One effective way that banks optimise their pricing strategy is through the strategic management of interest rates on CASA and special rates. — The Jakarta Post
IN the competitive landscape of the banking industry, pricing strategy plays a crucial role in attracting and retaining customers while ensuring profitability.
One effective way that banks optimise their pricing strategy is through the strategic management of interest rates on current account savings accounts (CASA) and special rates.
By understanding the significance of these interest rates and how they can be leveraged to achieve business goals, banks can develop a competitive edge in the market.
CASA accounts are a key component of a bank’s deposit base, representing the funds that customers hold in the bank for their day-to-day transactions. These accounts typically offer lower interest rates compared to other deposit products such as fixed deposits or savings accounts.
However, by increasing the interest rates on CASA accounts, banks can attract more customers to deposit their funds in these accounts, thereby expanding the customer base and increasing the overall deposits held by the bank.
Special rates, on the other hand, refer to promotional interest rates offered by banks to attract new customers or encourage existing customers to deposit more funds.
These rates are often higher than the standard rates and are usually applicable for a limited time. By strategically promoting special rates on specific deposit products or services, banks can generate interest and excitement among customers, leading to increased deposits and improved customer retention.
One of the primary ways banks optimise their pricing strategy through increasing CASA interest rates and special rates is by aligning them with market trends and economic conditions.
By closely monitoring the interest rate movements set by the central bank and competitors, banks can adjust their own rates to remain competitive and attractive to customers.
Currently, the special rate interest in rupiah has increased, approaching treasury securities and surpassing loan interest rates. The increase in the special rate interest has also exceeded its long-term trend, especially in state-owned banks and regional development banks.
Most banks have started increasing pricing for CASA, particularly current accounts. Furthermore, the rise in expensive rupiah funding, which has exceeded rupiah loan interest rates and is approaching the cost of issuing treasury securities, indicates that the utilisation of expensive funds will be temporary and not sustainable for banks.
Moving forward, the continued potential increase in state-owned banks’ deposit interest rates will drive up the deposit interest rates of regional development banks and national private commercial banks, which will then be transmitted to foreign bank branches in the second round.
However, the room for increasing special rate interest is becoming more limited, especially for regional development banks and state-owned banks. To maintain profitability, banks are implementing operational efficiencies and are only partially passing through third-party funding interest rates and credit interest rates.
In the future, the increase in credit interest rates will remain limited as banks continue efforts to keep credit flowing, while the expected decline in government securities yields is anticipated.
The projected decline in the Federal Reserve (Fed) fund rate in the second half of 2024 is also affecting banks’ expectations of the end of the high-for-longer period.
Indonesian banks are already adjusting their credit interest rates downward because of the decreasing Fed fund rate projection. Based on the Integrated Bank Financial Report, credit interest rate spreads have decreased from a range of 6.50% to 7.54% in 2020 to 4.46% to 6.67% in 2024 across all bank groups.
Moreover, banks can differentiate their pricing strategies by offering personalised interest rates based on customer segments and relationship value. By analysing the banking behaviours and preferences of different customer segments, banks can tailor their interest rates to meet the specific needs and expectations of each segment.
For high-value customers, banks may offer preferential interest rates to incentivise larger deposits and deeper relationships, while for new customers, special promotional rates can be introduced to encourage account opening and engagement.
In addition to attracting deposits, optimising pricing strategy through increasing CASA interest rates and special rates can also assist banks in managing liquidity and funding costs.
By offering competitive rates on CASA accounts, banks can reduce their reliance on expensive sources of funding such as interbank loans or debt securities. This helps stabilise the cost of funds and improve the overall profitability of the bank.
To maintain profitability, banks need to continue operational efficiencies, as indicated by the decreasing cost-to-income ratio, which has dropped from around 50% in 2020 to approximately 46% in 2024.
On the other hand, although the banking net interest margin remains high, it has been trending downward across almost all bank groups, especially the regional development banks and state-owned banks.
According to the data from the Integrated Bank Financial Report, the net interest margins of regional development banks and state-owned banks, respectively, have successively decreased from around 5.29% and 5.15% at the end of 2023 to 4.66% and 4.88% at the beginning of 2024.
Currently, the banking sector’s funding structure is returning to pre-pandemic levels, with loans and issuance of securities on the rise.
Based on pricing, both rupiah and foreign currency loans as well as securities have higher pricing compared to third-party funds. Despite this, banks still prefer this type of funding to strengthen the liquidity structure, especially in the long term.
According to the Integrated Bank Financial Report, by early 2024, rupiah and foreign currency loans had increased by up to 5.85%, while rupiah-denominated securities had reached 6.94%.
Furthermore, the effective communication and promotion of increased CASA interest rates and special rates are essential for maximising their impact on customer acquisition and retention.
Banks can leverage various marketing channels such as digital platforms, social media and traditional advertising to reach out to existing and potential customers with attractive offers and promotions.
Clear and transparent communication of the benefits and terms of these special rates can help build trust and credibility with customers, leading to higher engagement and conversions.
In conclusion, banks can achieve a competitive advantage and drive business growth by optimising their pricing strategies through increasing CASA interest rates and special rates.
By aligning these rates with market trends, focusing on customer segmentation and effectively communicating the benefits to customers, banks can attract deposits, improve profitability and strengthen customer relationships.
Embracing a dynamic and strategic approach to pricing management is essential for banks to thrive in today’s competitive banking landscape. — The Jakarta Post/ANN
Darmo Wicaksono is a senior economist at the International Department of Bank Indonesia. The views expressed here are the writer’s own.
