BOOSTING COMPETITIVENESS AMID WIDESPREAD UNCERTAINTY
The operating environment remains challenging for commercial banks as the liquidity glut persists and, despite some green shoots, loan growth remains anemic. And while the prospect of Fed hikes has increased, the yield curve remains flat and the path to NIM growth is uncertain.
The July issue of This Month in Commercial Banking explores a range of innovative ways that banks can both boost competitiveness and revenue through this challenging operating environment and position themselves to accelerate growth through the cycle. With NIM hard to come by, banks are increasingly focused on monetizing their commercial payments business, especially after many banks scaled back or outright cancelled PxV pricing events in 2020. We highlight ways in which banks can drive revenue growth from optimized PxV pricing and how these strategies align with customer primacy.
In the product arena, we cover insights into the digital arms race as banks invest to stay ahead of this rapidly evolving segment of the commercial offering and fintechs try elbow their way in. Finally, with ESG investing continuing to gain traction, we highlight how “green” offerings from banks have moved from assets to liabilities with the rapid proliferation of so-called green deposits.
Prepare Now for Higher Rates
The current macro environment is one of the trickier setups that bank management teams have had to deal with in the past 20 years. There is significant excess liquidity in the market due to the monetary and fiscal stimulus actions over the past 15 months. While necessary at the time, these programs have muted the demand for commercial lending, forcing banks to put cash to work into lower-yielding securities. As a result, revenue growth has been stymied.
Despite the excess liquidity and benign loan growth, however, implied policy rates have started to reflect Fed rhetoric. Relative to the start of 2021, forward policy curves are now pricing in three separate hikes over the next three years. But the treasury curve isn’t reacting to the same degree and, in fact, continues to flatten despite economic activity. (See Figure 1.) This is being driven by two forces that are unlikely to go away in the short term. First, the Fed continues to purchase securities in the market, which is impacting pricing. Second, banks have significant excess liquidity that is unlikely to work through the system before the second half of 2022.
Figure 1: Despite excess liquidity and benign loan growth, implied policy rates are starting to reflect Fed rhetoric, but the Treasury curve remains flat
This all means that the stakes are higher now than in prior cycles to position customer treatments to minimize beta impacts on profitability. If the Fed is forced to move faster than the market currently anticipates, many banks will be caught off guard with significant amounts of liquidity deployed into longer-duration, lower-yielding securities just at the time that clients are pressing for their share of any rate hikes.
Primacy, PxV Analytics are a Powerful Combination
There’s little doubt that achieving breakout fee income growth has been a challenge at a time when balance sheets are flush and NIM is squeezed by the flat yield curve and intense competition.
Industrywide growth has hovered in the low single digits, with a recent blip triggered when a surge in liquidity led to increased Deposit Administration Fee revenue.
Banks with strong books of primary client relationships are best positioned to drive increases in fee revenue. Primary customers both have significantly more service codes to potentially re-price, and the bank has relatively higher pricing power with these customers due to deep integration with the customers’ cash management operations. Although these customers won’t necessarily pay the highest price, banks can extract pricing that reflects a fair value exchange across the relationship (including deposit and loan pricing).
Scoring also helps banks understand the nature of the opportunity to ultimately balance primacy against pricing. Strong current primacy can give bankers the confidence to ask for fair market pricing. For clients with low current primacy scores, the bank can refine its strategy based on potential primacy. Deep discounting may be appropriate to convert high potential primacy clients. For clients with low potential primacy, there may not be a path to increase prices in the future.
In addition to primacy scores, banks should integrate strong PxV specific data and analytics. Having a specific understanding of a bank’s price position versus the market is key. TM fee demand curves flatten considerably around the market reference price, largely due to the high cost to switch for TM services. Banks have more opportunities to move prices within this “area of indifference” without worrying about how it impacts primacy. (See Figure 2.)
Figure 2: Typical TM Fee Demand Curve
Putting this together – combining primacy scores with PxV specific data and analytics – can help banks move the right customers to the right price point and protect current and future primacy.
Commercial Digital Innovation is Imperative for Growth
Digital innovation is the next frontier of differentiation in commercial banking offerings. Curinos primary research shows that even prior to the pandemic, companies were increasingly open to conducting more complex and value-added transactions and receiving advice through the digital channel. This transformation has only been accelerated by more than a year of remote work. Recent Curinos research suggests that these changes are here to stay, with more than one-third of banks expecting virtual and digital client coverage models to be used in conjunction with traditional in-person RM coverage well into the middle market space (See Figure 3.)
Figure 3: A View of the Future
Which of the following best describes your view of what the “new normal” client coverage model will look like?
We expect to return to previous levels of in-person client calling
We expect a hybrid model with some in-person calling complemented by more virtual client coverage and digital products
We expect virtual coverage will continue to be the norm and in-person calling will be the exception, at least in certain segments
We really don’t know yet what the future will hold, or think it’s something different from the choices above
In which of the following areas are you investing to adapt to evolving client coverage models?
Adding more staff
Expanding industry verticals
Source: Curinos Analysis
Differentiated digital platforms enable customers to complete routine and administrative tasks more simply and securely while also expanding the range of value-added services available to users. Leading platforms offer intuitive customer journeys from login to payments execution, all secured with leading cyber defenses. On the latter, treasurers continue to seek insights in cash forecasting and liquidity optimization. In fact, these ranked as the first and second priorities in our recent 15th Annual State of the Treasury Profession survey. (See Figure 4.)
Figure 4: Treasurer Priorities
Cash forecasting improvements
Liquidity or working capital management
Bank services optimization or RFP
Optimization or replacement of TMS
Enhance fraud/cybersecurity controls
Source: 2021 State of the Treasury Profession Survey
Additionally, leading digital platforms accelerate cross-sell by allowing customers to add services directly from the platform. This is especially powerful when integrated with advanced digital marketing techniques. Leading banks that have introduced this functionality have seen 20%+ growth in the listed products all through a lower cost sales model than a TSO or RM call.
But achieving scale and differentiation in digital channels is challenging. Banks typically need to place their bets a year or more in advance due to budgeting and development cycles. And commercial digital platforms are large and complex. Finally, the competitive landscape is both opaque and fast moving. The pace of change is only accelerating as more fintechs enter the commercial payments market with leading digital user experience capabilities.
Staying ahead in digital requires the tools and insights to see around corners and into the future.
Banks Are Going “Green”
Banks are increasingly adopting a broad range of approaches to meet growing demands for net-zero carbon emissions. In recent months, a number of banks have introduced so-called green deposits.
The goal behind carbon neutrality is to target and/or achieve net zero carbon emissions by reimagining internal industrial processes, funding environmental agencies or by automating manual efforts. In banking, we typically think of working toward net-zero emissions by upgrading technology, removing manual processes and paper trails and changing industrial processes around a commercial business. In addition to initiatives aimed at directly reducing carbon footprint through process automation and financing green infrastructure, a number of banks have recently launched “green” deposits. These time deposits are interest-bearing bank accounts that hold the deposits for a fixed term and give clients the ability to invest short term liquidity into environmental projects that are meaningful to them.
Banks that have recently launched green deposits include HSBC, Bank of the West, Citibank, Citizens and MUFG Union. These offerings allow corporations to choose a bank for more than just its ESG score, which provides visibility into a company’s corporate sustainability. To achieve the goal of net-zero emissions, some banks are advancing their finance portfolio by allowing clients to choose specific green initiatives, such as renewable energy, green transport, sustainable food, agriculture, forestry, waste management and greenhouse gas reduction. Other financial institutions are partnering with climate change environmental groups to offer sustainable and biodegradable debit cards and tokens for digital login. In some instances, commercial clients can track the environmental impact of their debit cards.
So far, more than 100 banks offer some type of sustainable banking product. As this issue becomes more top of mind for corporations, banks will need to develop more innovative offerings in order to stay ahead of the pack.