The Bank of England recently requested British banks to take all the necessary steps needed to prepare their systems for negative interest rates. We have experienced similar approaches taken by central banks in other countries to boost circulation of money in the economy. It could be a significant step taken by the Bank of England as an effort to stimulate the COVID-stricken economy. To that effect, the Bank of England has given banks and building societies in the United Kingdom six months to prepare for the introduction of negative interest rates, an interest that may be effective for the first time in 327 years.
Negative Interest Rate – What does it mean?
In simple terms, Negative Interest rate would mean saving money would be costlier and borrowing would be cheaper. With low borrowing cost, the lending would be expected to grow and currency circulation in the economy will also grow as a result and the same with demand for goods too. The Bank of England (BoE) is considering taking this measure as cautionary action and expects to use them only if the economic outlook worsens as COVID-related restrictions and health concerns continue to weigh heavily, or if the recovery of programs that drive the GDP does not reach pre-COVID levels in the near term.
This policy by the BoE is a move to avoid deep recession with a risk of deflation, as was witnessed during the 2007-09 financial crisis. Countries like Sweden, Japan, Denmark, and Switzerland are all using negative interest rates, as is the European Central Bank, which sets the interest rates for 19 states in the Euro region.
The central bank is asking high-street lenders to be ready for negative interest rates if the country faces fresh downturns and the Monetary Policy Committee (MPC) needs to deploy them. However, the bank did mention that this was not a sign that the MPC would cut borrowing costs below zero.
The Bank of England has kept the base rate at 0.1% since 19th March 2020. Though it may not be significant considering low base rate in the UK, banks do earn interests on the reserve kept with the central bank. However, if the interest rate is to go below zero, BoE will start charging banks to keep reserve with them. In the past, when the base rate for EUR became negative in Europe, it led banks to pass on these additional charges to a selective client base to ease off the pressure.
The Challenges for the Banks
Banks usually make money by borrowing money at one rate and then lending it at a higher rate. This money is mainly in customer deposits, including high-street customers, long-term bonds, etc. With a negative interest rate if banks start to charge customers for keeping money with the bank, it can potentially disrupt this model as this might lead customers to think twice before leaving their money in the bank, especially if they have to pay for this benefit. Historically it is observed that individual depositors are not charged. So, why would this be a problem for banks anyway?
For every deposit left with a bank, the bank maintains a proportion of that deposit with the central bank. With a negative interest rate, this reserve starts costing the bank.
How Banks can Assuage this Burden
One way for banks to reduce the burden of negative interest rates is to charge clients with large deposits beyond the operational needs selectively. It is also important to note that most of the systems used in banks and building societies can’t capture negative interest rates.
Keeping all the negative interest rates impacts under consideration, banks have to ensure that their savers are not penalized for saving money while borrows are rewarded with more money for borrowing it.
With all the variables at play here, banks have to ramp up their revenue management and billing cycle software platforms to make sure that these are now future-ready and can help them outpace change.
Their revenue and billing management systems have to now:
- Scale-up rapidly, both functionally and technically, to calculate and charge negative interest rates correctly
- They have to make sure that they can correctly charge their clients and make sure that the lack thereof does not translate to vast sums of deposits languishing in accounts
While identifying the capabilities of a billing and revenue management system for banks and financial institutions in the UK, we also need to ensure that any changes to these platforms cannot be time-consuming or expensive. Given the changing tides, these billing solutions should be able to:
- Charge for negative interest rates correctly
- Connect tactically with UK data sources and provide templates for manual upload and download of data
- Calculate charges and create the bill on the billing solution and if necessary, separate to their existing fees and charges calculation
- Enable real-time and batch-mode pricing analytics, customer management, including a 360-degree view of the customer and entity management, enable standard and exception pricing, correct bundles and packages, and apply valid discounts and taxes.
- Provide consolidated billing and statements to prevent revenue leaks, robust business intelligence, self-service, and easy onboarding
To help banks and financial institutions, RIA Advisory and Oracle Inc. have designed an out-of-box solution that allows banks to quickly configure negative interest rate solution. The solution comes with pre-defined templates for customer and balance feed uploads. Any bank can adopt this solution within 3-4 months and be prepared when the BoE requirements take effect.
Connect with us to know more.
