Preparing for an Increase in Interest Rates
Despite a relatively weak global economy, the U.S. has experienced slow and somewhat steady economic improvements over the past several months. As such, a bevy of market reports suggest that the Fed will increase rates later this month or in December - the first time since December 2015. The impending decision adds stress to the markets as investors and financial services firms speculate about the central bank’s decision.
A rate hike, even a relatively small one, will have some implications for financial service providers including banks, investment firms, credit card companies, mortgage lenders, auto lenders, and insurance firms. Although the impact may not be devastating, some potential effects could alter the way financial services firms conduct business and compete. Here are a few insights to prepare financial services providers for an increase in interest rates.
Ensure Consumers Are Aware of and Prepared for Rate Hikes
Within minutes of the December 2015 rate hike, Wells Fargo, JPMorgan Chase, Citibank and U.S. Bancorp announced increases in their prime rate, which serves as the basis for consumer loans such as mortgages and auto loans. As soon as rates are increased again, financial services firms will likely make a similar move that impacts millions of consumers. The effects will probably be felt first by homeowners with adjustable-rate mortgages, consumers with HELOC’s, and those with variable-rate loans.
While the Fed’s moves will not have a significant impact on most consumers, many of those affected will not be pleased with the consequences. Firms need to bolster communications and ensure clients are aware of and prepared for even the slightest changes to their accounts to avoid customer disdain and a potential strain on relationships. Targeted and proactive communications with the right consumer segments are critical.
Volatility in Financial Markets
Rising interest rates bring uncertainty and risk to the market. This fact has become increasingly evident over the past few weeks as members of the Federal Reserve share their sentiments on whether or not a rate hike is looming in the near future. Generally, an increase in rates leads to positive market gains over time. However, the impending election and other world events may cause additional tumult that is hard to predict. As a result, advisory-oriented financial services firms may benefit from engaging clients to ensure their readiness for unpredictable market conditions.
Volatility acts as a reminder to many that a well-conceived plan must align risk tolerance with goals. Advice-oriented financial services firms should proactively pursue investors who lack a financial plan to ensure they are armed with the right information, products, and services to reduce or eliminate exposure to risk.
Traditional Banks Will Continue to Lose Market Share to Online Banks
As a result of prolonged low interest rates, most banks have had to sit on massive amounts of deposits experiencing lower-than-desired margins. Traditional brick-and-mortar banks will not pass higher rates on deposits and, instead, boost loan rates to recover lost revenue. However, online and direct banks offering high-yield savings products will probably introduce more competitive Savings and CD rates than their traditional brick-and-mortar peers. Over the past few years, online and direct banks have grown by leaps and bounds as a result of their higher interest rates and better than average overall service. Moreover, these non-traditional banks are earning primary status from consumers more often. Firms like Ally Bank, GS Bank, Discover USAA, and other smaller direct banks will most certainly benefit from rising interest rates that they will share with their customers.
Traditional banks need to be particularly cautious with millennial and affluent audiences as these are the target market for most direct banks. In addition to winning new business on higher rates, direct banks have retained these customers with better service quality than their brick-and-mortar peers. An emphasis on retention will be key for all banks to ensure customers stay put, especially among the most coveted Millennial and Affluent cohorts.
The Bottom Line
Keeping pace with market fluctuations is critical. Financial services firms need to engage clients more often to demonstrate how they are differentiated from their peers. Specifically, they’ll need to:
- Proactively provide solutions that support a client’s future needs
- Supply customers with information to make more informed decisions about products and services
- Focus on the main segments of client populations that have the highest likelihood of being impacted by higher interest rates
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