All eyes remain on the Fed as markets prepare for an anticipated March rate lift-off and look for additional insights into the potential timing and pace of balance sheet reduction. This cycle will be different for everybody and especially challenging for commercial bankers and liquidity managers as client expectations around exception pricing are likely to run counter to bank needs for funding. That means it’s time for banks to get very focused and tactical in their planning to align commercial deposit actions to primary relationship growth and retention.
But optimizing value from commercial customers is about more than pricing. This issue of This Month in Commercial Banking also explores the evolving features of leading commercial dashboards that enable bank customers to access, analyze and act on the data most relevant to them in their specific roles.
And finally, we touch on how banks can refresh their small business product shelf to better align both access to services and value exchange in this valuable segment. This is especially relevant for regionals that are caught between the scale of their larger competitors and the intense personalization of the community bank experience.
Time to get Tactical Ahead of an
Expected March Rate Hike
Bank balance sheets remain flush with liquidity. This is especially true in commercial businesses, where deposits have continued their upward trajectory, up 2.5% quarter-over-quarter as of Dec. 31. (See Figure 1.) Meanwhile, commercial loan growth remains a challenge. And, on average, bank balance sheet loan-to-deposit ratios have fallen from the mid-80s pre-pandemic to the mid-60s today. (See Figure 2.)
Figure 1: Commercial Deposit Continued
to Grow in the Fourth Quarter
Figure 2: Loan-to-Deposit Ratios Have Fallen
With the Fed expected to begin hiking rates in March, that leaves banks with an immediate tactical question of how much rate to pass through to retain balances that aren’t productively deployed today. The textbook answer will be to lag aggressively, but the reality on the ground will be more complicated. Commercial bankers are sure to receive calls from some of their clients when the Fed does lift rates, asking how much of a hike they will see in their deposit accounts. The time is now to start putting that script in bankers’ hands.
An additional complication is that ideally that script should be tailored to client relationships and relationship potential, with the most favorable rates reserved to defend existing primary relationships and deepen high potential non-primary relationships. For banks that haven’t yet systematically scored clients, now is a good time to start that process. And in the interim, a tactical step is to integrate primacy concepts into exception pricing governance routines, especially for clients receiving the highest betas.
Commercial liquidity businesses should also game out how to respond to both specific competitive situations and broader market adjustments. In other words, incorporate multi-scenario planning. Here are three examples of potential situations:
- Scenario 1: A competitor offers an existing client a highly competitive deposit rate. Under what circumstances will the bank match versus allow the funds to leave?
- Scenario 2: A competitor moves the standard rate on business banking products in a bid to execute a “reverse lag.” Will you match or attempt to ride it out?
- Scenario 3: The Fed announces a much faster pace of balance sheet reduction, potentially causing a material drop in money supply. How and when will you execute the return to aggressive deposit gathering?
Given the pace at which events have the potential to unfold over the next year, we believe that it is critical that banks have proactive plans for the base case and a range of potential alternative scenarios.
We’ve quickly moved from the theoretical planning phase to the tactical planning phase that will require specific plans that are actionable at the client level quickly and at scale.
Making a Dash for a New Dashboard
Does your dashboard need an upgrade?
The power of the dashboard goes beyond its modern design, easy navigation and on-demand data integration. After logging in, the dashboard is the single most important client interaction within the digital experience. Financial institutions are rightly examining what this means for their clients – which features and functions are immediately accessible on the dashboard for users based on their roles at their organization. The latest dashboards include key components that showcase relevant data that can translate from insight to action in near real-time.
Front-end dashboards provide key access to common servicing features such as account balances, payment activity and, most importantly, access to time-sensitive transactions. Leading dashboards provide these key features, but also includes analytics and insight into cash forecasting for the organization. This benefits users who need quick and digestible snapshots of key financial information in one central place, reducing the time it takes to manually sift through the platform.
The best dashboards are built around each user to help them meet goals by enabling them to complete daily tasks simply and more efficiently. This is a change from traditional static dashboards that leave users hunting for data and information.
Curinos believes providers should consider the following features of a modern commercial dashboard.
- Interactive dashboards provide real-time insight into key metrics by allowing users to visualize, filter, dig deeper and interact with their data. This contributes to developing a deeper insight and information of the numbers that drive their business.
- Customization allows clients to track, analyze and view metrics that apply to their role at their company.
- Targeted functionality that is user specific creates a successful environment for cross-selling because digital marketing can position new solutions. This leads to success for the client and additional revenue for the bank.
- System integration moves away from siloed systems into a model where processes are configured and the communication seamless. It’s imperative from a dashboard standpoint to be able to share data internally to those who are authorized to receive it. This can help speed and simplify decision-making.
- Front-facing analytics allow users to discover trends, drill down and create hypothetical scenarios, all to improve project management. Data visualization and analytics can be accessed within a few clicks.
There’s little doubt that the dashboard is evolving. Indeed, there is already a move towards providing multiple dashboards with one login under a micro-servicing architecture model. The key is to be aware of these developments and act upon them in a way that benefits your client and the bank.
Time to Give the Small Business
Product Shelf a Makeover
The competition for small business customers is intense. Regional banks are caught between the largest players that leverage advantages of scale in marketing, awareness and technology investment and community banks that can offer a highly personalized experience, often at very low cost.
Regionals have an opportunity to unlock break-out growth in the segment by optimizing the product shelf so it can grow with clients’ evolving needs while promoting a win-win value exchange for bank and customer.
First, regional providers can better align the suite of checking packages that are offered to small business clients to promote a balanced value exchange. One of the obstacles in striking this balance, especially for regional banks, is competing reactively to competitors that are very aggressive in their pricing. Checking packages then provide more value to the client than the bank receives in fees or balances. (See Figure 3.) As a result, some regional bank portfolios are highly concentrated in entry-level (or even free) checking packages, are underpenetrated in fees and balances and, in extreme cases, are actively being arbitraged by clients that should be using account analysis.
Figure 3: Small Business Package Continuum
The second area of focus for driving small business growth is deploying or optimizing treasury management product bundles, also known as “TM-Lite” bundles. There is growing demand to adopt one or two TM products among larger small business clients that aren’t ready yet to migrate fully to account analysis. The current price points and product complexity are the most often cited barriers to adoption. TM-Lite bundles are the clear answer here, but banks have been slow to roll them out. In a recent study of 20 banks and 55 checking account packages, Curinos found that only about 40% of packages offered access to a TM-Lite bundle. More than half of these packages only offered a bundle for incoming wires.
This untapped demand for TM-Lite bundles is significant. Our recent analysis suggests that demand for common TM products among small business clients ranges between 1% and 10%, depending on the client and the product. (See Figure 4.) When looking at a portfolio of 50,000 or 75,000 small business accounts, this translates to an opportunity than can easily exceed $500,000 a year for a bank that currently offers no TM-Lite bundles.
Figure 4: Estimated TM Bundle Adoption
by Checking Package Type
The opportunity for small business growth is significant for regional banks. Aligning checking packages to promote a balanced value exchange and deploying or optimizing TM-Lite bundles will be critical to achieving this growth. In order to succeed in these areas, banks must go deeper than competitive benchmarking and gain a better understanding of client behavior and demand.