The rise and rise of fixed rate bonds
For almost 10 years, fixed rate bonds have taken a back seat. In fact, there are people in their 20s and 30s who have probably never considered fixed rate bonds as a banking product. And with super low interest rates the norm, why would they?
At present, interest rates are consistently rising, having been raised by Bank of England five times since December 2021. Therefore, fixed rate bonds are back on the radar, in a new digital incarnation.
To explore the rebirth of the fixed rate bond, we tapped the collective wisdom of Abhish Saha, Sandstone’s Executive General Manager, Digital Banking, along with his colleagues Michelle Yu, Head of Products and Services and Ranjan Kumar, Director of Product Management, Digital Banking.
So much ‘lazy money’ sitting in bank accounts
In the last five years, much of Sandstone Technology’s work with banks has been in the lending space. But as our foremost economists presage more interest rate hikes, we’re likely to see the brakes pulled on the lending boom to some extent, says Saha.
As talk of a possible recession continues, the consumer mindset is likely to switch from borrowing to protecting cash or income, in anticipation of hard economic times. Those cash-rich savers whose house-deposits now have nowhere to go, will “need to park that money somewhere,” Yu says.
Not to forget the customers who still have a buffer squirrelled away from the height of the pandemic, and continue to shore up household savings. They’ve been stashing money in their everyday accounts for lack of anywhere else to put it. According to Kumar, they’re likely to start moving it into savings accounts and fixed rate bonds sooner rather than later.
At the other end of the spectrum, there are the cautious retirees living off their cash, or in some cases, using it as part of an investment strategy. They won’t be playing fast and loose with their cash.
In fact, in the Bear market that we’re seeing now, investors generally will start turning away from the riskier asset classes towards risk-free assets, diversifying through products like fixed rate bonds, bonus savers and high-interest accounts generally. With interest rates expected to keep increasing until the end of 2023, there is an opportunity to lock in a higher rate for a longer period.
The rise of the fixed rate bond
Fixed rate bonds are the perfect product for people who want a risk-free return, but don’t want to lock up their money for too long. Essentially a contract between bank and customer, fixed rate bonds typically impose a fee or penalty against the interest earned if the customer breaks the term. When the term runs out, the customer either renews it or the money goes into a current account.
A bonus saver account is a savings account that rewards the saver with bonus interest when they meet the account conditions.
Sandstone has started seeing more demand from our clients for products like these that help customers “stash their cash”. A lot of clients are getting pressure from their boards to improve their digital banking channels, including optimising how fixed rate bonds are established and renewed. It’s a recurring theme: How can we make opening bank accounts easier and faster?
Boards are also aware that customers are shifting away from banking in branch and from dealing with call centres and looking to interact with their bank digitally.
How far have we come, digitally?
Many financial institutions around the world, including the UK, Australia and New Zealand, are further ahead in their digital journey than other sectors, with substantial investments made in their digital transformation over the last decade. That progress has been accelerated in recent years with the launch of neo banks and digital banks in the space. These digitally-advanced players have increased competition and forced established banks to improve the experience for their customers.
Yet there are still some institutions, whose websites only have a very basic digital offering. They’re still relying heavily on customers going into the branch or using call centres.
There is still a lack of understanding of the opportunity here, Saha says. “As interest rates go up, there will be more competition for deposits, and the loans and the net-interest margin element will get tighter and more competitive,” he says.
Banks will need to focus on improving cost of service – doing more with the same amount of money – and there’s only one way to do that: moving more processes onto digital, lower cost-to-serve channels.
Onboarding in a digital age
It used to be that you marketed fixed rate bonds on your website, or through other advertising channels; and application was through a physical form, Kumar says. Today there are multiple digital options for reaching customers, from offers and notifications pushed through mobile banking, to banners at the point where customers log into online banking.
Originating savings and fixed term bonds is exponentially faster through online or mobile banking. Customers may be able to apply directly by responding to a notification.
During the term, customers can use dashboards to check their term and product details. Apps become even more critical during difficult economic times, as people are more likely to be checking on every pound saved.
Some banks are also using digital channels to handle requests, complaints and inquiries around savings products. This is an effective alternative to call centres, which are often a frustrating customer experience and represent a higher cost to serve.
When the customer’s term runs out
In the past a customer received a letter in the mail when it was time to renew their fixed rate bonds. They would have to call the bank and renew; or if they didn’t read the letter, their money would automatically go back into their everyday account – unless there was an auto renewal attached to their contract. In that case, they would need to cancel the auto-renewal by the required date, or they would be stuck with break fees. All of these are potentially negative customer experiences.
Today, a customer could instead receive a notification through a digital channel. They could log on and find their investment instruction, see what other products are available, make decisions about whether they want to switch products, what the new term might be, and modify the amount.
Pushing renewals into the digital realm allows more direct communication with the customer, particularly when it’s through a mobile app. Unlike a lot of other apps that lie mostly dormant, bank apps today are critical infrastructure on a user’s phone, providing an essential service, helping people look after their investments and their loans.
If the app makes noise, customers tend to look at it. Instant messaging, notifications and SMS cut through the noise of email, allowing a bank to enter its customer’s day-to-day life. But beware: if you are going to disrupt customers in this way, your messaging and your offer need to be highly targeted.
Term deposit as acquisition tool
Using a mobile app as a way to renew fixed rate bonds term deposits is a far better customer experience, and ultimately, a powerful retention tool.
Because it’s a minimum-effort product to onboard, a deposit is also an acquisition tool.
Unlike a home loan, which requires complicated mortgage documents and incurs a variety of fees and charges, the bond is a two-minute exercise to turn on.
If interest rates do head towards the 6% range, that’s when fixed rate bonds and bonus saver accounts will become the show ponies for acquiring new customers. It’s a long-term strategy, and banks should start the work now. Those that wait might find their competition has already taken their clients.
The future of fixed rate bonds
Until recently, consumers have been used to a return of somewhere between 0 and 1% interest on their bank accounts, regardless of who they bank with. But that’s about to change. With every fixed rate bonds renewal, there will be rate chasers. Competition will be fierce. Banks will do battle over who can give the best rates.
On the positive side, there’s a real opportunity for banks to get creative with fixed rate bonds and bonus saver products, tailoring them for different life stages and socio/demographics. Saha cites Christmas saver accounts as an example of what banks have done in the past – offering a fixed rate bonds that helps families save money for Christmas, adding money to the account through the year and drawing down a month before Christmas, to start all over again in the new year.
Also, for those customers who are part of the younger “subscription generation”, valuing choice, flexibility and services on demand, creating different versions of the bonus saver product could be an option.
There’s scope for better personalisation as well. As Yu points out, if a bank has the data and knows the life stage of their customer, and it can see they have a large sum of “lazy money” in their account, the bank can be more targeted in the offers it presents to them, including fixed term bonds.
Bearing in mind that because a chunk of the market has never used a fixed term bonds product before, there will need to be an education piece around what these products are and how they work. Providing that education in app and online is the ideal.
How Sandstone Technology fits into that future
Sandstone Technology provides the systems and digital experiences to enable a full range of fixed term bonds and bonus saver accounts. Our BankFast and Apply solutions already support fixed term bond origination, as well as savings accounts and debit products, integrated with a seamless online banking experience.
Using Sandstone’s mobile app or internet banking solution, a financial institution can set maturity instructions or reinvestment instructions to be sent to the customer when a product is reaching maturity. The mobile app can also enable push notifications; in fact, we already have a client in New Zealand using this feature for fixed term bonds.
Customers can set a preference to receive notifications for fixed term bonds – or not – in their mobile app. They can self-serve, or raise complaints through a secure messaging capability. Sandstone also provides bank staff with the tools to manage these communications and respond digitally.
Further into the future, banks will be able to design their own experiences around digital self-service using simple tools inhouse. Ultimately, banks will look at solutions not just as a cost centre, but a way for clients to service customers digitally, reducing the need for expensive call centres and third party services, and saving millions of pounds in the process.