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Lessons learned from working with negative interest rates

Negative interest rates are in play across the Eurozone, and many central banks and national banks have had to learn how to adapt. Financial Services Faculty Commissioning Editor Brian Cantwell covers some practical advice.

As of February, the Bank of England has asked banks to prepare for the possibility of negative interest rates in the UK.   

There has been a lot of focus in the press on the effect of the policy on savers, retail consumer products and business banking.   

But while bankers are busily updating legacy systems and algorithms to factor in negative rates, there are also a host of unknowns in terms of practice and management for banks dealing with this potential change.   

A European example 

Across the Eurozone negative rates have been a reality since 2014.  

The costs of holding deposits have been absorbed by banks in that time. Recently some banks have introduced liquidity fees, calculated as an average on deposits, for large business banking clients, designed to mitigate the costs of holding deposits in a negative rates environment. 

“The response from clients has been neutral,” said one senior banker ICAEW talked to about the realities of introducing these charges. 

“We’ve had a handful of depositors who have called in with a noisy reaction, but they realise that there is no other way once we explain the realities to them.” 

This might lead to a change in behaviour such as capital loan repayment in the medium term, said the source, but it is believed that there will be a marginal reaction overall.  

“Other banks in our area have experienced an increase in deposits, much like we have, so it hasn’t impacted client behaviour.” 

Practical advice 

There have been some learning points along the way that may affect bank strategies towards a negative rates environment. Here are some pointers our source outlined while rolling out changes across the book.   

  1. Education and communication to the front-line banking services to explain why the bank needs to charge. Fundamentally the thinking must be clear from the top, but it is those in the contact centres and at the counter who will be the mouthpiece of change. Make sure there is training for those managing customer enquiries to adequately explain the need for liquidity fees or charges. This will minimize the number of complaints, improve customer satisfaction and reduce workload for senior management in the longer term.  
  2. Start with business accounts and clients. Business banking relationships tend to be more sophisticated and larger scale, with charges already a part of the relationship. A liquidity fee will work on the account so long as the value is explained to the customer. Once the bank and its business banking lines are comfortable with the idea then future strategies can be made for retail and HNW clients. 
  3. Transparency. Changes need to be managed in a clear way with plenty of notice. Letters as a form of communication announcing fee changes and explaining their impact were sent out in advance and helped reduce potential negative feedback.  
  4. Make the most of the opportunities. Eventually retail savers will also face higher costs for their banking, whether this is via fees, or a monthly charge or cost. Free banking may become unsustainable. The changes may offer commercial opportunities to the bank for those with larger deposits. Take the opportunity to ensure that customers have access to the most appropriate products.  
  5. Operational updates can be painful. It is never easy to make operational changes but it is important that systematic change is handled accurately. It is better that system updates with legacy systems are managed slowly and accurately than rushed with poor customer outcomes. It may be that some leadership is required in the market and banks may wait for larger players to ‘make the first move’. Make sure that your strategy meetings are flexible around potential change are ready to reflect the results from early adoption of negative-rate policies. 
  6. Educate the market extensively. Speak to journalists and advertise in the press fully about any changes. Perceptions are important and rather that ‘savers being punished’ it should be explained what the benefits are or potential pitfalls are without change. Give plenty of lead-in time for changes to product lines. 
  7. Negative rate banking speeds up cheaper banking like digital-only accounts. The banker ICAEW spoke to said low-cost digital banking platforms and products had helped to offset the cost of negative rates before the new charges came in on 1 February, but that also they were an effective tool in attracting younger customers who were more used to the paid model of banking and as such were easier to explain negative interest rate costs. Make sure that your digital suite of products are ready to scale.  
  8. The pandemic is speeding up the conversation with retail customers on negative interest rates. As the pandemic continues, and branches remain closed in the most part, customers are becoming more used to online banking and to the changes in the economy. This links to the value as described in the digital banking platforms, is part of changes to tech and society that require charges, and customers will appreciate the value of trust in accessing their cash even if it is on a paid basis.