The Digital Customer Experience

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The digital customer experience is a critical component to staying competitive today. Bank customers are consumers first, and their expectations are being shaped by tech companies like Apple and Uber, says Brian O’Neill, chief client officer at Numerated. To improve the digital experience for customers and boost customer loyalty and retention, bankers should focus on creating experiences that make it easier for customers to manage their financial lives, by making payments or applying for loans.

Topics discussed include: 

  • The Competitive Landscape 
  • Measuring Customer Satisfaction
  • Simplifying Financial Transactions 

Treasury Management Steps Into the Spotlight

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At Q2 we typically perform our “State of Commercial Banking” analysis and report on an annual basis. But 2023 has been no typical year for the banking industry. The tumultuous events that began in March prompted us to take stock earlier, with a mid-year analysis. You can download the full report here, but this article will focus on a particularly intriguing finding involving Treasury Management.

Before we dive into the numbers, a quick reminder: the data in this article is pulled primarily from Q2’s proprietary databases and reflects actual commercial relationships with more than 150 banks and credit unions in the United States — ranging from small community banks to top 10 U.S. institutions. We also gleaned insights from relationship manager pricing activity on the Q2 PrecisionLender platform. 

The Shift from NIM to NII
Until the first quarter of 2023, each progressive rate increase had a direct, positive impact on net interest margin. With deposit betas relatively low, the spread between lending rates and funding costs had widened with each Fed increase. But that positive correlation between the Federal Reserve’s fed funds rate and NIM came to an abrupt halt earlier this year, as industry wide NIM compressed despite rising rates.

 

Source: FDIC

Meanwhile, the rising costs associated with commercial lending – interest expense, liquidity premiums and loan loss provisions – have shone a light on cross-sell as banks seek to preserve or even strengthen profitability. After non-interest income had trended lower in the latter stages of 2022, the first quarter of 2023 saw a renewed focus on NII and some impressive gains.

Source: FDIC

Treasury Management Powers Relationship ROE
The data in those FDIC charts highlighted a trend we’d already suspected, confirming what we’d heard anecdotally during our daily conversations with bankers throughout the United States.

It’s hardly a surprise that banks are putting increased emphasis on cross-selling. Irrespective of the rate environment, relationships with ancillary business produce measurably stronger yields than those without. Cross-sell helps preserve long-term operating accounts, granting customers the benefits of earnings credit to offset the cost of the additional services, while also securing low-cost deposits for the bank. Additionally, the non-credit business itself is fee-rich and highly lucrative.

Still, when we delved into the Q2 PrecisionLender Commercial Pricing Database to get a measure of how big that cross-sell impact is, and what’s driving it, we were struck by what we found.

In the first half of 2023, with NIM still relatively high, credit-only relationships gave a solid 13.4% ROE. The ROE rose by nearly 40% (to 18.9%) when relationships also included deposits.

But take a look at what happens when the relationship includes treasury management (TM).

Source: Q2

The ROE on those relationships (both those that include a credit element and those that are only deposits and treasury management) averaged 39.2%!

Moving Forward
The data from the first half of 2023 shows that banks can no longer ride the wave of rate increases to maintain risk-adjusted returns. As lending costs rise, banks are putting increased emphasis on cross-sell. When that cross sell adds treasury management products and services to the relationship, the ROE impact can be powerful.

A Regulator Looks Back

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Julie Stackhouse has witnessed a lot of turmoil in the industry since she started her career in 1980 at the Federal Reserve Bank of Kansas City.

An oil-fueled recession made for an interesting start to what became a four-decade career, lastly as executive vice president handling supervision of banks. In the early 1980s, she spent a lot of time in Oklahoma at a bank that failed as a result of the excesses of the time, Penn Square Bank. The Oklahoma City-based bank made a lot of bad energy loans, selling loan participations to big banks like Chase Manhattan Bank, later JPMorgan Chase & Co., and Chicago’s Continental Illinois National Bank & Trust Co. — which failed as a result in 1984, the largest bank to fail at that time.

Banks were overloaded with deposits; Penn Square had to put that money to work somewhere. Shoddy underwriting got deals done faster, and the bank grew rapidly before a run on deposits in the summer of 1982 resulted in its insolvency. Sound familiar?

“There [were] some real cowboys in Oklahoma back in those days,” she recalls. “And you pretty much had to figure out when you were being told what was happening with candor, and maybe when it was just a little bit embellished. And so I learned a lot from that.”

She’s learned a lot through the series of crises that hit the industry and retired on the cusp of another one, the Covid pandemic that hit the U.S. in early 2020. So, she swore she’d never join a bank board — until George Makris Jr. of Simmons First National Corp. persuaded her to join his. Makris, now executive chairman of the $28 billion, Pine Bluff, Arkansas-based bank, served as CEO until his retirement last year. She kept saying ‘no,’ she says. “I will give George credit. He is persistent when he has something in mind.”

But as much as she’s learned from a career regulating banks, it’s the five years she spent as an active stay-at-home mom — where she became deeply involved in improving her local community — that taught her about engagement and leadership.

“Just because I was not getting paid doesn’t mean I was choosing to do nothing,” she recalls. She joined the planning commission in Egan, Minnesota, and volunteered locally. She worked with great leaders, learning lessons she says she never would have learned at the Fed. “To be a great leader, you have to not only have a vision of what you want to accomplish, you have to have the energy and commitment to carry that vision along.”

She takes the same active approach to retirement as she took to motherhood, serving on the planning commission in Fort Collins, Colorado. Stackhouse shares lessons learned from her career as a regulator and weighs in on the industry’s current challenges in this edition of The Slant podcast.

This episode, and all past episodes of The Slant Podcast, are available on Bank Director.com, Spotify and Apple Podcasts. Governance issues like these will be covered during Bank Director’s Bank Board Training Forum in Nashville Sept. 11-12, 2023.

A Framework for Incentive Plan Adjustments

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Over the last few years, compensation committees have used their discretion more readily to approve adjustments that impact incentive award payouts. These adjustments were a practical matter during the pandemic and a more recently, to address the rapidly changing interest rate environment. Compensation committees made decisions to achieve appropriate outcomes, given external forces, while holding management accountable for results.

While compensation committees often spend time determining whether adjustments lead to a balanced outcome, they often pay less attention proactively thinking through the process which could be used for future decision making. The following principles create a framework that operationalizes the use of adjustments to metrics from year to year.

Principle 1: Accountability
Compensation committees should determine whether a potential adjustment was due to material external changes or factors that could have been avoided through better decision making. For example, accounting and tax law changes are regularly excluded for the year in which they are enacted and after the goals have been set. Conversely, taking a certain accounting or tax position that ends up being faulty is unlikely to be excluded from actual results, since it was a management decision.

Principle 2: Impact
Any modifications should include documentation from management regarding the impact of the adjustment on the payout and a year-over-year history of adjustments. The document should walk the compensation committee through the issue, the rationale for the adjustment and the financial impact. Assessing the effect to ongoing operations is an important aspect, since adjustments may be made due to a mid-year decision but then incorporated into the banks budgeting process on a go-forward basis.

Compensation committees should discuss potential adjustments at the time business decisions are made, so that it builds in adequate time to review requests. Last-minute requests for adjustments put the compensation committee in the difficult position of understanding incentive outcomes and the rationale for adjustments at a time when agendas are jammed-packed with year-end decisions. The committee’s inclination may be to simply acquiesce and move the meeting along, leaving directors afterwards feeling strong-armed into a point of view.

Principle 3: Bank and Market Practices.
The compensation committee should develop a guideline document that identifies the categories of adjustments it may or may not exclude. For example, events outside of management’s control that could have a material impact to the business, such as tax and regulatory changes and natural disasters, are common adjustments. Certain non-recurring expenses due to mergers and share buybacks may also be excluded in the year in which a business decision is made but was not part of the annual budget. For these events, compensation committees should ascertain whether management’s decisions provided a positive impact to shareholders and the adjustment eliminated a potential disincentive to act in shareholder’s best interests.

There should be documentation summarizing current and historical adjustments the compensation committee could use as a reference to ensure consistency year-over-year. Often adjustment decisions are discussed in executive session, leaving little documentation around the rationale; and the actions become buried in multiple meeting minutes throughout the years. Listing the categories of potential adjustments and the history of past actions will help clarify which adjustments are acceptable while allowing flexibility for unique circumstances.

Principle 4: Timeframe of Adjustment
Compensation committees should assess whether the reason for adjusting is a short- or long-term issue. For example, a one-time management decision that would likely result in better performance over the long-term may reduce an annual incentive payment in the current year, but increase the value of future award payouts, in both the annual and long-term incentive programs.

Developing a framework that evaluates adjustments along with a process for deliberation is likely to result in more confidence in the outcomes, greater consistency in practice and a more efficient process for management and the compensation committee.

Responding to Uncertainty by Focusing on Bank Fundamentals

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In the face of a novel environment and great economic uncertainty, community banks should focus on their fundamentals — and their customers.

That’s the message from speakers throughout the first day of Bank Director’s 2023 Acquire or Be Acquired conference. More than 1,700 attendees started off Sunday with an overview of the challenging economic landscape, coupled with encouragement that there are opportunities for nimble operators.

“No way do I believe that size alone is a determinant of success,” says Tom Michaud, CEO of investment firm Keefe Bruyette & Woods, in the conference’s opening session. “Size hasn’t ensured success. Some of the finest banks I know are under $5 billion in assets.”

It all comes down to execution, and there is reason for banks to be cautious. It’s not clear if the economy will go into a recession or land softly, although Michaud says his firm is projecting a “softer” landing for 2023 and single-digit loan growth. The Federal Reserve has raised rates at a pace that most bankers have never experienced — a dramatic turnabout two years after the industry was deluged with $2 trillion of stimulus spending to address the coronavirus pandemic. But even with the prospect of slower growth, Michaud advises banks to keep their balance sheet clean and find opportunities to build capital. 

“An industry that is catching its breath but remains profitable is a good place to be,” he says.

For now, this rapid whipsaw is the new normal in banking. Ahead of the conference, former Comptroller of the Currency Gene Ludwig told Bank Director that one truism in banking from the last half-century is that “the ups and downs come more frequently, and probably more severely, in shorter periods than they have in the past.” Technology and globalization have accelerated the pace of change, and banks need to be prepared for the volatility. 

Ludwig speaks from experience. In addition to serving as comptroller in the 1990s, he founded IntraFi, a reciprocal deposit network formerly known as Promontory Interfinancial Network, and is now a managing partner of Canapi Ventures, a bank-focused venture capital fund that invests in financial technology companies.

Having seen a variety of economic and credit cycles, Ludwig advised management teams to operate their institutions for the long haul and resist the noise of one quarter or the next. For the former comptroller, this comes down to the fundamental focus on customers, community and deposits. “Is what I am doing, and how I’m operating, best for my customer? Am I doing that in fundamentally a safe and sound manner?”

Increasingly, low-cost deposits are an important aspect of those customer relationships. Technology has made it easier for deposits to move, creating competition for those once-sticky funds. “Bankers that cultivate good customer relationships and use modern tools are able to have more stable and lower cost funding than banks that don’t,” Ludwig said, adding that banks have a variety of methods and tools to encourage existing companies to keep their deposits. 

The environment has shifted from unprecedented levels of liquidity flowing into banks to outflows. Total deposits in the banking industry declined for the second consecutive quarter, down 1.1%, or $206 billion, from the second quarter of 2022 to the third quarter, according to the Federal Deposit Insurance Corp. Driving the shift were accounts with balances above $250,000.  

“Banks in general are going to have to start thinking about funding loans as they go along,” Michaud told Bank Director ahead of the conference. “Previously, they had this reservoir of excess funding that made it easy to make an incremental loan. Now they’re going to have to fund it marginally, and that’s why we’re seeing deposit costs rise.”

Many institutions consider themselves “relationship lenders,” but Mac Thompson, founder and president of analytics firm White Clay, points out that many bankers struggle to quantify the depth of their customer relationships. That is one imperative for community bankers to grasp ahead of a potential recession.

“Who is using your liquidity, who is using your capital and what are you getting paid for it?” he says during a lunchtime presentation. Relationship managers should know the answer to those questions by analyzing a customers’ loans and deposits. Thompson urges banks to focus on bringing customers’ operational accounts to the bank — the accounts that pay their bills — because those accounts may be harder to move in response to interest rates. 

Customer loyalty goes both ways in relationship banking, and Michaud said this is one approach banks leverage when navigating the uncertain environment. 

“Now’s the time for banks to be there for their best customers,” he said, especially as access to credit tightens. “Typically when they are, their best customers tend not to forget it.” 

A Safecracker Explores the Nature of Security

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Dave McOmie starts every job staring down a locked door.

McOmie has been a safecracker for more than 50 years, having gotten his start watching a local locksmith help out a neighbor. He became the locksmith’s apprentice and quickly discovered the work of safecracking: breaking into vaults and safes for customers that had become inadvertently locked out of them.

That took him into the world of banking. Vaults have been a mainstay feature of bank branches, but anyone who has worked in a branch will know there are other physical safety mechanisms that occasionally lock up: lockers, cash safes, undercounter units and ATMs. He’s worked on all of them and knows the stakes: Whatever is behind that locked door is important, and someone wants it.

“When the bank or credit union cannot get into their vault, that situation tends to escalate quickly,” he says. There’s usually some urgency to the situation: Someone needs a wedding ring, a passport or a will, and there’s a tight timeline. McOmie is under pressure to open the vault. “[I]t’s stressful when you have an entire family sitting in the lobby, waiting to retrieve their passport so they can go to the airport. … You don’t want to be the reason they didn’t make their flight.”

In facing these locked and secured doors, McOmie says it’s key to prepare and research in advance. A mistake can trigger other safety mechanisms in a vault, quickly shutting down his entire progress. He carefully documents his progress and the products he works on to make the next job easier. 

“It’s all about the challenge and the conquest. You’ve got a locked door in front of you. What’s the problem? How can you overcome it? And can you do it efficiently? And quickly?” he says. 

McOmie joins Bank Director to discuss how he became a safecracker, how he approaches a locked door problem and what trends in bank branching mean for vaults, physical security and the future of safe cracking. Listeners interested in learning more about his experience can read his memoir “Safecracker: A Chronicle of the Coolest Job in the World,” which includes his experience opening the musician Prince’s vault at Paisley Park.

This episode, and all past episodes of The Slant Podcast, are available on Bank Director.com, Spotify and Apple Music.

Disability and Opportunity in Banking

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Keri Cain didn’t set out to become a marijuana banker. But after her muscular dystrophy led her to give up her dream career in apparel merchandising, she moved back to Oklahoma and stumbled into the massive opportunity to support businesses operating in the newly legalized marijuana space with legitimate banking services. She currently serves as Bank Secrecy Act director of special programs at Tulsa, Oklahoma-based Regent Bank, and created the institution’s cannabis banking program. 

Her interest in this sector is informed by her curiosity as well as her disability. She shares with Bank Director her thoughts on including disability in conversations about diversity and inclusion, how banks can make their workplaces more accessible for all employees and how therapeutic cannabis may figure in her future.

This episode, and all past episodes of The Slant Podcast, are available on Bank Director, Spotify and Apple Music.

What’s Working and Why

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DI_mag_thingy.pngI am a big believer that many banks have immediate opportunities to expand what banking means to individual and business customers. This special supplement to Bank Director magazine highlights a number of interesting technologies that have re-shaped the fortunes of banks across the U.S.

Now, technology in the financial world encompasses a broad spectrum of tools. For most officers and directors, I’ve found conversations about technology naturally incite interest in mobile banking. This isn’t a surprise when one considers that 68 percent of American adults connect to the Internet with smartphones or mobile devices, according to the Pew Research Center. Smartphone penetration is highest among people with higher incomes, and the young. What an opportunity to engage and reshape your relationships with this audience! To show how Americans use smartphones, and how banks are offering mobile services to meet that demand, Bank Director compiled an infographic on pages 4-5.

Clearly, banks are trying to reach customers with the appropriate technology to stay relevant. But some banks are pushing themselves beyond what every other bank is doing. A story on page 6 features interviews with banking leaders about the most successful innovations or technological advances impacting banks right now. Among new ideas is Malauzai Software’s and Allied Payment Network’s PicturePay, which allows banks to pay customer bills with a photo of the bill taken on a smartphone. 

As many banks face pressure to grow revenue or reduce expenses, we take a look at some that are coming up with creative solutions to tackle that problem. For instance, Central Bancompany in Jefferson City, Missouri, turned to Ignite Sales to double the number of services the average new business customer uses at the bank from three to six or seven different products or services. 

Likewise, City National Bank in Charleston, West Virginia, found success with the help of StrategyCorps. About one-third of the bank’s customers have opted into a value-added checking account for $5 per month, even though free checking is still available. Inland Community Bank in Ontario, California, used Paladin fs to save money on its core information technology contracts during the sale of the bank, improving the value of the deal and saving $700,000 in termination expenses.

While most banks are far more efficient than they were just five years ago, there is money to be saved in banking. Some of the more ambitious companies, who want to stay relevant and solve their customers’ problems, are saving money and growing revenues through a variety of means. Banks have to make changes to stay relevant and address customer needs, and some of the more inventive banks are finding unique ways to do this while boosting the bottom line. On behalf of our team, please enjoy this special supplement, one we designed to inspire and shine a light into what’s possible.

Contents

When Free Checking Is No Longer Enough

By: Sandy Smith

Successful banks like City National are always looking for customer friendly ways to grow fee income, says StrategyCorps’ Dave Crook.

Giving Banks a Better Way to Cross Sell

By: Sandy Smith

When Central Company engaged Ignite Sales, it needed to help its front-line associates improve relationships with its business customers.

Saving Money on IT Contracts

By: Rick Grant

Financial institutions are generally paying too much for information technology contracts. In many cases, those contracts could negatively affect M&A transactions in the future.

Succeeding With Mobile Bill Pay

By: Rick Grant

Park Sterling Bank is increasing customer retention through mobile bill pay.

Walmart Makes a Bet on the Future of Banking

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10-10-14-StrategyCorps1.png
Photo: Business Wire

When Wal-Mart Stores Inc. announced its partnership with Pasadena, Calif.-based Green Dot Corp. to launch the online and mobile-only banking alternative GoBank, the retailer was also placing its bet on where the future of banking is heading. But with all its other financial ventures up to this point still in place, like in-store branches and prepaid debit cards, Walmart is keeping a hand in all possible outcomes.

Not only is GoBank designed with modern features that would be appealing to any consumer looking for more advanced mobile banking, the account is low cost and open to almost anyone over 18 with i.d. verification. This makes the account extremely attractive to customers who simply aren’t satisfied with their current bank relationship or have limited access to traditional banking.

Data from the annual Consumers and Mobile Financial Services report published by the Federal Reserve shows that people who are unbanked (do not have a bank account) make up 11 percent of U.S. consumers, while the underbanked (minimal access to bank services) make up 17 percent. And according to data from statistician Nate Silver’s web site, Fivethirtyeight.com, states with higher percentages of unbanked households are home to more Walmart stores. Since Walmart’s traffic is more likely to have a high concentration of unbanked and underbanked customers, GoBank allows the retailer to seize the opportunity to help those people get banking products, which helps GoBank’s business grow and allows people to spend more money in Walmart stores.

“GoBank is breaking down the barriers to traditional banking and brings the benefits of a FDIC-insured checking account that’s loaded with features to a large segment of Americans,” said Green Dot CEO Steve Streit in a statement.

The move to launch GoBank now gives Walmart the opportunity to target consumers from three different angles—the traditional branch, prepaid cards and GoBank—in order to appeal to the underbanked or now, any modern bank customer.

Traditional Branches
The retailer is already offering traditional branches in nearly 40 percent of its U.S. stores. With more than 700 branches in Walmart, Woodforest Bank, headquartered in The Woodlands, Texas, has the largest presence out of the total of more than 1,600 in-store banks. Woodforest serves the underbanked with its trademarked Second Chance Checking, created to give people who would typically be denied a traditional checking account the opportunity to open one.

Prepaid Cards
10-10-14-StrategyCorps2.pngJust two years ago, Walmart partnered with American Express to launch the Bluebird prepaid card as another alternative to traditional debit and checking accounts. The prepaid cards have functionality very similar to a traditional debit card.

In Walmart’s October 2012 press release for the launch, American Express group president Dan Schulman (who was recently named the new CEO of PayPal) stated its purpose: “In an era where it is increasingly ‘expensive to be poor,’ we have worked with Walmart to create a financial services product that rights many of the wrongs that plague the market today.”

GoBank
Walmart isn’t necessarily bidding GoBank against Bluebird or its in-store branches, but rather, it is opening up even more options for underbanked customers who want to use mobile banking. The Federal Reserve found that in the U.S., 49 percent of the unbanked and 64 percent of the underbanked has access to a smartphone.

10-10-14-StrategyCorps3.pngGoBank has features more advanced than basic mobile banking. For example, its Fortune Teller feature can become a budgeting resource for customers’ shopping decisions. You simply enter how much an item costs, and the Fortune Teller is able to instantly tell you if you can afford it or not based on the budget you set. “Remember that time you won the lottery? I don’t either,” is one message you can expect from the Fortune Teller, along with lots of humanized language that’s a refreshing update from standard bank formality.

To open a GoBank account, customers buy a $2.95 starter kit at Walmart. Instead of paper checks, customers can use online bill–paying services. There are no minimum balance requirements and no overdraft fees. Plus, customers have access to 42,000 free ATMs throughout the country. The $8.85 monthly fee is waived with a direct deposit of $500 or more each month.

Of these three ventures, the financial industry will keep an eye on which survives in the long run and becomes Walmart’s go-to product.