LOMBARD, Ill.—Executives at financial institutions are concerned about deposits, especially if rate competition increases due to Fed rate hikes and money begins to flow out.
That is a key finding from Raddon Financial Group’s quarterly CEO Strategies Group program held in December. The program provides institutions with comprehensive analytics that measure performance across all areas of the organization and help guide their strategic initiatives.
There were 14 meetings held in locations across the U.S., attended by 110 institutions and 403 total attendees, including C-level participants from nearly half of the participating organizations. Other levels of the organizations, from branch operations to marketing, IT and finance, were also well represented, Raddon explained.
Deposits Draw Attention
Among the key topics and issues discussed, deposits drew the most attention, Raddon explained.
“With industry loan-to-deposit ratios returning closer to pre-recession levels, many institutions expressed a need to acquire deposits,” explained Raddon Financial Analyst Greg Ulankiewicz in the Raddon Report. “In turn, even ignoring the Federal Reserve’s Dec. 16 announcement of a quarter-point rate increase, deposit rates have begun to see upward pressure as these institutions price more aggressively in an effort to lure new money.”
One great “unknown” with deposits is how consumers will behave and react to rate offers – and rising rates in general – after such a protracted low-rate environment, said Ulankiewicz.
“How likely are they to switch institutions to achieve a higher rate? How can institutions limit cannibalization where customers simply move existing deposits into higher-rate products, raising the cost of funds without contributing any new money?” said Ulankiewicz. “At the workshops, a significant portion of the discussion focused on strategies and tactics to help mitigate these issues and generate new deposit growth in a cost-effective manner.”
Another key issue on the deposit front centered on staff capabilities to discuss and sell deposits. With loan growth a primary focus for financial institutions since the recession, many frontline personnel lack experience in engaging customers in a deposit conversation, said Ulankiewicz.
“Only a small percentage of frontline staff has ever worked in a rising-rate environment, last seen 10 years ago. As a result, deposit training for client-facing staff is becoming a critical focus for many organizations,” he said. “Even institutions not actively seeking deposits are looking to develop strategies and training aimed at retaining deposits and key relationships.”
Other Topics For Discussion
Technology and mobile banking were also hot topics, and cybersecurity was mentioned at every workshop. With the mobile channel playing a rapidly evolving role in banking, institutions are looking to leverage this service and measure the value it brings to their organizations, Ulankiewicz explained.
“We also discussed household performance by branch accessibility. Do households that access a branch have stronger relationships than those that don’t? How well is mobile banking serving customers who don’t have convenient access to a branch?” said Ulankiewicz.
On the payments front, many of the attendees indicated they had signed on with Apple Pay or were in the stages of doing so.
“As services like Apple Pay and Samsung Pay gain increased consumer awareness and the shift to EMV extends merchant acceptance, it will be interesting to monitor how quickly consumer households embrace these services and whether or not there’s an effect on usage and top-of-wallet status,” Ulankiewicz said.
Overdraft income is down more than 25% on a per-account basis since 2010 and refinance activity has slowed dramatically over the last two years, according to Raddon. As a result, growth of noninterest income has flattened for the industry. At the same time, margins have steadily declined and the prospect of rising rates complicates pricing decisions.
“At the workshops, the need for income diversification, especially new sources of noninterest income, was a particularly hot topic,” Ulankiewicz said. “Using relationship pricing as a tool for effective cost-of-funds management and relationship retention was also discussed.”
Given the pressures on revenue, expense management – more specifically, expense optimization as it relates to process improvements – is also a concern. Participants discussed the importance of continually evaluating processes to identify bottlenecks and redundancies. Process improvements that enhance the consumer experience should be leveraged as a differentiator so organizations are less reliant on attractive pricing and low fees to win and retain business, Ulankiewicz said.
“Ultimately, the December CEO Strategies Group workshops highlighted the increasing complexity of competing in the financial services space and signaled a turning point in the operating landscape as we slowly emerge from a post-recession environment,” said Ulankiewicz. “However, with a solid understanding of the issues facing consumers, the industry and the economy, organizations can position themselves for success.”