposits only. Checking is defined as non-interest bearing, Savings/MMDA is defined as Interest
Bearing less Time Deposits
Proprietary and Confidential to Novantas, Inc.
There are a number of market factors that
lead to response rate expectations
Potential Impacts
Lower
Higher
 Low Loan to Deposit
Ratios and Slow Loan
Growth
 Increased Customer OnLine Shopping and
Purchase
 Industry Profit Pressures  Increased Value of Core
Deposits
 MMF Less Competitive
 Increased Customer
Elasticity
Page 5
 Mix Shift away from CDs
Proprietary and Confidential to Novantas, Inc.
In this environment, relationship deposits
are critical
Relationship
Non-Relationship
‘Average’
Behavioral Life
3 Years
1-2 Years
Customer
Lifetime Value
$5,000-10,000
$1,000
Average
Price Elasticity
Page 6
Proprietary and Confidential to Novantas, Inc.
Question:
How do you see the next Rising Rate
Environment and the role of Relationship
Deposits?
Page 7
Proprietary and Confidential to Novantas, Inc.
Five Relationship Opportunities
1. Selling “Cash 2. Activation and 3. Consolidating
4. Crossengagement
Management”
deposit wallet selling loans
Related
Cash
Mgmt
Products
Activation
of
Services
RateBased
Deposits
Secured
Loans
Investments
5. Selling cash management or
investments on the back of mortgage
Page 8
Proprietary and Confidential to Novantas, Inc.
Question:
How do you see Relationship Deposits?
What are the Key Opportunities you’ve
been targeting?
Page 9
Proprietary and Confidential to Novantas, Inc.
Different Flavors :
Product-Level
Customer-Level
Product Structures that Provide
Implicit Value Exchanges
Targeted Customer-Level Offers
Pricing
WHO
is it for?
Bundling
Pricing
How targeted is it (all customers or just some)?
WHAT
is the Customer
What do customers give versus get?
Value
Exchange?
HOW
is it delivered?
How do you communicate and fulfill the product/price?
Page 10
Proprietary and Confidential to Novantas, Inc.
Bundling
Question:
What have you Done in Relationship
Pricing?
Page 11
Proprietary and Confidential to Novantas, Inc.
Customer-level Pricing
Most valuable
sources of
new money
New $
Source of
short term
funding
Existing $
Retention
Demand
Demand
Existing $
Retention
Constant Shoppers
New $
Price
Price
Convenience Oriented
Demand
New Money Elasticity
Low
High
Situationally Elastic
Existing $
Retention
New $
Core
customers to
the bank
Used for

New account targeting

‘Back Book’ Management

Discretion price management
Price
Existing Money Elasticity
Page 12
Low
High
Proprietary and Confidential to Novantas, Inc.
12
Customer-level Bundling – Disney Example
Typical Family: 2 Adults, 2 Children (ages 5 and 7)
Itinerary: 7 Nights Disney Hotel + 4 Theme Parks + 2 Water Parks + Dining + Entertainment
Premium Package –
Hotel
$8,629
$2,058
Park Tickets
$1,616
Dining
-- 3 Meals Daily, Snack
-- 2 Character Dinings
15% Savings
with
Premium
Package
À La Carte Realistic – $6,503
33% Higher
Expenditure
with
Premium
Package
$1,460
$ 800
$2,260
Entertainment
-- Water Sports
Unlimited
-- 9 Special Disney Tours Unlimited
-- Cirque du Soleil + Golf Unlimited
Unlimited
Services (“Babysitting”)
À La Carte Replica – $9,884
Unlimited
Page 13
Proprietary and Confidential to Novantas, Inc.
Required Capabilities
Analytics
Relationship Product
and Pricing
Product
Development
• Customer lifetime value
• Customer elasticity (per currency)
• Structured product innovation
process
• Advanced customer research
techniques
• Technology to deliver customerImplementa- level offers with ‘enforcement’
• Alignment with sales incentives
tion
• Test and learn approaches
Page 14
Proprietary and Confidential to Novantas, Inc.
Question:
What have been ‘lessons learned’ in
implementing Relationship Pricing?
Page 15
Proprietary and Confidential to Novantas, Inc.
Planning for 2015
Prediction for 2015
Takeaways
• Rates will rise (50 bp in
3Q-4Q)
• Initial responses will be
muted
• There will be active
experimentation and
innovation
• Define ‘relationship’
and understand the
value
• Conduct tests in pricing
and product
• Start with duct tape
and wires
Page 16
Proprietary and Confidential to Novantas, Inc.
www.novantas.com
Page 17
Proprietary and Confidential to Novantas, Inc.

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