We begin this month with an early readout of the Curinos CDA Executive Summary, which shows another increase in commercial deposit volumes. This time, the increase is similar across banks of all sizes.
Next, we take a moment to review the status of virtual accounts in the industry. These have moved from a rarely-sold accommodation to a key expansion opportunity. Finally, we analyze the expansion of real-time payments in commercial, another capability that has been languishing on the shelf for years but is finally starting to take off.
Another Quarter In The Books, More Commercial Deposit Growth
The same old refrain is back as we conclude our analysis of second-quarter commercial data: deposit growth continues, though thankfully the pace is subsiding. Commercial deposits grew at 1.0% for the quarter, which would be fine if it wasn’t for the enormous glut of commercial deposits that has flowed into the system over the last 18 months.
After several quarters in which smaller banks grew deposits much faster than larger banks, institutions of all sizes showed roughly the same commercial deposit growth in the second quarter. It appears that banks of all sizes are now operating on similar playbooks of accepting commercial deposits when they believe a primary relationship will be forthcoming, but discouraging them otherwise.
The big question is whether the growth in regional and sub-$50 billion banks over the prior two quarters will prove to be transitory, non-operational funds that depart as the economy improves or whether regional and smaller banks can convert some of these depositors into primary customers that take out loans and use treasury management services. (See Figure 1.)
Figure 1: The largest banks continue to limit deposit growth more than regionals and smaller banks
Meanwhile, loans will be a bright spot at some point, but that point isn’t now. The quarter saw a very modest increase in commercial loans, with balances up just 0.5%. Banks frequently report hefty pipelines that should mean healthy new activity in the quarters to come, but thus far the new activity has been effectively overshadowed by paydowns and payoffs.
There was very little movement in commercial deposit rates in the second quarter, with modest downward movement continuing. While it may seem as though all commercial deposit rates in the market have hit a floor, there are still pockets of basis points to be squeezed out of some portfolios. Even as this downward trend continues, a surprisingly large majority of banks have started preparing for rising rates. More than 80% of banks have taken the first steps of reviewing and analyzing past rising-rate cycle performance to prepare for higher rates on the horizon. (See Figure 2.) The mantra of rising-rate performance in the industry is consistent: you have to understand customer primacy to begin your rising-rate planning.
Figure 2: Which of the following steps have the business and Treasury engaged in to prepare?
52%: Back-of-the-envelope scenario analyses for rates, deposit growth, and loan growth
52%: Complete scenario analyses for rates, deposit growth, and loan growth
71%: Agreed on preliminary beta targets for the business overall
24%: Agreed on preliminary beta targets for specific sub-LOBs/segments
24%: Agreed on preliminary beta targets for specific customers
10%: “Wait and see” approach – no immediate moves planned
The Rise Of Virtual Accounts And Real-Time Virtual Cash Management
Virtual account management (VAM) isn’t a new solution in the commercial banking space, but the use cases are evolving and expanding due to API and open banking. The growth can also be attributed to new virtual cash management solutions that are penetrating the market, streamlined accounting, ease of maintenance and enhanced security – all for a low cost.
Virtual accounts are account identifier numbers provided to SMEs and multi-national organizations that are assigned and linked under the umbrella of a physical account, serving a multitude of functions with greater control. Digital accounts act like physical accounts, but they don’t carry a balance. Instead, they simply act as the middleman, facilitating payments to and from the physical account. Administrators of corporate virtual accounts can set spending controls by limit, day and vendor while setting granular reporting levels. The power is in control levels, security and reporting.
The principle is similar with virtual credit cards, which mask sensitive account data by providing unique account identifiers.
Virtual accounts for businesses provide the companies with greater control, meaning they can open and deactivate accounts in real time, a process not available with Know Your Customer (KYC) requirements of physical accounts. This slashes the time it takes to open or close an account to seconds from weeks or months.
They also provide greater visibility into payment data, actionable insight within account reconcilement and the receivables and payables management process. VAM offers robust reporting on par with physical accounts and allow users to organize virtual accounts by vendors, payment type or function. New use cases include expanding into liquidity management and loan management to serve the totality of the relationship.
Security is also a big selling point. Administrators can assign and self-service digital account identifiers and set filters and limits by user, company entity, transaction amount or payee. Fraud prevention is maintained because the physical account number that virtual accounts are tied to is protected, so companies aren’t providing or sharing the information.
A large number of banks are getting on the VAM bandwagon. JPMorgan, Goldman Sachs, Citibank, and HSBC already offer the solution. Others are expected to join in soon.
There’s little doubt that these products are filling a need. Large commercial clients typically open and maintain on average 20-50 accounts and that can grow to hundreds for the largest corporations. This can be expensive and hard to maintain with physical account opening and servicing process.
The heightened need for virtual cash management, account security, self-service and real-time capabilities are imperative for growth and will be table stakes moving forward. Virtual accounts fit into a financial institution’s internal roadmap of digital advancement and real-time solution strategy, driving these initiatives forward while offering a multitude of benefits to customers in the remote working environment.
RTP Can’t Be Ignored
When The Clearing House launched its Real-Time Payments (RTP) network in 2017, commercial bankers wanted to know when they would need to offer RTP to their business clients and how they would do it. The slow pace of initial adoption muted the urgency and payment limits precluded RTP from many B2B transactions. Over the next few years, adoption remained steady at these low levels as the industry concentrated on consumer RTP and P2P applications. As a result, most banks (except for the largest ones) didn’t implement RTP – and especially not for commercial clients.
Fast forward to today. Implementation and adoption have picked up steam and commercial banks are again wondering if and how to respond. The number of banks in process of implementing RTP via The Clearing House increased by a multiple of five in 2020 to 130 institutions total, according to the latest RTP trends report from FIS. The report also found that half of U.S. demand deposit accounts have access to RTP. Along with these trends is the acceleration in usage during the pandemic of real-time P2P apps like Venmo and Zelle.
Furthermore, another RTP network hosted by the Federal Reserve is now actively piloting among 200 institutions and targeting a 2023 launch date.
Does this rapid change in adoption mean banks that aren’t currently offering or implementing commercial RTP will be left in the dust?
Commercial RTP adoption and usage still remains low. As a result, Curinos believes that banks may be at risk of implementing commercial RTP with an overly optimistic or defensive business case.
While many studies and surveys have shown that businesses are eager to implement RTP, we haven’t observed wide-spread adoption or usage yet. Indeed, our analysis of commercial payment volume data sourced directly from corporates via NDepth and from banks shows that RTP volumes are minimal compared with traditional payment types. Also, businesses need to update their own systems and processes in order to use RTP to their full value – something that we haven’t observed en masse yet. In the end, banks that implement RTP defensively now may not drive the volumes needed to justify the expense.
One exception, however, is banks that focus on segments that have a strong use case for adoption, such as payroll or title companies. A successful rollout will be rooted in the understanding of those use cases and the ability to articulate them to help create the business case, both internally and externally to their clients. (See Figure 3.)
Figure 3: Sample Commercial RTP Use Cases by Industry
Receive: RTP can replace other types of payments used – cash, certified checks or wires – and provide immediate settlement and finality.
Send: RTP would replace wires and overnight packages with checks.
Send/Receive: RTP can replace wires to provide immediate settlement and a wider availability window.
Source: Curinos Analysis
Commercial RTP will likely be a major payment type and a critical capability for banks to provide their clients, but the data and market trends suggest that we are still a few years away from widespread usage by businesses. That doesn’t mean banks should just sit back and wait. They should take this opportunity to study the issue, determine budget requirements and develop a deep understanding of the best use cases so that, when the time is right, they are ready to go.