Shifting Focus With Rising Interest Rates

2022-12-01

After an almost decade long slumber, global interest rates are rising in order to battle the overwhelming increase in inflation. Since the Hungarian National Bank (MNB) is one of the most hawkish reserves globally, implementing a series of rate hikes resulting in a more than 10% increase in a single year, many Hungarian Banks had to rethink their corporate and retail strategy, shifting the emphasis from loans to an almost forgotten part of the product portfolio: towards savings.

Hungarian retail investors were always looking for risk-free products, multi-year long Treasury Bonds and term deposits with one year duration. In the past decade as deposit rates were hovering around 0%, many retail investors turned to real estate investments (even with high leverage, which resulted in a dynamic growth in the Hungarian loans market) while the Hungarian National Bank provided enough liquidity for the Banks, which resulted in not providing any measurable returns in term deposits and in T-Bills (with durations shorter than one year).

After several rate hikes, the Government-issued Treasury Bills started to offer higher rates in 3, 6, 12 months than many of the highest-selling Treasury Bonds which triggered a dynamic flight from long term state-issued Bonds to T-Bills. Beside the rate hikes, the MNB has successfully tightened the available liquidity for the Hungarian Banks, making sure the monetary transmission to be effective which meant increasing loan rates as well, resulting in an almost 90% drop in the volume of the loan disbursement on a quarter-to-quarter basis. The two phenomenons made all the currently available retail savings to flow into the short-term T-Bills, and with the dried-out retail loan market, Banks were faced with the challenge of not being able to get deposits and even disburse loans which would ultimately lead to narrowing profit rates. This was the point where the Hungarian Banks started to rethink their strategy and put a much bigger emphasis on the savings products, which resulted in many new IT developments that were due a long time ago.

Being one of the top IT consulting firms, Advocate Business Consulting’s experts were already working with several Financial Institutions and were able to help our clients in a wide range of savings-related projects:

• Electronic Brokerage Systems: with the growing influx of savings into the T-Bills, many Banks opted to enhance the Bond-trading functionality of their e-Brokerage solutions. Our experts helped in the design and testing phases of those projects.
• Term Deposit Product Catalogs: term deposits (TDs) and even savings accounts were non-existent in the past few years, this is why many Financial Institutions didn’t upgrade its central term deposit product catalogs (there weren’t any term deposits products). With the introduction of new Mobile Banking / Internet Banking solutions, because of deadline issues, many projects opted for not to integrate the new e-channels with the already available TD product catalogs. As the savings market started to come alive again, many Hungarian Banks were found themselves without a marketable term deposit product, so simultaneously with the product developments, the IT and technical developments got a green light as well - with our consultants on board helping with Project Management and Business Analyis.
• Personal Finance and Savings Management Systems: Personal Finance (PF) functionalities became a must-have for Mobile Banking and Internet Banking solutions in the past few years - although, most of the times because of the low interest rates those functionalities were not used by the customers and lacked the ability to provide a savings funnel into savings products (mostly savings account in the form of micro-savings). With rising interests rates and the retail customer’s behaviour shift from spending towards savings, many Financial Institutions started to provide meaningful interest rates for savings accounts. These new saving accounts were marketable enough to start relying on the already available e-Channel functionalities. Advocate experts were part of the testing teams who made sure the related developments will be able to provide a smooth user experience for saving accounts-related user interactions.

As the global economy getting accustomed to higher interest rates, many experts predict that higher interest rates will stay with us in the next two years, Financial Institutions around the world are already turning towards a forgotten class of retail customers: towards the risk-averse ones, who are using term deposits and savings accounts. The Hungarian money market is no exception to this trend - and Advocate consultants are here to help our strategic partners tackle the new challenges of providing savings products.