From the Curinos webinar, “The Year Ahead: Planning for Success in 2024” on December 5, 2023. The webinar featured executive vice presidents Pete Gilchrist and Brandon Larson; Adam Stockton, head of retail deposits and lending, and Suraya Randawa, head of omnichannel experience.
1. Higher-for-longer interest rates are here to stay.
Even if the Fed cuts its benchmark rate in 2024, it’s likely to remain above 4%. With today’s marginal cost of funds (mCOF) already between 9% and 12%, deposit gathering will continue to be expensive. Even the most effective targeting and mass personalization won’t necessarily be able to protect the back book from significant repricing. And just as many market participants underestimated the pace of increases in this rate cycle, so too are many likely to overestimate the pace of the declines, which will not be as fast or as far as the market anticipates.
2. Commercial and small-business deposits can improve mCOF.
Commercial banking involves more personalization and less cannibalization than retail, and the result is a marginal cost of funds that tends to resemble a coupon rate of 4% to 6%. Small-business deposits will also continue to be attractive because most are in non-interest-bearing (NIB) checking accounts and, over time, those deposits grow much greater than consumer balances. Adding the primary lending relationship raises those small-business deposits balances by 2X to 3X.
3. Upcoming jump in CD renewals is not a bubble.
More than half of the relatively low-cost CDs of this past year are set to renew in Q1 2024, but this is hardly a one-and-done phenomenon. Planning horizons for CD renewals need to be multi-year and to be effective, they need to encompass accurate forecasting, adaptive product strategies, personalization and seamless ways to renew digitally. CDs represent much more than hot money — renewal retention is holding above 80%, and among the customers who bought CDs over the last 18 months, total relationship balances have increased. Clearly, CDs are likely to be an important component of any successful long-term deposit franchise.
4. Deposit growth means balancing marketing expense and interest expense.
Using rate to grow deposits is expensive, but it’s one of the only tactics that works in the near term. Building a branch today doesn’t bring in deposits tomorrow, and marketing campaigns take time to gain traction. The most expensive form of marketing may be branch signage, which is seen only by existing customers and results in back-book cannibalization without new-customer acquisition. Still, FIs may need to curb their optimism when pulling the rate lever. Just 18 months ago, 86% of branch balances were priced under 10 bp. That’s now down to 47%. Expecting deposit growth and retention while reining in interest expense will continue to be a difficult needle to thread.
5. Cost cutting needs to take the long view.
Branch closures and marketing are relatively easy targets for cost cutting because their effects are immediate, but losing a branch can mean losing fully half of new-to-bank sales over time. A material portion of any branch-related savings needs to be diverted to marketing, the sales force or even new branches. The ROI on marketing is often up to 18 months, so any cuts today need to consider possible effects on acquisition in 2025. Curinos forecasts that marketing spend in 2024 will be flat but cautions that budgets in Q3 and Q4 are vulnerable to cutbacks.
6. Lending opportunities are out there.
In commercial lending, there will be pockets of opportunity, but they may be relatively difficult to identify and underwrite. Curinos believes that lenders have the right to ask for more of the business, including treasury services and additional deposits. In home lending, the bright spot is home equity, where rising real estate prices have more homeowners tapping into their growing equity. A growth area in consumer lending is “buy now, pay later,” which saw a 17% year-over-year increase in Black Friday sales and a whopping 43% increase on Cyber Monday. Curinos continues to see that credit decisions for all forms of lending are clarified and improved when the institution has the deposit relationship.
7. AI will move from fraud prevention to conversational customer support.
Most financial institutions are already using artificial intelligence for fraud detection, anti-money laundering, anomaly detection and credit-risk assessment. Emphasis going forward will be on improving the origination process for consumers and businesses, and containing costs through streamlined documentation and administration. The biggest growth potential for banking is what customers already experience in other industries: true conversational AI. In the face of continuing branch closures, these customers (especially the three in 10 who aren’t digital natives) will be looking for a convincing replication of human interaction through generative AI-fueled chatbots.