Chief Investment Officer
Commercial Loan Automation
BirdsEye Viewdeposit growth
A poll conducted at the recently held Acquire Or Be Acquired conference confirmed what we already know – that the value of a banking franchise is influenced by many factors, and core deposits are chief among them. As I’ve written many times, core deposit growth is always a beautiful thing. The simple truth is – BANKS CAN’T SURVIVE WITHOUT DEPOSITS.
During the last recession deposits were shed by large and small banks in light of anemic loan growth and meaningful capital charges against deposits. This gave many CD-heavy banks the opportunity to improve their deposit mix and shed CDs in favor of core deposits, especially as consumers and commercial clients both found no better place to put their liquidity than their bank.
As the economy improved and, with it, loan growth, this picture has changed. Banks are looking to grow deposits, some almost at all costs. I’m concerned that, in their hasty quest for deposits, some banks will damage the great deposit mix they have achieved by moving into higher-yielding products. Once you get on the rate-surfer radar and rake in those funds, it is extremely difficult to get off that addictive source of funds.
What can banks do to grow core deposits effectively? I wrote about this last year; here are some more thoughts.
Account Opening process
Our account opening process hasn’t changed much for the better in the past decade. In fact, it has gotten more cumbersome due to intensifying regulatory scrutiny, especially regarding Know Your Customer and BSA. While our compliance departments continue to expect little change, our competitor, bank and non-bank alike, have made dramatic changes to their account opening processes. We are at a competitive disadvantage at the most critical juncture of relationship building - account opening.
Consumers will typically give us 30-45 minutes of their time when they open their first account with us. Sadly, we use that time to fulfill many compliance requirements, and run out of time when we get ready to better understand the customer and their needs. This impacts the balances, cross-sell and tenure of new customers. We must find ways to shorten the administrative part of account opening – without compromising regulatory compliance – to free ourselves to better understand new customers and prospects for a better overall experience and product matching. The more productive time we spend upfront with new customers, the longer their subsequent tenure, trust, well-being and future purchases from us.
This quandary has been solved by some of our competitors. If Chase can do it, so should we. Some of the tools utilized to shorten the administrative aspects of account opening are discussed below, and there are many more.
Most community banks shed their collateralized municipal deposits 7-9 years ago. They are now revisiting this segment with a wary eye. Community banks have an edge in this segment, but only with the local, non-bid bound, relationship-oriented entities. It’s time to reach out and cultivate again those prospects, especially those where relationships are still highly valued.
The most vexing part of account opening and maintenance is authentication. It’s a lengthy and annoying process for both banker and customer, and I’ve harped on this many a time. Open an online account at Chase and you’ll see how authentication can be neither vexing nor biometrics-based. There is much that can and should be done in this area, from piggybacking on phone authentication methods (don’t you love the iPhone X facial recognition?) to asking questions that only the respondent can know but that aren’t difficult to remember (your favorite ice cream flavor; your first pet’s name; who is your car loan with).
Banks aren’t the only industry where careful authentication is required. Even the US government has found ways to do it more easily than we have; just try to get your Social Security card reissued and you’ll see what I mean. Our progress along this dimension is too slow and needs to change.
Dealing with universal banks and online bank competition
The competition is moving faster than we are. That’s not new. What IS new is the magnitude of their gains. Universal banks have grown deposits solidly and rapidly, leveraging an irresistible mix of technology and physical ubiquity. They continue to grow share and improve the customer experience.
I know and believe that community and supercommunity banks should not seek to emulate the largest banks. We will not be successful competing on their turf. At the same time, waving the “best service” flag using old distribution methods alone doesn’t meet the customers’ definition of good service anymore. This is true everywhere in the country, not just on the two coasts.
It is imperative that banks that want to survive and grow their deposit base create a compelling mix of technology and a personal touch that can be executed more effectively by banks other than the largest in the land. The appropriate mix will vary by region, bank brand and other factors. The key is – change what you’re doing now to fit who you are. Staying the same is a losing proposition.
It’s time to dust off the creative genius behind deposit products. We haven’t spent much time on this for almost a decade. Returning to our roots (the titanium account, the 6% DDA with too many strings attached) won’t fly in today’s regulatory environment. Trying new concepts – such as commercial deposit products especially designed for small business and the lower end of the middle market – are fruitful opportunities to focus on. Expanding existing commercial relationships through effective product design and pricing is an untapped opportunity for us.
Deposit sales forces
I’m hearing more about deposit-only sales forces at our forums. This idea resonated with me and has met with much success in my past. In addition to asking our commercial bankers to focus more on deposits with their existing relationships, it makes eminent sense to hire a salesforce to concentrate on commercial non-borrowers with deposit needs who value the relationship aspect you bring to the table. Bankers who live and die by deposit volumes will do better than those who can make their goals by lending money alone. They will target prospects outside your commercial base and will develop the requisite expertise to meet their deposit needs more effectively than we’ve done to-date.
Account maintenance simplification
Another deterrent to deposit growth is our manual account maintenance process. For example, we still accept, sometimes demand, paper communications back-and-forth with our customers. We should automate account maintenance and communications processes to make it easier for our customers to interact with us while saving money on bank operations and saving the rain forest all at the same time!
The commercial side of the banks we know is committed to modernizing their loan operations and simplify loan file maintenance, as evidenced by the rapid growth of companies like nCino. We have not spent as much time or mindshare on similar streamlining and automation of the deposit side of the house. We should!
Shifting loan mix away from Commercial Real Estate
CRE has been the bread and butter of many banks for many years. It’s a loan segment that offers chunkier loans that are secured by real estate, aspects everyone on the commercial side likes. Unfortunately, unlike C&I loans, CRE credits typically are not deposit-rich (with some notable exceptions). Commercial deposit growth is more often associated with the robust and active operating accounts found in C&I businesses. Focusing more on C&I lending makes sense also in consideration of the 300%-100% regulatory limitation on CRE lending, as many banks have reached these limits and some even elected to breach them.
Changing commercial banking incentives
I personally believe that, as long as commercial bankers can make most of their incentives on the basis of loan volume or profitability alone, their deposits will lag loan growth. If you really want deposits you must demonstrate that desire by putting deposits on par with loans in your incentive plans. As long as loan incentives dominate the commercial bankers’ incentive plans, deposits will not get the mindshare they need to achieve meaningful growth.
Some banks support deposit growth by requiring the commercial bankers to team up with Treasury Management sales people a minimum number of times – or generating a minimum level of new deposits – in order to qualify for their loan-related incentives. Whichever way you get there, tying the payout to deposit performance is the secret to success.
Celebrating deposit growth
In addition to signaling the importance of deposits through incentives, you should reinforce their importance through recognition. A large loan is typically celebrated throughout the bank and everyone hears about it, while large deposits remain out of the limelight. Strong bankers want recognition, sometimes even more than money. Giving the deposit gatherers accolades will go a long way to elevate deposits in the commercial bankers’ minds.
ITM and deposit-taking ATM deployment, especially at corporate campuses
One more interesting commercial tactic is to deploy ATMs on corporate campuses. Using ITMs and ATMs to attract the commercial customer’s workforce is a cost-effective way to promote the bank’s presence on-site and offer unparalleled convenience. ITMs provide a personal touch and can be used to build relationships with the bankers on the other side of the machine.
Loan rate differentiation (with and without deposit pricing)
One excellent tool for commercial bankers to help bring deposits in-house is to offer two rates for a loan – one without the deposits and one with them. This tactic not only communicates to the customer AND THE BANKER the clear value of the deposit relationship, but also creates a certain rate flexibility which is a valuable tool for the banker as they negotiate with the borrower.
There are many more tactics for deposit generation which have been shared in our forums. I hope you’ll email me some of your successful practices as well. At the end of the day, differentiated, meaningful deposit growth can only be achieved if the CEO and CFO appreciate the value of deposits and are assertively supportive of the effort. Tone from the top is essential to create any focus for an organization, and this situation is no different. If your CEO wills it, it shall happen.