Rising rates appear to be headed our way sooner than previously expected. Amid an unprecedented glut of liquidity, this next cycle will require a fresh playbook. This month we cover the steps that commercial banks can take to prepare for rising rates with a focus on strategic pricing aligned to retaining and acquiring primary relationships.
We also explore important ways in which banks can compete on the strength of their solutions and look at 2022 commercial investment priorities that focus on digital onboarding, faster payments, simplification and value chain extension. And we take a closer look at the ways in which leading commercial digital platforms are making it easier and faster for commercial clients to transact across the globe.
This is the final edition of This Month in Commercial Banking for 2021. We wish you all a happy and healthy holiday season and look forward to continuing to share insights with you in the new year.
Commercial Deposits Will Get More Interesting as Higher Rates Loom
Commercial deposit markets have been relatively benign for the past year. Commercial deposits have grown modestly each quarter within a range of 0.2% to 2.3%. (See Figure 1.) Meanwhile, commercial deposit rates have remained virtually flat for the past two quarters, with the bottom quartile of rate payors near zero and market averages in the 10bp-12bp range for interest-bearing deposits. (See Figure 2.)
Figure 1: Aggregate Quarterly Commercial Deposit Growth | 4Q20 to 3Q21
Figure 2: Middle Market Segment
ECR DDA Avg. Portfolio Rate
IB DDA Avg. Portfolio Rate
MMDA Avg. Portfolio Rate
Source: Curinos CDA | Note: Quartiles represent populations of distinct banks split evenly from lowest to highest rates. Average is calculated as the simple average of the entire population
But after this period of calm, things appear poised to get interesting quickly. The Fed has already begun tapering asset purchases and as inflation indicators remain persistently elevated, it appears prepared to accelerate the pace of tapering. Meanwhile, futures markets are now indicating two to three rate hikes in 2022 with the first move occurring in the March–May 2022 timeframe. (See Figure 3.)
Figure 3: Target Rate Probabilities for December 2022 Fed Meeting
Most banks don’t need all the liquidity they are carrying on balance sheet today and likely won’t need it in the near future. A simple supply-and-demand analysis would suggest relatively lower betas in the early phases of the upcoming rising-rate cycle. But with high levels of exception pricing and the likelihood that some deals will clear at very competitive rates, maintaining portfolio pricing discipline will be a challenge. Banks also should be prepared to react quickly in using price to defend or acquire primary relationships.
Market indicators continue to pull forward the timeframe in which rising rates hit the market. Banks should prepare now. Our checklist for a rising-rate playbook includes four items:
- Know who your primary customers are today and identify your top prospects for winning primary relationships. Be prepared to use price strategically with this group.
- Integrate benchmarks into your pricing governance to maintain discipline and perspective in the face of anecdotal high rates.
- Plan ahead for how you will react to difference market conditions and funding needs.
- Communicate internally early and often so that the front lines are equipped with a clear and consistent story when rates begin to move and clients start calling.
Commercial Banks Prioritize TM Client Experience in 2022
Now that most banks have completed their budgeting processes for 2022 and are preparing to put the plans into action, we asked our CDA panel of banks how they are deploying those funds. As we’ve previously outlined, the 2022 strategic agenda for commercial banks includes building primacy, TM fee pricing, rising-rate playbooks and enhancing digital capabilities. What the banks have told us about their planned investments clearly reflects these priorities.
All four of the top priorities touch on one or more of these strategic themes. (See Figure 4.) More than three-quarters of the CDA banks said that enhancing client experience was a top priority and 40% said that product and/or pricing simplification was a top priority. A key way to secure funding for either of these types of initiatives is to stress the benefits of deepening primacy among current clients. Product and pricing simplification via checking account packages and TM product bundles, specifically, are an effective platform to capture primary relationships for small business clients. While the other two top priorities – faster payments and extending solutions deeper into client value chains – are directly tied to growing fees and enhancing digital capabilities, they are also products that enable a bank to win more primary relationships by bringing value to the client’s working capital management processes.
Figure 4: Which of the following are your top three cash management investment priorities for 2022?
Source: Curinos CDA
A deeper cut into investment priorities also shows how focused banks are on enhancing client experience. (See Figure 5.) When asked what about onboarding investments, 95% of banks reported that they are currently investing in or planning to invest in onboarding. Three-quarters of them reported a focus on new client and account onboarding when seeking to win primary relationships. In our corporate consulting experience, effective onboarding is often a major factor for clients when deciding to maintain or grow relationships at banks. A poor onboarding experience actively discourages the migration of volumes between banks for both the on-boarded products and others. Banks must excel at onboarding to build primacy. It will also have the added benefits of accelerating revenue and achieving better allocation of sales and operational resources.
Figure 5: Which of the following onboarding activities are you currently investing in or planning to invest in during 2022?
Source: Curinos CDA
Global Wallets Simplify Foreign Currency Payments
The growth and transformation of digital payments today center around building an ecosystem that can originate and accept payments in any channel and communicate seamlessly across systems in near real-time on a single platform. The goal of the global wallet is to redefine and streamline international payments, regardless of currency, through one main U.S. account. Users can have multiple currencies under one account without opening multiple foreign currency accounts. This is significant because it is burdensome to open and close accounts. There are a handful of fintechs and financial institutions building toward this global model.
Key client benefits of global wallets include control over FX fee transparency, speed of transaction by reducing clearing time and tracking for the originator and beneficiary. Most financial institutions already offer end-to-end payment view through SWIFT’s GPI initiative under the commercial platform. Payment tracking adds a self-service component that allows corporations to share tracking links with beneficiaries through the commercial platform, solving payment inquiries in real-time. Reporting, analytics and insights are being built into the service to simplify reconciliation across all accounts and currencies
AI can turbocharge global wallet solutions in different ways, such as facilitating a payment on its own (outside of approvals) and proposing the best method of payment based on timing, amount, transaction history or what the beneficiary prefers.
These innovations aren’t limited to global financial players. National and regional banks can build off current global wallet models or partner with fintechs that have developed a winning solution to launch faster for less cost. The global market is now within reach of a company of any size – middle market companies and even some small businesses also transact overseas. The key is developing a solution to assist client growth that includes the ability to receive and pay in local currency, to deliver instant domestic or cross-border payments without regulatory or policy risks through desktop servicing and mobile applications. The virtual market is global and financial institutions need to innovate to acquire new and retain current clients that are growing across borders.