Welcome to the September issue of This Month in Commercial Banking. We begin this issue by looking at commercial deposit balances that are continuing to edge up while loan growth remains elusive. With the Fed signaling an increased likelihood of rate hikes as soon as 2022, it’s time to start planning to manage balance sheets and profitability even as clients look to benefit from rising rates.
Additionally, banks are looking to regain their footing with annual treasury management pricing events after 2020 price increases were largely shelved or scaled back. With lower overall targets for price increases in the market, banks should take advantage of a growing set of advanced analytical tools and cleared price benchmarks to precisely target increases.
Finally, as we continue to examine how digital innovation is transforming the relationship between companies and their banks, we’re seeing clients and leading bank platforms increasingly embrace and enable self-service for an expanding range of transactions. This will create both greater efficiency and higher-value touch points when bankers connect with their clients.
Rising Rates Come Into Focus As Balance Sheet Headwinds Persist
U.S. commercial deposits have grown by more than 30% since March 2020. Meanwhile, loan growth has been flat for the past year and trended lower in recent quarters as PPP forgiveness accelerated with no offsetting growth from core C&I.
Against this backdrop of accumulated excess liquidity, the Fed has signaled that, in addition to beginning to taper asset purchases, it may begin raising rates in 2022. In fact, the most recent dot plots suggest half of FOMC members anticipate at least one hike in 2022, up from fewer than a quarter in March of 2021 (See Figure 1.)
Figure 1: Percentage of FOMC members predicting at least one Fed Funds hike in 2022
If the Fed begins raising rates before banks lend through the pent-up excess liquidity on their balance sheets, which seems increasingly likely, bankers will have a particularly challenging task in managing bank net interest margin relative to client expectations that those hikes should be passed through to their deposit balances. Clients will naturally remember the late stages of the prior rising-rate cycle during which many became accustomed to betas of 80% or more on their deposit accounts. But that strategy only works when banks are competing for deposits to fund marginal loan growth at prevailing market rates. Passing through 80% betas to fund interest on excess reserves held at the Fed is another matter.
Most banks will need to be selective as to when and where they should use rate to acquire or defend deposit balances and where they decide not to compete on rate even if that results in balance runoff.
To be clear, we anticipate that banks will (and should) compete aggressively for primary operating accounts. But they will have to be more selective than in prior cycles in determining where to allocate balance sheet and interest expense budget when it comes to reserve balances – even if those balances are held in a DDA.
The key to establishing these pricing frameworks is to link relative pricing to current and potential primacy. Banks should price up primary relationship clients marginally to maintain a fair value exchange and ward off competitors. But these balances generally don’t require top of the market rates. One of the benefits of primary relationships is that a part of the value exchange between client and bank is predicated solutions and partnership rather than merely price. Meanwhile, the top rates should be deployed opportunistically to sweeten the deal on cementing primary relationships with the most promising under-penetrated clients.
TM Pricing Can Benefit From More Analytics
Commercial banks are deep into 2022 planning and many are finalizing their treasury management pricing events. Fees will be a critical lever for revenue growth in 2022 as NIM continues to be constrained, but banks are trying to balance that against what their clients will bear. Therefore, it will be critical for banks to optimize any TM price increases.
Though price increases rarely lead to client attrition in a vacuum, being too aggressive can lead to client disruption that distracts the front line from other revenue-generating activities. On the other hand, banks can’t afford to be too conservative and risk leaving money on the table.
The price increases of the last two years have been conservative amid the COVID-19 pandemic. According to the Curinos CDA Executive Summary, banks went into 2020 with robust pricing plans – nearly a third of banks planned an event seeking growth of 5% or more from their price increases. But most tamped down those plans in response to the pandemic, with more than 90% seeking 5% or less in increases and nearly half shelving their plans entirely. In 2021, most banks did seek price increases, but most sought a 5% or less increase and only a handful sought more than 5% (See Figure 2).
Figure 2: Which of the following would best characterize your planned 2021/2022 PxV pricing event (inclusive of standard and exception prices)?
Given the lost opportunities of the last two years and the growing view that rates will soon rise, commercial banks are in a once-in-a-rate-cycle window to pursue more assertive price increases. To do this, however, they need to expand their tool kit when planning treasury management pricing events.
When we asked banks what inputs they use, market standard price benchmarks were the only input selected by a majority and only a few banks segmented services or clients by elasticity or other factors. (See Figure 3.) Also, a small portion of banks used inputs that crossed multiple domains of data (market or internal benchmarking), analytics (elasticity or other segmentations), tools and monitoring. (See Figure 4.) The limited insights gleaned from only looking at standard price benchmarks are likely a major driver for these tactical increases, focusing only on low-hanging fruit.
Figure 3: When planning and executing TM pricing events, which of the following do you leverage? (Select all that apply)
Figure 4: TM pricing maturity domains used
This analysis suggests that benchmarking data aren’t enough to seek transformational price changes need in 2022. Benchmarking only tells banks where their prices are versus the market, but it doesn’t answer the critical question of where they should be. Only analytics like segmenting services by price sensitivity and segmenting clients by elasticity and primacy will start to reveal this crucial answer.
Individual pricing tools and performance monitoring will also help to push those insights out to the field and collect critical feedback that can continually improve pricing approaches and processes. Banks must expand their treasury management pricing tool kits to consistently optimize fees in 2022 and beyond.
Help and Support: The Rise of Self-Service
Rapid advances in digital innovation have brought new self-service capabilities to commercial banking – and treasurers are embracing it.
The expansion of self-service places control right back into the hands of the signer or system administrator who is responsible for managing accounts and cash flow. And it comes amid an increased demand among treasurers to maintain complete control and real-time access.
The remote working environment caused the framework of self-service to be redefined. Previously, the parameters were boxed within day-to-day servicing, depositing or requesting copies of checks, alerts and user management, to name a few.
National players are taking the lead in this area with a focus on onboarding and case management. And it comes as market leaders are already pushing into areas like digital marketing and virtual assistance. (See Figure 5.)
Figure 5: Most investments are still going to table stakes functionality, but market leaders are a step ahead
In onboarding, new features for Know Your Customer (KYC) self-service tools include signing, uploading required documents, viewing real-time status requests and communications directly from the bank – all within the platform. Processes are improved by removing countless emails and phone calls to and from the bank within the message center.
Banks are also creating self-service dashboards that allow clients to track and manage all service requests and cases submitted. Clients can manage, close and open requests regarding payments, products, services and statement inquiries, minimizing the time that was spent chasing down requests. Users can request a response from customer service if needed on demand and actively interact within the audit trails from current or previous requests. The most robust self-service solutions include global management, benefiting clients that manage 20 to more than 100 accounts on a weekly or monthly basis.
When building and rolling out self-service capabilities within payments, account management or across any key process, a set of best practices is taking hold to ensure a successful launch. Co-creating and pilot testing by case or sample group is imperative to assess the viability of a solution, highlighting flaws through the workflow or key successes that can be expanded upon. Unseen risks, whether back-end or client-facing, can cause loss of trust and security from a client perspective and cost the bank loss of revenue by damaging primary relationships. On the flip side, strong self-service capabilities can enhance the relationship.
Curinos analysts so far haven’t observed additional fees built across a “self-service” feature. Instead, there have been increases in the cost per account or per module. There may be additional fees in the future as large corporate platforms are enhanced and value is added. These self-service capabilities should be continually reviewed and upgraded.