Welcome to the May issue of This Month in Commercial Banking. There is little doubt that rates and pricing will be a big juggling act for the rest of the year as bankers weigh customer needs against the institution’s strategic and economic goals.
It certainly won’t be easy, but the way to stand out from the rest is to know your clients deeply by using analytics and other tools to segment them based on factors that are most important to the bank. It’s about reaching out to them in a way that resonates — from ECRs to onboarding.
Commercial Rates and Balances are On the Move
Rates moved only modestly between the initial Fed hike on March 16 and the end of that month, up just 1-2 bp on interest-bearing accounts at most banks. But betas have continued to move higher, reaching 12% for MMDA and 20% for IB DDA by the end of April. (See Figure 1.) With the Fed signaling more 50 bp hikes on the horizon and quantitative tightening ramping up to $95 billion by the end of 2022, it will only get more complicated to navigate this rate environment.
Figure 1: Through-the-Cycle Betas (April 2022)
Figure 2: Quarter-over-Quarter Deposit Growth,
1Q22 vs. 4Q21
In fact, commercial balances declined an average of 4% through the first quarter, with the bottom quartile of banks by balance growth losing an average of 10% of their total commercial deposits. (See Figure 2.) Even if system-wide deposit growth remains flat to very modestly negative through the year, the asymmetric impact across banks will accelerate the return to rate competition. This is substantiated in the following findings from the Curinos 1Q22 Commercial CDA Executive summary:
- There is a wide variance in banker expectations with respect to 2022 deposit growth (See Figure 3.)
- Beta expectations for 2022 have moved higher since the start of the year for both ECRs and interest-bearing products (See Figure 4.)
Figure 3: 2022 Year-End Expectations
Figure 4: What are your expectations for changes in deposit levels for 2022 year-end?
There’s little doubt that the confluence of rapidly rising rates, accelerated quantitative tightening, 40-year highs in inflation and geopolitical uncertainty make this the most complex rising-rate cycle most bankers will have ever experienced. The keys to success remain the fundamentals:
- Rigorous client segmentation, including understanding at the client level where you are on the relationship primacy journey
- Access to the benchmarks and analytical tools to understand the competition and the drivers of your rate and balance performance
- A good plan A, but also a plans B, C and D for the unexpected
- Strong governance and clear lines of communication to the front lines
TM Pricing Plans Fall Short Amid
Treasury management fee performance was strong in 2021, but banks may have a hard time matching that growth in 2022 if they don’t focus on pricing.
Although the latest Curinos Commercial CDA Executive Summary shows that the median bank reported a healthy 6.5% increase in year-on-year fee growth in the first quarter, many of the drivers are tied to the pandemic, including increased DAF charges from surge deposits. With rates rising and the Fed cranking up quantitative tightening, many of the factors that were tailwinds in 2021 will soon turn to headwinds. Indeed, Curinos data show that median banks saw fee growth of just 0.5% in the first quarter compared with the fourth quarter of 2021.
Current plans for TM price increases most likely won’t outpace the current rate of inflation. Nearly a third of banks told Curinos in the first quarter that they will seek price increases in excess of 5% in 2022 compared with 12% in 2021 and 8% in 2022. (See Figure 5.) With the latest inflation numbers at 6.2% (excluding food and energy prices), this means that 70% of banks will effectively see a price decrease in real terms.
Figure 5: Which of the following would best characterize your planned 2022 PXV pricing event (inclusive of standard and exception prices)?
Figure 6: How have inflationary pressures influenced 2022 PXV pricing events?
Figure 7: What PXV pricing events changes are planned or implemented for standard prices, exception prices and the overall portfolio?
Additionally, 46% of banks told us that inflation had no influence on their 2022 pricing event. (See Figure 6.) This is a major risk to 2022 performance — even before considering the likely impact of rapidly-rising ECRs as rates go higher.
This complex market requires banks to pull all price levers in 2022 (and likely 2023) to keep pace with fast-moving developments. When asked where they were seeking price increases, banks were more bullish on exception price increases in 2022 than standard price increases, with 20% more seeking exception price increases beyond 3%. (See Figure 7.) This suggests that there will be room for banks to turn to standard prices when pushing their pricing events beyond the rate of inflation.
Broadly speaking, however, a strategic view of TM pricing should be rooted in an analytical understanding of a bank’s primacy position and opportunity, as well as the complex trade-offs between fee, deposit and credit revenues. Now more than ever, banks need a deep understanding of client behavior and how their current portfolio stacks against it.
The Many Challenges
(and Importance) of Onboarding
The onboarding process is one of the first opportunities that a bank has to showcase its technology and customer experience capabilities with a corporate client — and it can set the tone for the entire relationship.
If the process runs smoothly, it’s a sure win. If there are pitfalls and internal issues, the bank runs the risk of losing partnerships and clients will be left with unfulfilled expectations and uncertainty.
Many banks are already digitizing the onboarding process. The goal: to deliver a process that is fast, convenient and simple. In this early stage, it is best to leave aside the bells and whistles until they have been perfected. At that point, they can be positioned as value-added components that remove friction.
Onboarding continues to remain a core focus of the digital roadmap, whether it is focused on new client relationships or expanding a current partnership. (See Figure 8.) A shortened onboarding time can enhance cross-sell opportunities during the initial customer engagement, further enhancing the customer relationship. Furthermore, an accelerated implementation time that delivers on promises built around transparency is the foundation of trust.
Figure 8: Which of the following onboarding activities are you currently investing in or planning to invest in during 2022?
From enrollment to product activation and usage, the traditional onboarding process can take up to six months. Now, banks are trying to reduce it down to 24-48 hours.
Managing expectations, providing project objectives and associated timelines will be critical. Key to accelerating faster onboarding is automating as much of the KYC process as possible within the digital experience, housed in self-service hubs. This requires dynamic and secure tools that can be kept up to date with evolving regulatory requirements.
Providers can take a customer-centric approach with proactive initiatives. Built-in on-demand client support and status notifications are now table stakes. Tracking the status and viewing audit trails around the onboarding process, with the ability to receive requests when additional documentation is required, provides a positive user experience.
Clients must be part of the process and easily able to identify what is pending versus what has been completed. Hybrid models of the document exchange process (traditional with partial digitization) leave customers irritated and disrupt the journey with unwanted delays to final product usage. Direct touchpoints must be embedded into the process for customer transparency.
Data validation and integration across systems require standardized processes across industry and location. A primary objective is to set a model that creates a seamless experience around workflow and data configuration, reducing duplicate data entry and enabling data integrity. A single repository of all client data is required and interconnected with all applications. Complexities with high volume transactions that are embedded within legacy systems with little to no flexibility and scalability will impede the process and can lead to operational collapse.
Once a comprehensive onboarding solution is ready for client engagement (after passing user acceptance testing), training and on-going guidance must be put in place to ensure successful execution. Dedicated teams or product specialists should be assigned to accounts to oversee implementation and advise which solutions best fit each company profile. These efforts can be aided by AI technology.
With innovation at the forefront, leveraging new technology for improved functionality and workflow is key for both client and bank success.
ESG Takes Center Stage With
Last month’s issue of This Month in Commercial Banking noted that environmental, social and governance (ESG) issues were an increasingly important area of responsibility and priority for corporate treasurers. But what does that really mean?
Many of the corporate treasurers who participated in the annual survey conducted by Treasury Strategies, the corporate treasury consulting branch of Curinos, say they have already incorporated ESG criteria into their organization’s investment policies. This includes not only long-term investments associated with benefit plans, but also short-term investments in mutual funds. And it highlights opportunities for the small, but growing, segment of green deposit products. Digital initiatives are also part of the ESG movement, especially by reducing reliance on paper.
We expect more treasurers to play an active role in changes to these policies.
Individual elements of ESG have been part of the corporate culture at U.S. companies for decades. These formerly-isolated efforts of individual departments at some companies are now integrated into an overall approach to business and corporate culture.
The March 2022 release for public comment of the SEC’s enhanced climate-related disclosure rules further enhances the importance of this topic to treasurers. These proposed rule changes will require more detailed disclosure of businesses’ exposure to severe weather events and greenhouse gas emissions (GHG) for the company and their suppliers.
In 2021, we saw the first formalized ESG evaluations by corporates when selecting
banking partners. We expect this trend to grow in the years ahead and expect ESG questions to be included in the RFPs sent to banks. High ESG ratings will become a competitive advantage for some banks.
Many treasurers understand that they play a role in improving their company’s ESG rating through support of digital bank initiatives. This includes removing paper from the cash conversion cycle by replacing paper invoices with electronic invoices and replacing checks with ACH and card payments. These strategies are a win-win approach for corporations because they reduce both costs and carbon footprints. We expect the pace of these initiatives to accelerate and expect a competitive advantage for banks that can provide practical, scalable digital solutions to companies.
Several treasurers who participated in the survey mentioned that they plan this year to explore the pros, cons and considerations of green and social bonds and loans for their boards of directors. These efforts could include incorporating sustainability into their supply chain financing programs.
The rapidly-increasing importance of ESG ratings in the buying and selling of goods and services between large public corporations creates a window of opportunity for banks with high ESG ratings. It also provides a growth opportunity for banks that offer digital solutions associated with financial transaction processing and investments.