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Commercial Primacy Comes into Focus as Higher Rates Loom

The case for primacy has never been stronger in commercial lines of business. But the definition of what makes a primary customer has changed, shifting from credit to payments for many corporates. This puts new pressure on banks to identify, acquire and retain these customers before rates start rising.

Curinos believes that banks should intensify their efforts now to cement primary relationships among existing corporate clients and also identify those who can become primary in the near-term.

A strategy that incorporates clearly defined and ingrained approaches to primacy will be essential as banks navigate the challenges of identifying which balances to defend with rate and which to lag aggressively.


Just like in retail banking, commercial primary relationships bring a litany of benefits, including an outsized share of stable through-the-cycle, low-cost operating deposits and fee income. Indeed, Curinos research has consistently shown that banks with leading approaches to commercial relationship primacy generate 25% more fee income than the average bank. They also have more pricing leverage with primary customers because those clients would face high costs if they migrated complex payments relationships to another providers.

In another example of the benefits, betas on ECR DDA portfolios (which typically comprise primary cash management deposits) were a mere 7% through the last rising-rate cycle compared with 57% for commercial MMDA portfolios. (See Figure 1.)

Figure 1: Average Portfolio Rate Betas for Commercial Middle Market, Dec. 2015 – June 2019

It used to be that commercial customers were considered to be primary when the bank obtained a significant position in the credit. But providing credit is no longer a differentiator at a time when banks have ample capital and liquidity to grow assets and a proliferation of alternative funding sources, including non-bank lenders, are also extending credit.

Instead, banks and corporates alike have started defining primacy as the point when the bank takes on management of the customer’s payments.

This transition has accelerated as the pace and complexity of payments is increasing, prompting banks and fintechs alike to innovate products that extend the value proposition of their offerings deeper into companies’ cash conversion cycle.

Moreover, investments in digital innovation are creating additional layers of differentiation between market leaders and all others across the bank and payments fintech arena.

There are also other reasons today to focus on acquiring primary relationships and developing advanced approaches to measuring primacy. First, banks are starved for high-quality commercial assets. The average bank has grown deposits by more than 30% since March 2020 while the commercial loan book is flat to down. This is especially true when looking at core C&I. The primary bank will likely have first call on customers incremental financing needs.

Furthermore, there are significant implications for pricing and balance sheet allocation. In the current environment, banks have limited capacity to grow deposits without diluting return metrics such as ROE and ROA.


What does this all mean? Achieving primacy with your customers and measuring when you’ve gotten there are more difficult than ever.

Curinos believes that banks should measure primacy along two dimensions: current primacy and future primacy. These measures will vary by bank and customer, but both require a combination of analytics and data. The best approaches systematically incorporate data to measure and validate the “off-us” portion of the customer’s business.

In measuring current primacy, the biggest challenge is to move from the notion of “what do I have?” to “what should I have?” Many banks’ primacy definitions are heavily levered to total revenue or product utilization. This can lead to wrong conclusions where clients produce large revenues at thin margins in non-primary products. With respect to future primacy, it is equally important to know where the opportunities are.

This helps bankers to focus calling efforts on a narrow subset of clients where they have the greatest potential for cross-selling (and advising) their way into the primary position. On the flip side, it is critical to know where primacy potential is low to avoid deploying resources towards activities that will likely have low value.

The next rising-rate cycle, which according to half of the FOMC is expected to start in 2022, will present an unprecedented pricing challenge. In prior cycles, most banks have had a practically unlimited demand for deposit growth, so elasticity was the foundation for pricing strategies. But we anticipate that many banks will still be carrying significant excess liquidity on their balance sheets when rates rise next year. Consequently, customer primacy, not rate elasticity, should form the foundation of most pricing strategies.


Lagging betas in a rising-rate cycle always entails a delicate balancing act between the customer’s desire to ride the tide of higher rates and the bank’s need to capture a fair through-the-cycle value exchange with the customer. Bankers are often caught in the middle.

We anticipate additional layers of complexity in the upcoming cycle. First, bankers and clients alike will have recent memories of the heady times at the late stages of the past rising-rate cycle when betas of 80% or more on commercial interest-bearing deposits weren’t uncommon. Moreover, there will likely be additional elements of pricing disruption due to the emergence of fintechs that have acquired bank charters. But with balance sheets loaded with liquidity, established players won’t be able to profitably apply the playbook they used in the late stage of the last cycle.

A fair value exchange will typically dictate that primary customers should get a good rate, but not necessarily the best rate in the bank. This is because the relationship is secured through many layers of sticky integration and value exchange across product and business lines. That said, if a primary relationship comes under attack from a competitor, the bank should be positioned to move swiftly and decisively to defend the customer relationship.

For non-primary relationships, the pricing strategy should depend on the potential for future primacy. Pricing can be an effective lever to deepen the relationship for non-primary customers with high potential. For non-primary relationships with low potential, the bank should treat the deposits as wholesale funding and use rate only when the bank needs the liquidity. Curinos acknowledges that this can be a challenging message for bankers because it may result in deposit attrition.

Successful primacy programs require committed executive leadership, an inclusive approach across front line teams, rigorous but accessible analytical approaches that are backed by both bank data and “off-us” data and a programatic approach. These efforts take time, so there’s no time to waste.

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