Keeping Deposits for the Long Term

Promotional interest rates can help raise deposits in the near term, but yield-seeking customers won’t necessarily stick around for long, says Slaven Bilac, CEO at Agent IQ. Community banks that have long thought about banking as a relationship-driven business can tap into that mindset for holding onto deposits. But the tools banks adopt to meet customer needs more efficiently should also maintain a human touch.

Topics discussed include:

  • Promotional Rates’ Impact
  • Measuring Loyalty, Engagement
  • Person-to-Person Support

5 Steps to Boost Deposit Levels on a Budget

Last year, for the first time since 1948, deposit levels declined. In the wake of these dwindling deposits, financial institutions are scrambling to drive deposit growth without overexerting their marketing budgets. Despite challenges like economic uncertainty and profitability pressures, banks can grow deposit levels on a budget by following these five steps.

1. Center the Standouts
The easiest and most productive way to jump-start deposit growth is to focus on nurturing existing relationships with top customers. Acquiring new customers can cost up to seven times more than retaining current customers, so the smartest banks will concentrate on maximizing retention strategies to boost loyalty and deposits while cutting marketing costs.

Working with established customers can also increase profitability. Banks can achieve returns of over 70% by targeting customers who already trust the institution, according to PwC research.

Banks also have access to a wealth of current customers’ data that they can leverage to determine which segments are the most valuable. For instance, institutions can use this data to extend relevant offers to high-depositing customers.

2. Make Enticing Offers
The secret to captivating and retaining customers is creating irresistible offers with appealing value propositions that drive engagement. Customers new and old are drawn to advantageous deals like industry-leading interest rates, affordable fees or product bundles that seamlessly integrate credit score solutions into their banking experiences. Elevate these offers with extra perks like:

  • Fee waivers.
  • Loyalty programs.
  • Financial education resources.

Though some of these benefits have short-term costs, the long-term gains far outweigh the initial investment.

These offers can be further fortified through the power of personalization. Research from McKinsey & Co. found almost three-quarters of customers expect personalization and 76% get frustrated without it — banks that offer personalized deals can gain a leg up over competitors. Draw on data analysis to ensure the right offers are going to the right customers, using insights to help uncover patterns and predict customer behavior.

3. Employ Economical Marketing Moves
Marketing teams on a limited budget can still accomplish a lot with the plethora of affordable marketing channels available. Digital marketing options, like social media and email marketing, are relatively inexpensive and can help you meet customers where they already are: online.

Once your organization has deployed digital marketing outreach, it’s critical to calculate the return on investment of each channel. Prioritize those channels with the highest value to maximize customer engagement, even if it takes more than one “touch” for customers to engage.

4. Deliver Easy Banking Experiences
The smartest banks will concentrate on making the omnichannel banking experience an effortless one for customers. The following tips will help your organization deliver hassle-free banking interactions.

  • Prevent customers from having to reenter information when switching between devices.
  • Since many customers now use mobile banking first, ensure that your platforms are optimized for mobile use.
  • Improve conversions and user experience by reducing the number of clicks and form fields to fill in your online processes.

Acting on these tips can help improve customer satisfaction and, ultimately, retention: as research shows happy customers are six times more likely to stay with their current bank than dissatisfied customers.

5. Cultivate Customer Relationships Digitally
Since 78% of customers prefer to do their banking digitally, having a digital strategy at your bank is crucial. Digital demand has skyrocketed partly thanks to its always-on functionality that allows users to access banking functions from anywhere, at any time. Importantly, customers who access their bank via a mobile app or website have the highest level of satisfaction. Almost 90% of customers believe their experiences with a company matter as much as the company’s products and services, so prioritizing your digital offerings is critical to customer engagement.

The benefits for your bank don’t stop there. Banks that digitally optimize their customer experience grow 3.2 times faster than those that don’t. Moving forward, strong, lasting customer relationships will increasingly hinge on the efficacy of your digital strategies.

Despite any dips in marketing budgets, teams can still retain customers by ensuring positive experiences that strengthen customer relationships and encourage deposit growth and your bank’s success.

Treasury Management Steps Into the Spotlight

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.

Assessing Risk Management Readiness

As recent events have shown, even large, sophisticated banks can fail. These failures have been the result of risks which generally are managed within bank treasury groups: market and liquidity risks. For these banks, decreased market values of high-quality assets, paired with excessive levels of uninsured deposits, was a fatal combination.

There are a number of proactive tangible steps that boards and management teams can take to evaluate and enhance their institutions’ current market and liquidity risk management practices, beyond first-tier risk management.

Let’s start with measurement. Virtually all banks calculate base case balance sheet interest rate and liquidity risks. They need to measure the short-term effects on net interest income, along with the effect on market values in both rising and falling rate scenarios. They should particularly scrutinize portfolios that require behavioral assumptions for cash flows: non-maturity deposits, loan commitment facilities and mortgage-based assets.

This is where banks frequently fall short in not creating sufficiently stressed scenarios. They view extremely stressed scenarios as implausible — but implausible scenarios do occur, as demonstrated by the pandemic-driven economic shutdown. And yet, considering every possible extreme scenario will lead to scenario exhaustion and balance sheet immobilization.

What to do? One approach is to reverse the process and ask, “Where are potential exposures that could hurt us in an adverse scenario?” Use large, rapid movements up and down in interest rates, changes in yield curve shape like inversion or bowing, customer actions that drain liquidity, and market situations which affect hedge market liquidity and valuations. These scenarios create stresses based on known relationships between market events and balance sheet responses along with the effects of uncertain customer behavioral responses in these environments.

From these scenarios, the bank would know the market value and net interest income effects on investments, loans and known maturity liabilities. On non-maturity deposits and undrawn amounts in committed loan facilities, the bank must rely on assumptions of how these items would behave in various scenarios. One starting place for setting these assumptions is the outflow rates provided in the liquidity coverage ratio rules, which can be used for base assumptions, followed by scenarios with variations around these starting levels of outflow.

Measurement may be the most straightforward element of managing balance sheet risks. Once the bank puts measurements in place, they must communicate, acknowledge and act on them. Each of these elements present an opportunity for breakdown that executives should evaluate.

Effective communication is the responsibility of both treasury and risk management teams. In normal operating times, treasury develops information and risk management challenges this information. Risk management must then interpret the results for executives and the board. This interpretation role is useful in normal operating environments, but critical in stressed environments; risk management amplifies treasury’s message to ensure timely and appropriate actions.

Effective balance sheet risk communication must be accurate and timely. These communications include two critical components:

  • They are layered. The first layer shows the status of compliance with policy limits. The second layer provides a narrative of the current balance sheet situation, operating environment, projected earnings and range of potential risks. Unfortunately, the second layer often is presented as a compendium of everything that has been calculated and analyzed — but this compendium of information should occur in a third reference layer.
  • They are designed for the intended audience. Asset/liability committee, executive management and the board each should be receiving a different form of communication that aligns with their decision-making role.

Acknowledgement and action both must occur outside of the treasury group. Executive management and the board must absorb the risk situation and act accordingly. There is one word that captures the likelihood that a bank will effectively acknowledge and act on a risk situation: culture. An effective risk culture is one where all parties strive to optimize returns within agreed risk parameters while looking to eliminate or mitigate risks where possible.

There are signposts of effective risk management that a bank can evaluate and act on now. Management teams and the board should be looking at their current risk management practices and determine:

  • Are the measurements correct?
  • Is the information on risks communicated in ways that are digestible by each intended audience?
  • Are policy limits comprehensive and aligned with risk levels required to support business activities?
  • Do risk management groups have unfettered access to all information, as well as regular interactions with key board members?
  • Is everyone working collaboratively towards optimizing long-term risk adjusted returns?

If the answers to all these questions are “yes”, then the risk management function seems to be effective. If not “yes,” use the markers described above as starting guidance on moving toward effective risk management.

3 Strategies for Gathering Deposits in a New Era

With interest rates at their highest point in 16 years, financial institutions must revisit their deposit gathering strategies.

The conventional tactics like using rate specials for certificates of deposits and high yield online savings accounts are more expensive and less effective than they once were. And in a world where every customer can instantly withdraw funds for a better offer via a phone app, it’s not enough to simply attract deposits. Financial institutions must be able to retain those deposits with something beyond the best rates. Here are three strategies for banks to attract and retain primary deposit accounts in this challenging operating environment.

1. Personalized Approach for Individual Customers
In the age of big data, a personalized approach is not just possible, it’s necessary. Financial institutions should utilize the wealth of information they have on their customers to tailor services and products to individual needs.

  • Understand customers. While this strategy is obvious, its successful execution has been elusive. Too often, these data points are scattered between disparate systems; banks are challenged in reconciling them effectively and in a manner where they can be deployed where and when they’re needed. Financial institutions should be demanding this type of reconciliation from their digital banking vendors, which sit at the intersection of many internal systems, various fintech partners and the bank customer’s primary interaction point with their accounts.
  • Offer tailored products. Use the insights gathered to offer personalized savings plans, customized investment advice or bespoke financial products that encourage customers to maintain and increase deposits. Again, the idea is not original, but the execution is tricky. Making tailored offers at scale should be considered table stakes in modern banking but requires investments in both technology and talent. Simply enabling account holders to view balances on their phone is not enough to build loyalty. Financial institutions should think about how they can replicate the old school relationship banking approach, where a customer feels understood and doesn’t have to navigate bureaucracy and poor technology to get to the products and services they need.

2. Sophisticated Treasury Tools for Businesses
Today’s businesses need more than a simple deposit account. They require comprehensive financial solutions that support their operations, manage risks and foster growth. A growing number of these businesses are using these sophisticated services — often from third parties. Integrating sophisticated treasury tools into business accounts can make these accounts stickier and more attractive for current and prospective customers.

  • Cash management tools. Advanced cash management tools can provide businesses with real-time visibility into their cash flow, enabling them to optimize liquidity. This includes tools for automated receivables, payables and sweep accounts to manage balances across multiple accounts, along with optimizing interest rate options.
  • Risk management tools. Effective risk management tools are essential in helping businesses navigate today’s myriad financial risks. This can include foreign exchange tools to manage currency exposure, interest rate derivatives to handle interest rate fluctuations and fraud detection tools to safeguard against malicious activities.
  • Digital payment solutions. Digital payment solutions can streamline transactions, making daily operations smoother and more efficient. From Automated Clearing House payments to wire transfers, mobile payments and integrated payables, these tools provide flexibility, speed and convenience in handling transactions.

3. Investment in Technology and Innovation
Adopting the above strategies requires banks to make a significant investment in technology and innovation. However, this is a crucial step to stay competitive in the evolving financial landscape.

  • Robust data infrastructure. Invest in a robust data infrastructure to support the implementation of a data-driven personalized approach. This includes advanced data analytics tools and machine learning algorithms that can extract valuable insights from customer data.
  • Advanced treasury tools. Develop and integrate these sophisticated tools into business accounts. This may require investing in fintech partnerships or in-house innovation and offering value-added services beyond traditional banking.
  • Digital platforms. Enhance the user experience, making it easy for individuals to manage their accounts and for businesses to use their treasury tools. This includes intuitive interfaces, real-time updates and seamless integration with other financial systems.

In this era of high interest rates and less sticky deposits, traditional strategies are losing their charm. In order to stay competitive, financial institutions must innovate and personalize their approach to gathering primary deposit accounts. Understanding and catering to the needs of individual customers and businesses will allow financial institutions to attract and retain more deposits and successfully navigate the challenges of this high-rate environment.

What Drives a Bank’s Valuation?

With the rise of uncertainty amongst regional banks following the demise of Silicon Valley Bank, it’s an important time to understand how investors may value an institution and when board members should have a clear picture of that value.

“You should always understand what you’re worth,” says Kirk Hovde, managing principal and head of investment banking at Hovde Group. “Most banks say they aren’t for sale, but my view is most banks should operate as if they could be viewed … for sale.”

It can be easy to determine a public company’s valuation since it’s accessible through a brokerage, online resource or a tool like Bloomberg Terminal. For private companies, it’s something that requires further analysis. That can make planning difficult when weighing certain initiatives.

With valuations nearing Great Recession lows among public banks in 2023, according to research from the investment firm Janney Montgomery Scott, recognizing why and what investors use to come up with the numbers can be critical to how an organization responds. For banks, it’s required in many situations, such as when investors want to sell shares or the board needs to approve certain compensation packages.

Tangible book value (TBV) has become one of the most critical benchmarks that investors consider. This metric takes all the tangible assets the bank owns, including loans and buildings. The calculation excludes intangible assets like goodwill and debts — those would be removed from the balance sheet or paid out first during a liquidation event. This gives investors a sense of the value of the assets that can be liquidated if the bank suddenly goes bankrupt. They compare this figure to the stock price to calculate the bank’s price-to-tangible book value, which can be measured and benchmarked over time.

During times of sector strength, investors often look more at earnings growth instead of TBV. If earnings keep growing, then the bank looks stronger. Higher earnings during times of uncertainty can also make a bank look strong when others are weak. With bond portfolios struggling in the high interest rate environment, however, some banks may have to sell securities if earnings slow, says Hovde. This locks in losses.

“[Investors] have started to switch back to TBV currently, as they think about what losses might be recognized,” says Hovde.

Investors may also approach valuation by running a scenario called a “burn down analysis.” Essentially, this shows how quickly the bank would run out of funds if it had to pay creditors and cover liabilities immediately. This is a tactic that investors embraced during the financial crisis of 2008, says Christopher Marinac, director of research at Janney Montgomery Scott, who adds that investors have begun to run this type of analysis again due to the fears in the sector.

Investors often don’t take into consideration that banks typically have two to three years to pay down their entire credit cycle; a burn down analysis assumes the bank must pay all creditors immediately. As a result, it isn’t always accurate and can work to deflate the value of the bank.

“No one wants to see companies go away,” says Marinac. “There’s empathy in the credit risk process. Investors don’t think of it that way.”

While it’s important to understand a bank’s valuation from the investors’ perspective, directors also should have a sense of the institution’s value to weigh certain initiatives that could have sweeping impact across the institution.

It’s particularly important for directors to get a sense of their bank’s valuation in case it faces a potential liquidation event that no one expected. “Directors should be focused on liquidity and capital position to understand what the health of the bank really is,” says Hovde. “No one predicted the failures we have seen.”

Beyond liquidation, “there are a myriad of reasons” for bank directors to understand the valuation of their institution, and they’re not all for planning purposes, says Scott Gabehart, chief valuation officer at BizEquity, a valuation software developer.

Directors should have a sense of their bank’s valuation to make the right call when opting into a long-term plan. One example of this is when a private bank looks to implement an employee stock ownership plan (ESOP). These types of plans can serve as a retention tool by providing employees with a piece of the business that they work for.

When a company offers an ESOP, its employees can receive or buy shares of the organization, even if it’s a privately held. How many shares are available and whether the incentive tool will work depends, in part, on the valuation of the business. If it rises, employees can participate in the bank’s success.

Then there’s the fact that many bank executives receive stock options or grants as part of their compensation package. The options “must be valued at the time of granting,” says Gabehart. The valuation will incorporate other variables beyond earnings and TBV, like interest rates, volatility and other metrics. The perceived value that the executives receive from the options will depend, in part, on the valuation.

Finally, directors need to understand the bank’s valuation if they’re going to properly consider an acquisition or merger. Now, “it may be the best time to undertake an acquisition for expansion in that the multiples or costs to buying a bank [are] lower, all things equal,” says Gabehart. Of course, as Gabehart also acknowledges, it’s more difficult to fund an acquisition now, due to higher interest rates and weakened valuations for the buyer. Bank M&A activity slowed in 2022, with 164 bank acquisitions announced, according to S&P Global Market Intelligence. Through April 30, 2023, just 28 transactions had been announced for the year — down by half compared to the same period the year before.

“Before deciding how to finance an acquisition, it is always first necessary to know what the company is worth,” says Gabehart. Then leaders can determine the best funding tactic.

Beyond planning, there’s also the need for directors, as shareholders, to understand the value of the bank simply to sell their own shares. Understanding this valuation will ensure that whenever any other director sells shares, they will receive the best possible price — which benefits the entire organization.

The higher the valuation, the higher the sale price.

That’s not just good for the director. It’s great for the other bank investors as well.

Current Benefits of Banking Legal Cannabis Businesses

While historically viewed as “strange bedfellows,” more financial institutions are offering services to cannabis businesses across the country. Though their worlds may seemingly look quite different, both are highly regulated, cash-intensive industries that can solve challenges for each other.

From the cannabis operator perspective, the benefits of a strong banking partner are straightforward. This relationship offers a safe place to store the intake from cash-heavy sales, a way to make tax and other payments electronically and the ability to facilitate direct deposits for employees. Additionally, other opportunities for banks include loan opportunities and additional benefits such as partnerships with human resources/payroll, payments and insurance are becoming more common.

The benefits for financial institutions, however, are ever-evolving. Up until this year, banks primarily looked at cannabis customers as a service relationship. “I’ll take care of your business needs, and you’ll pay me service fees for doing that.” But what we at Green Check have seen over the past several months is that these relationships are starting to look far more traditional. That means financial institutions that are willing to bank, and truly work with, the cannabis businesses in their market will encounter a far bigger opportunity.

Let’s start with low cost deposits. The federal funds rate is up. Many financial institutions are staving off the certificate of deposit pricing wars by paying higher annual percentage yields (APYs), and the overall cost of funds is inching up daily. The standard play here is often to seek out commercial customers. When we look at cannabis deposits in that light, the cost of funds is most often less than 1%. That could certainly help in those asset-liability committee meetings.

Next we have fee revenue. We’ve all had that conversation around the boardroom table about replacing overdraft fee income with other options to keep noninterest income from plummeting. Opening up the traditional suite of commercial services to the cannabis industry gives a financial institution a fresh new market segment to approach, along with the additional business service fees from those new opportunities.

And what about lending? An increasing amount of our financial institution clients have begun lending to the cannabis industry. It’s often one of the first questions that cannabis operators ask when seeking out a new banking relationship, making it quickly a table stakes option. One way for banks to step lightly into lending is to begin with the smaller lending opportunities such as unsecured line of credit facilities, or even equipment financing: loans that are less than $1 million, with less complex collateralization. Other financial institutions that aren’t able to take on the larger real estate loans and build-out financing can be a participant with a lead bank who has more experience in this area.

Far from strange bedfellows, these two industries can work together synergistically. In this current high rate environment, they need each other now more than ever. However, it’s essential that any bank wanting to offer services to this complex, rapidly expanding industry seeks proper guidance. Seeking experienced help from a reliable cannabis banking firm should be your bank’s first step in reaping the benefits of working with legal cannabis.

Mobile Banking Attracts Deposits; Does It Aid Their Exit?

Mobile banking channels, which banks have used to attract deposits, are helping deposits flow out faster as rates rise, a May research paper shows. 

The combination of higher interest rates and technology means that banks with robust mobile banking capabilities have also seen more deposit runoffs — even before the spring banking crisis — according to researchers from Columbia University, the University of Chicago and the National Bureau of Economic Research.  

They found that mobile banking has increased the sensitivity of deposits to interest rates, reducing their stickiness: it’s easier for customers to shop rates, open accounts and move funds. The paper refers to the slow or gradual pace of deposits leaving banks as “deposit walks” versus deposit runs, where many customers overwhelm a bank with withdrawal requests.

“Average deposits have become more sensitive to changes in the federal funds rate in the last decade,” they found. This is “particularly pronounced for banks with a digital platform and banks with a brokerage account.” 

In the study, banks were considered digital if their mobile application had at least 300 reviews, and as having brokerages if they report brokerage income in their call report. In the study, 64% of banks that had between $1 billion and $250 billion in assets — admittedly a wide swath — were considered digital. The impact of digital bank channels on deposits appeared in third quarter 2022 as deposit growth between digital and nondigital banks diverged; a quarter later, digital banks began losing both insured and uninsured deposits. 

“Whatever happened in the banking system in late 2022 and early 2023 was not just about the flight of uninsured deposits,” they wrote.

A 400 basis points increase in the federal funds rate leads to deposit decline of 6.4% at banks that don’t have a brokerage and aren’t considered digital, compared to 11.6% for digital banks with a brokerage. They also found that digital banks slowed their “deposit walks” by increasing deposit rates and their overall deposit betas.

Although larger banks with brokerages certainly could have more rate-sensitive customers than smaller banks without brokerages, the researchers attempted to account for that adding another analysis: internet usage among depositors. 

“We find that banks’ deposit outflows are more pronounced in markets with higher internet usage, but that this is only the case for digital banks (regardless of whether they report brokerage fees or not),” the researchers wrote.

Digital banking capabilities contributed to the rapid failure of Silicon Valley Bank, Signature Bank and First Republic Bank, according to testimony from bank officials and regulators. Silicon Valley Bank customers “sought to withdraw nearly all” of the bank’s deposits in less than 24 hours, said Federal Deposit Insurance Corp. Chair Martin Gruenberg in May 18 testimony to the U.S. Senate. He added that “the ease and speed of moving deposits to other deposit accounts or non-deposit alternatives with the widespread adoption of mobile banking” is a development that has increased the banking industry’s “exposure to deposit runs.”

First Republic Bank’s run was “exacerbated” in part by “recent technological advancements that allow depositors to withdraw their money almost immediately,” said former First Republic Bank CEO Michael Roffler in May 17 Congressional testimony. The bank experienced $40 billion in deposit outflows on March 13, after the failures of Silicon Valley and Signature, and a total of $100 billion in withdrawals in the ensuing weeks. 

Not everyone is concerned about the impact of mobile apps on deposits and its implications on bank stability. Ron Shevlin, managing director and chief research officer of Cornerstone Advisors, believes that a small percentage of banks will face notable deposit exits, with most banks able to keep funds stable. Additionally, he points out that banks benefited from having digital and mobile banking channels, especially in the earliest days on the coronavirus pandemic. 

“I don’t think it’s that big of a problem because I think a lot of financial institutions are fairly sophisticated in looking at this,” he says. Banks aren’t just looking at account closures to study deposit outflows; they also analyzing changes in account behavior and transactions. “This is not super new behavior anymore. It’s been in the making for 15 to 20 years.”

Both Shevlin and Luigi Zingales, one of the authors on the paper and a professor at the University of Chicago Booth School of Business, see digital transformation as an inevitability for banks. Zingales points out that apps — not branches — will shape the next generation’s experience with banks. As more community banks become digital banks, he says they may need to adjust their assumptions and expectations for how these capabilities could alter their deposit base, costs and overall balance sheet.

“I think what you need to do is be much more vigilant in how you invest your assets. In the past, you had this natural edge and now this natural edge is much smaller. And if you think you have this natural edge and you take a lot of duration risk, you get creamed,” he says. “I think the [solution] is not to resist technology — to some extent, it’s irresistible. The [solution] is learning to live with a new technology and understanding that the world has changed.”

Risk issues like these will be covered during Bank Director’s Bank Audit & Risk Conference in Chicago June 12-14, 2023.