The Cannabis Banking Outlook for 2023

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The U.S. cannabis market is expected to continue its growth in 2023, with projected sales of $72 billion a year by 2030. That’s more than double the current market estimation of $32 billion annually. Today, 21 states and the District of Columbia allow adult cannabis use. According to the Pew Research Center, 43% of U.S. adults now live in an area that has legalized cannabis use. While not every state that has legalized cannabis use saw growth last year, the market as a whole continues to expand.

Meanwhile, last fall, President Joe Biden announced pardons for simple cannabis possession at the federal level and ordered a review of federal cannabis scheduling under the Controlled Substances Act. According to a recent survey from Data for Progress, the majority of likely voters support legalizing cannabis at the federal level.

But as the market expands, access to banking continues to lag. Congress has failed to pass the SAFE Banking Act, a bill aimed at normalizing banking for licensed cannabis businesses. Despite the lack of legislative progress, a playbook exists for banks to serve the industry in compliance with FinCEN guidelines; bank examiners continue to recognize the work banks are doing to meet their compliance obligations. Bankers considering this line of business can have confidence that the cannabis use space will continue to grow and keep banking services in high demand.

Three Trends to Watch
As the industry expands and attitudes toward cannabis evolve, financial institutions are facing new competition and pressures on their business models. We are seeing three significant changes.

  1. Cannabis industry consolidation is creating businesses that need access to the balance sheets that bigger banks can provide. As a result, larger financial institutions are entering the space. There are more financial institutions in the $1 billion to $10 billion assets space actively serving the industry today, along with a few banks with over $50 billion in assets. Considering just a few years ago these institutions were predominantly less than $1 billion in assets, this is a significant shift that gives cannabis businesses greater choice.
  2. Early entrants that gained cannabis banking expertise in their home market are leveraging that proficiency to provide services across entire regions, or nationally in states with legal cannabis programs. Some of this is driven by consolidation, as bankers follow their customers into other states. Others are seeking new customers in underserved or newly minted cannabis markets.
  3. Lending, both directly to operators and indirectly to landlords or investors, has emerged as a critical component of the cannabis banking portfolio. Not only is this a competitive differentiator for banks, it is also as a prime source of earning assets and a way to gain additional yield. Like all lending, however, it is important to understand the unique credit risks in this industry, which can vary greatly from state to state.

Competition Demands a More Customer-Centric Approach
Competition is creating pressure on financial institutions to operate more efficiently while delivering more client-centric services. When it comes to meeting compliance obligations, banks that employ strategies that achieve greater efficiency can dramatically lessen the burden on both their bankers and their customers. There’s now more clarity about what information offers the most value for risk management teams; bankers can tailor their compliance requirements to reduce risk and avoid creating unnecessary work streams. Technology that automates compliance tasks and aids in ongoing monitoring can also contribute to a better customer experience. As cannabis operators face increased competition and tighter margins, financial institutions that take steps to minimize the compliance burden can gain a competitive advantage.

Financial institutions are also introducing new pricing strategies to attract customers. Historically, banks priced these services strictly to offset or monetize their compliance function. Now, bankers can use pricing tools to benefit customers while creating value for the institution. For example, offering account analysis can encourage customers to maintain higher balances while generating noninterest income on accounts with lower balances.

The past year brought about significant economic and policy changes in the cannabis industry. In 2023, bankers can act with even greater certainty in the industry’s stability, investing in the processes, services and technologies that will improve the customer experience while supporting the institution’s bottom line. As financial institutions and regulators gain a deeper understanding of the compliance requirements for this industry, it is increasingly clear that the industry is not going backward. States that have legalized cannabis and are issuing new licenses offer banks an ever-growing opportunity to tap into the industry’s financial rewards with the confidence that positive momentum is on their side.

Giving Customers Choice, Access With Investments

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It’s time for community financial institutions to significantly upgrade their investment resources to service their clients. Retail investors want to be more educated about investing opportunities and have greater access to investment tools; in response, investment-as-a-service companies are building platforms so banks can give their clients more of what they want.

One problem with financial and investment innovation today is that there is either too much focus on gimmicks or not enough focus on innovation. Crypto-only investment companies indiscriminately pitch every token as the latest and greatest get-rich-quick scheme. Gamified investment apps promote risky options trades to retail investors, turning investing into a lottery or casino and distracting users from what investing should be: a powerful tool to maintain, protect and build wealth. Further, legacy investment institutions often make the bulk of their revenue from customers who are already wealthy via older products, with little incentive to experiment with creative new offerings.

In this unhappy mix, it is investors with the most to gain from a long-term investing strategy — younger less affluent or not yet rich investors — who lose the most. Unable to access wealth management and investing services from their trusted financial institution, they seek out third-party investment apps that don’t prioritize their long-term success and happy retirement. For community financial institutions, this interrupts the chain of familial wealth transfer and risks their next generation of customers.

Investors desire a unified platform that offers access to a growing list of investments, ranging from physical metals to AI-driven investment models to crypto-assets to collectibles. A self-directed platform is key: Investors should be given a choice to pursue the investment strategy they feel fits best for their unique investment interests and risk profile. The platform should include all the tools they need to effortlessly pursue the “Get rich slowly” strategy: passive investing and dollar-cost averaging into a low-cost, highly diversified portfolio.

Cloud computing innovations and numerous rounds of fintech venture capital have made it possible for companies to build curated investment platforms that traditional banks can easily add and implement. Investment tools driven by application program interfaces, or APIs, allow financial services to embrace change in collaborative ways that don’t conflict with existing business, yet still appeal to the ever-changing preferences of investors.

Investing is not one-size-fits-all. Wine fans may want to invest in a portfolio of wine assets to hold or eventually redeem. Investors who collected baseball cards as a kid may now have the capital to buy collectibles with significance to them as culturally relevant assets. Individuals also may want to invest in thematic categories, like semiconductors — the foundation for all computing, from electric vehicles to computers to smartphones. These investments are not optimal for everyone, but they don’t have to be for everyone. What matters most is access.

Too many banking platforms do not take full advantage of the full range of investment tools available in the marketplace, even though their clients are looking for these. Lack of access leads to painful experiences for the average investor who wants to be both intelligent with their money and allowed to experiment and explore the ever-changing world of digitally available investment categories. Give customers a choice to pursue wealth-building strategies based on their unique insights and instincts, and made available through their existing bank.

Managing Risk When Buying Technology for Engagement

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No bank leader wants to buy an engagement platform, but they do want to grow customer relationships. 

Many, though, risk buying engagement platforms that won’t grow relationships for a sustained period of time. Most platforms are not ready-made for quality, digital experience that serve depositors and borrowers well, which means they threaten much more than a bank’s growth. They are a risk to the entire relationship with each customer.  

Consumers are increasingly expressing a need for help from their financial providers. Less than half of Americans can afford a surprise $1,000 expense, according to a survey from Bankrate; about 60% say they do not have $1,000 in savings. One in 5 adults would put a surprise expenditure on a credit card, one of the most expensive forms of debt. More than half of consumers polled want more help than they’re getting from their financial provider. However, the 66% of those  who say they have received communication from their provider were unhappy about the generic advice they received. 

This engagement gap offers banks a competitive opportunity. Consumers want more and better engagement, and they are willing to give their business those providers who deliver. About 83% of households polled said they would consider their institution for their next product or service when they are both “satisfied and fully engaged,” according to Gallup. The number drops to 45% if the household is only satisfied. 

Banks seeking to use engagement for growth should be wary of not losing customer satisfaction as they pursue full engagement. As noted earlier, about 66% of those engaged aren’t satisfied with the financial provider’s generic approach. What does that mean for financial institutions? The challenge is quality of engagement, not just quantity or the lack thereof. If they deliver quantity instead of quality, they risk both unsatisfied customers as well as customers who ignore their engagement. 

According to Gallup, only 19% of households said they would grow their relationship when they are neither satisfied nor fully engaged. This is a major risk banks miss when buying engagement platforms: That the institution is buying a technology not made for quality, digital experiences and won’t be able to serve depositors and borrowers well any time soon. 

But aren’t all engagement platforms made for engagement? Yes — but not all are made for banking engagement, and even fewer are made with return on investment in mind. Banking is unique; the tech that powers it should be as well. Buyers need to vet platforms for what’s included in terms of know-how. What expertise does the platform contain and provide for growing a bank? Is that built into the software itself?

A purpose-built platform can show bankers which contact fields are of value to banking engagement, for example, and which integrations can be used to populate those fields. It can also show how that data can become insights for banks when it overlaps with customers’ desired outcomes. And it offers the engagement workflows across staff actions, emails, print marketing and text messaging that result in loan applications, originations, opened accounts or activated cards.   

Previously, the only options available were generic engagement platforms made for any business; banks had to take on the work of customizing platforms. Executives just bought a platform and placed a bet that they could develop it into a banking growth tool. They’d find out if they were right only after paying consultants, writers, designers, and marketing technologists for years.  

Financial services providers no longer need to take these risks. A much better experience awaits them and their current and prospective customers clamoring for a relationship upgrade.

Chief Risk Officers Help Community Banks Navigate Uncertain Environment

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The role of chief risk officer is no longer relegated to the largest banks. Ever since the Great Recession of 2007 to 2008, banks of all sizes have begun incorporating chief risk officers into the C-suite.

Nowadays, the role could be more useful than ever as community banks confront an assortment of risks and opportunities, including cybersecurity, emerging business lines such as banking as a service, as well as rising inflation and a potential recession.

In the earliest days of the pandemic, Executive Vice President and Chief Risk Officer Karin Taylor and the teams that report to her helped executives at Grand Forks, North Dakota-based Alerus Financial Corp. understand the potential impacts on the business and coordinate the bank’s response. They addressed employee concerns, made decisions about how to sustain the business during the pandemic, performed stress tests and helped human resources with establishing new policies and communication.

“[CROs] bring some discipline in planning and operations because we facilitate discussion about risks, help identify risk and help risk owners determine if they’re going to accept risk or mitigate risk. And then we do a lot of reporting on it,” she says. “If anything changed in the pandemic, perhaps it was a better understanding of how [the risk group] could better support the organization.”

At $3.3 billion Alerus, Taylor reports directly to the CEO and serves as the executive liaison for the board’s risk and governance committees. Her reporting lines include the enterprise risk group as well as the bank’s legal, compliance, fraud teams, credit and internal audit teams (internal audit also reports to the audit committee). Those kinds of reporting lines allows CROs to help manage risk holistically and break down information silos, says Paul Davis, director of market intelligence at Strategic Resource Management. Their specific risk perspective makes them useful liaisons for community bank directors, who are usually local business people and not necessarily risk managers.

“You’re going to have one member of the management team [at board meetings] talk about opportunities,” he says. “It’s the CRO’s job to say, ‘Here are the tradeoffs, here the potential risks, here the pitfalls and the things we need to be mindful of.’”

Southern States Bancshares, a $1.8 billion institution based in Anniston, Alabama, decided to add a CRO in 2019 as the company prepared to go public. Credit presented the largest risk to the bank, so then-Chief Credit Officer Greg Smith was a natural fit.

His job includes reviewing risk that doesn’t neatly fit into other areas of the bank. He also serves as liaison for the risk committee and sits in on other meetings, like ALCO, to summarize the takeaways.

“While I was focused on risk the entire time I’ve been at the bank, this broadened that horizon and it expanded my perception of risk,” he says.

For instance, the bank’s rollout of the new loan loss accounting standard made him consider risk in the bond portfolio. Working with several attorneys on the board made him think about reputation risk when the bank launched new products and services. That expanded perspective allows him to raise considerations or concerns that different committees or areas of the bank may not be focused on. He can also help the bank price its risk appropriately.

Taylor sees her role as helping Alerus and its directors and executives make empowered decisions; her job isn’t just to say “No,” but to help the bank understand and explore opportunities based on its risk appetite. However, she doesn’t think all community banks need a CRO. Banks of similar asset sizes may have very different levels of complexity and strategies; adding another title may be a strain on limited resources or talent. The most important thing, she says, is that executives and the board feels that they have the right information to make decisions. To that end, Taylor shared a list of questions directors should ask when ascertaining if banks have appropriate risk personnel.

Questions for Directors and Executives to Ask:

  • Do you feel you have a holistic view of risk for your organization?
  • Do you think you have the information you need to understand your risk profile and identify potential pitfalls or risk to your strategy, as well as being able to address opportunities?
  • Is there a good understanding of the importance of, and accountability, for risk management throughout the organization?
  • Can these questions be answered by existing staff, or should we consider hiring for a chief risk officer position?

Why There Is No ‘Back to Normal’ for Banks

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In the past few weeks, I’ve started to go back into the office more frequently. Despite any inconveniences, it’s refreshing and invigorating to see colleagues and clients in person again. It’s clear that most of us are ready for things to go back to normal.

Except, they most likely won’t.

Last year was largely favorable for banks, with industry ETFs outperforming the broader market and rebounding from 2020’s contractions. Larger banks with diversified revenue sources — including mortgage lending and banks with active capital markets or wealth management businesses — did particularly well.

Now, with rising inflation and a rapidly shifting geopolitical landscape, there may be different winners and losers. But after two years of the global pandemic, we have learned what the future of work could look like, and how much the environment will continue to evolve. The recent challenges in Eastern Europe remind us that ongoing change is the only certainty.

In PwC’s latest look at the banking environment, Next In Banking and Capital Markets, we see investors being far more interested in growth than in saving a few dollars. And we see potential for that growth across the banking industry — regardless of size, geography or customer segment. In particular, we see five opportunities for institutions that focus on digital transformation, build trust — with a particular emphasis on environmental, social and governance (ESG) issues, win deals, review and respond to regulation, and adopt cloud technology.

Digital Transformation: My colleagues researched how consumer behavior has changed over the past two years. We found that the pandemic significantly accelerated the trend toward digital banking — and many banks weren’t prepared. The implications go far beyond adding a peer-to-peer payment tool to your consumer app. In fact, nearly every bank should be thinking about developing a growth strategy based on a customer focus that is much sharper than “They live near our branches” or “Businesses need access to capital.” Digital transformation is here to stay; aligning to a disciplined growth strategy can help make technology investments successful.

Environmental, Social and Governance (ESG) Frameworks: Community reinvestment, diversity initiatives and strong governance models are not new issues for banks. In fact, the industry has been laser-focused on building stakeholder trust since the 2008 financial crisis. But with a solid baseline of social and governance investments, banks have now shifted their focus to helping define and deliver commitments around the environment, namely climate change. Banking industry leaders are looking for more effective ways to integrate climate risk management throughout their operations. But the data we use to report on ESG issues is very different from typical financial metrics, and most firms struggle to tell their story. Leading firms can help enhance transparency with trustworthy data, while developing strategies to drive their climate agenda.

Deals: The industry experienced historic rates of bank mergers and acquisitions last year — everything from some foreign banks stepping away from the U.S. market, to regional bank consolidation, to banks of all sizes adding specialty businesses. But with valuations at current levels, corporate development teams should get far pickier to make the numbers work. Increasingly, this may require a greater emphasis on creating growth than on finding cost synergies. To do that, banks and their leaders need to have a very clear idea of whom they’re serving, and why.

Regulation: Evolving concerns over the global economy have resulted in a different approach to regulation. While this does not represent a 180° turn from where we had been, it is clear that banks have been attracting new attention from regulators and legislators, especially with respect to consumer protection, cybersecurity, climate risk, taxation and digital assets. Banks should be particularly diligent about control effectiveness, as well as identifying effective ways to collect, analyze and report data. But regulation isn’t just a matter of defense: The more banks understand and manage risk, the more they can take advantage of “new economy” opportunities like mitigating climate change and digital assets.

Cloud: Virtually every bank has moved some of its work to cloud-based systems. But with definitions of “cloud” as imprecise as they are, it is no wonder that many executives have not yet seen the value they had hoped for. If you set out to consolidate data centers by moving some background processing to the cloud, don’t expect major rewards. But emerging cloud capabilities can, for example, help banks improve the customer experience by being more agile when responding to client demands — and this could be a game changer. Today’s cloud technology can help institutions rethink their core business systems to be more efficient. It can even help solve new problems by more efficiently integrating services from a third party. This year, we’re likely to see some banks pull farther ahead of their peers — perhaps, even leapfrogging competitors — by making strategic choices about how to use cloud technology to jump-start digital transformation, rather than just as a way to manage costs.

Last year, I made the case that banks needed to stay agile, given economic uncertainty and the rapid pace of change. This is still the case. But bankers and boards should also keep their eyes on the prize: Whether you are a community bank, a large regional institution or a global powerhouse, you will have plenty of chances to grow this year. The five opportunities described above can offer significant value to banks that adopt them strategically.

How to Build a Bank From Scratch

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Corey LeBlanc is best known as the man behind the @InkedBanker Twitter handle, inspired by his affection for tattoos. He’s also co-founder, chief operating officer and chief technology officer of Locality Bank, a newly chartered digital bank based in Fort Lauderdale, Florida. In the interview below, which has been edited for length, clarity and flow, he talks about the value of standing out and the process of standing up a de novo digital bank.

BD: How did you become known as the InkedBanker?
CL: A few years ago, Jim Marous, co-publisher of The Financial Brand, told me that I had to get on Twitter. When my wife and I created the profile, we needed something that made sense. I’ve had tattoos since I was 18 – full sleeves on both arms, on my back and chest — so that’s what we picked. It’s turned out to be incredibly important for my career. People remember me. It gives me an edge and helps me stand out in an industry where it’s easy to get lost in the mix.

             Corey LeBlanc, Locality Bank

BD: What’s your vision for Locality Bank?
CL: The best way to think about Locality is as a digital bank that’s focused on the south Florida market. There’s a void left in a community after its locally owned banks are either bought by bigger, out-of-state rivals or grow so much that they no longer pay attention to their legacy markets. Our vision is to fill that void using digital distribution channels.

BD: Was it hard to raise capital?
CL: Not especially. Our CEO, Keith Costello, has been a banker for many years and was able to raise an initial $1.8 million in December 2020 from local investors to get us off the ground. We later went back to that same group to raise the actual capital for the bank, and they committed another $18 million. Altogether, including additional investors, we raised $35 million between October and November of 2021. Because that was more than the $28 million we had committed to raise, we had to go back to the regulators to make adjustments to our business plan, which delayed our opening.

BD: How long did it take to get your charter?
CL: It was about 10 months. We filed our charter application on St. Patrick’s Day of 2021. We received our conditional approvals from the state in mid-September, and then we had our conditional approval from the [Federal Deposit Insurance Corp.] in early November. Our full approval came on Jan. 11, 2022.

BD: What was it like working with the regulators?
CL: You hear bankers say that regulators make everything difficult and stop you from doing what you want to do. But we didn’t find that to be the case. Just the opposite. They served more like partners to us. They worked with us to fine-tune our business plan to better meet the needs of the customers and markets we’re targeting, while still trying to accomplish our original objectives.

BD: What’s your go-to-market strategy?
CL: We’re going to be a lend-first institution. Our primary focus is on the south Florida commercial market — small to medium-sized businesses all the way up to early stage, larger enterprises. We’ll expand as we grow, but we want to be hyper-focused on serving that market. To start out, we’re offering two commercial accounts: a basic commercial checking account and a money market account. Then we’ll expand to providing accounts with more sophisticated capabilities as well as [Interest on Lawyer Trust Accounts] for lawyers. Because of the markets we’re in, those two accounts are absolutely necessary.

BD: As a new bank, how do you ensure that you’re making good loans?
CL: It was a top priority for us to recruit good, trusted bankers who understand that you need to balance the needs of the bank and the needs of the market. The bankers we’ve hired know how to do that. On top of this, if you can get a banker who’s been successful with the tool set that most traditional institutions give them, and then you give them a better set of tools, imagine the experience that you’re creating for those bankers and their customers. You’re empowering them to do something exponentially greater than they could in the past. And by giving them that set of tools, you’ve now inspired and motivated them to push even further and start challenging systems that otherwise they would have never challenged. We see it very much as a virtuous circle.

Key Considerations for Measuring Customer Loyalty

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Retail banking has particularly been affected by the shift to the digital delivery of products and services, given its sheer magnitude and importance.

The global coronavirus pandemic significantly accelerated banks’ adoption of digital channels and led to critical behavioral changes for customers. Banks now need to determine which shifts are here to stay and which could revert, to some degree, to pre-pandemic levels.

Strategic Resource Management conducted a detailed survey in July 2021 that offers a snapshot of customer attitudes at a particularly interesting moment in time. Sixteen months of dealing with Covid-19’s realities had created a degree of equilibrium; thoughts of a return to “normal life” had begun to enter the conversation. This cross-section provides a view into the likely permanence of customer mindsets, helping financial institutions better understand customers’ perceptions of, and feelings toward, the institutions with which they bank.

Several noteworthy takeaways:

  • US financial institutions performed well in loyalty and engagement, though credit unions performed the best. Although the roughly 5,000 credit unions in the United States comprise a small number of overall banking assets (8% based on June 30, 2021, data from the credit union and banking regulators), its member ranks remain exceptionally loyal and engaged. While some community banks enjoyed similarly high ratings, other institutions should take note of credit unions’ success and consider following some of their tactics.
  • Charlotte, North Carolina-based Truist Financial Corp. ranked very high for customer perceptions of care, value for money and understanding customer needs. The product of a 2019 merger between BB&T Corp. and SunTrust Banks, the $541.2 billion bank embarked on a significant brand awareness campaign that emphasized financial wellness and a holistic level of care for the customer’s financial life. While the largest banks often excel in terms of resources and digital tools, they are frequently viewed as more transactional. Truist does not fit this stereotype – its customer ratings demonstrate that they place great importance on emotional connection, similar to credit unions and community banks.
  • Chime ranked poorly on engagement and loyalty. While other digital brands lagged in this area, Chime ranked at the bottom of both dimensions. It has done an excellent job of building market awareness and initial enrollments but has fallen short converting new customers into more meaningful relationships. The company faced backlash last summer following reports that it suddenly closed several customer accounts. Few respondents treat Chime as their primary transaction account; the absence of a branch network may be a contributing factor. But the company could still shift public perception. By teaming with a brick-and-mortar presence — mimicking PayPal Holding’s approach in partnering with Discover Financial Services to achieve point-of-sale ubiquity — Chime might overcome concerns about access. 
  • Great service remains the biggest factor behind customer loyalty. When asked for their top reason for choosing and staying with a given institution, great service led the pack. It outpolled product quality, ease of use and personal recommendations. Beyond that, subtle yet interesting differences emerged. Location, value for money and loyalty programs moved up the pecking order when customers decided to stay with a provider. The order of “reputation and trust” and “doing what they say” swapped positions — arguably because customers can now assess an institution’s behavior firsthand rather than relying on reputation. This may also explain why brand values gained prominence in the research.

Attracting and retaining customers is instrumental to a financial institution’s relevance. It’s what ultimately fuels its success. Banks must determine why customers partner with organizations, why they stay with them and why they leave. Taking this into consideration and keeping a close pulse on what behavioral changes are permanent will help financial institutions form stickier, longer-lasting customer relationships.

The Secret to Increasing Wallet Share

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Quick, name a bank.

Did you name your bank, or another local or national bank? It is often easier for people to think of a national bank than a local one, thanks to name recognition through advertising and branches.

But as important as top of mind awareness is, staying top of wallet is even more important. When your organization comes to both customers and prospective customer’s minds, you increase the chances at becoming their primary financial institution (PFI).

At Wallit, we define PFI as a customer having an active checking account, a debit card and direct deposit with a financial institution. There are five ways banks can accomplish this objective, increase deposit growth and boost non-interest income in a way that maintains healthy, growing customer relationships.

1. Elevate the debit card. The debit card isn’t just a payment card, method or option. It is a powerful and valuable lifestyle tool that many community banks underutilize.

At the point of sale, consumers decide whether to use a credit or debit card, based on their own needs. They make this decision multiple times each day.

I’m sure that most community bank customers that have a checking account also have that bank’s debit card in their wallet. But do they use it? Do they use a competitor’s card? Do they reach for a credit card?

2. Be Visible. Consumers have more options than ever when choosing financial services providers. So many, in fact, that consumers actively avoid marketing and advertising. Community banks have to be more visible, but not pushy.

Look for opportunities to connect your brand to things your customers value by linking it to places that your customers already think deliver value. Connect your brand to local businesses in the communities you serve, building and growing relationships with these businesses.

Promoting local businesses and providing information people need extends your bank’s reach and gets your name out there. This also borrows the brand halo of those businesses and makes your brand top of mind and top of wallet in the process.

3. Capitalize on Connections. The best businesses succeed through collaboration. Leveraging current relationships and connecting local merchants to local consumers unlocks the trapped value of your bank in the digital age.

Your bank can create a sense of belonging for members of your community, with your institution at the center. Think about it this way – Connecting buyers and sellers is far more valuable than merely connecting the bank accounts of buyers and sellers.

4. Generate Word of Mouth. Consumers will always share what they think of brands, products and services with others in their network across a wide range of communication channels. These recommendations are highly credible and relevant; they’re generally more effective than the marketing and advertising your bank currently pays for.

The best tactic to generate word of mouth is to impress current customers with a card-linked, cash back offer when they visit one of your local businesses. Your customers already have your bank’s debit card with them, making it a tool for spreading positive word of mouth, building your brand and driving revenue by offering and rewarding unique, highly personal, share-worthy experiences.

5. Experiment. Create a culture of experimentation. Start small and learn fast. Having the courage to apply new technologies and reinvent existing ways of working can improve financial performance.

Develop and improve your bank’s ability to be hyper-relevant and serve customers more effectively by sensing and addressing their changing needs. Consider starting a pilot with employees, then extending to scale with a portion of your customers.

Increasing share of wallet and becoming a primary financial institution requires intention, commitment and experimentation.

By leveraging your bank’s current strengths and investing in your debit card and merchant services programs, such as offering and marketing cash back rewards to local businesses and consumers, you can tip the scale in your favor.

Customer Loyalty and the Competition for Stable Funding

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It’s more important than ever for banks to compete on value and increase client loyalty.

Banks are increasing loan loss reserves to counteract eroding credit quality at the same time they are also contending with competitors’ high-yield savings accounts, which pay more than 0.60% APY in some cases. August’s consumer savings rate was 14%, albeit down from a high of nearly 34% in April.

It’s easy to lose sight of the importance of competing on value in this environment, even as cost-effective ways to retain funding are more necessary than ever.

When I managed cash and investment products for banks and brokerage firms, I was regularly asked to increase the interest rate we offered our clients — often because a large client was threatening to leave the firm. My response then is still relevant today: A client relationship is more than an interest rate. In fact, multiple research studies I’ve sponsored over my career showed that when it comes to their cash deposits, the majority of clients rank safety, in the form of deposit insurance protection, first; access to their cash when they need it second; and interest rate third.

It’s a given that the majority of banks are members of the Federal Deposit Insurance Corp. and have debit cards linked to savings accounts, making clients’ funds accessible. According to the FDIC, the current average national savings rate at the end of October was 0.05% APY.

I ask potential bank partners the following key questions to understand what their strategy is to retain the excess deposits as long as possible on their balance sheet.

  • Does your bank create value with relationship pricing?
  • Does your institution have an easy-to-navigate website and app?
  • Can clients easily open an account online?
  • Does your bank offer a broad range of flexible products that meet clients’ cash needs?
  • When was the last time your institution launched an innovative savings product?

We’ve learned a lot about building more value for customers from successful consumer technology over the last few decades. Decisive points include that product attributes should be intuitive for use by front-line sales, be easily incorporated into a bank’s online experience, and allow clients to co-create a banking experience that meets their individual needs.

What would tech-inspired, easy-to-use, personalized products look like in retail banking?

Example 1:
A savings ladder strategy can meet clients’ needs for safety and access to their cash. This approach gains crucial additional value, however, when a bank deploys technology linking all the steps in the ladder into one account. Clients want to see what they’re getting in advance too: to test different inputs and compare potential strategies easily prior to  purchasing. Implementing new, individualized products should be as easy as clicking on the Amazon.com “Buy” button.

Example 2
In the face of economic uncertainty and job losses, many clients may look for flexibility. Some consumers will want to readily access cash for their already-known needs — for instance, parents with college-age children, small businesses, or homeowners with predictable renovation schedules. Advanced software lets banks meet these needs by creating customizable, fixed-term deposits with optimized rates that allow for flexible withdrawals.

Banks can consider adding value to their product offering beyond rate with time-deposit accounts that are easy for clients to implement and designed to meet their specific cash needs and terms. A product with such attributes both meets clients’ individualized needs and creates value in a competitive field.

Example 3
If a client prefers safety with some exposure to the market upside, a market-linked time deposit account also helps banks offer more value without increasing rate. An index or a basket of exchange traded funds can be constructed to align with your client’s values, which is especially attractive in today’s market. Consider the appeal of a time deposit account linked to a basket of green industry stocks, innovative technology companies, or any number of options for a segment of your clients. Offering products that align with your client’s broader worldview allows you to build a more holistic, longer-lasting relationship with them.

The ability to create customer value beyond rate will ultimately determine the long-term loyalty of banking clients. Fortunately, we can look to technology for successful models that show how to add value through simple, intuitive, and individual products. At the same time, tech already has many solutions, with software and IT services that banks can access to meet their clients’ personal needs, even at this challenging moment. Innovation has never been more relevant than now — as banks need to secure their communities, their client relationships, and their funding in a cost-effective manner.

Fixing What’s Broken In Bank Product Pitches

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There’s a better way to sell pens: Don’t start with the pen.

A classic teaching example for sales hands a shiny new pen to someone with the instruction, “Sell me this pen.” Typically, the student takes the pen and begins to describe it, attempting to use the looks and features of the pen to sell it. The would-be salesperson often struggles to “sell” the pen, because they fail to discover if the person needs a pen to begin with.

This is often how banks sell products and services to their customers. But the search for a solution to this sales dilemma has led to new and advanced ways to sell pens (and everything else) the wrong way.

A better way to sell the pen is to put it in your pocket and, instead, ask the customer questions. The goal is to discover the customer’s needs and help them realize that a pen — the one you happen to have in your pocket — is what will meet their needs.

Artificial intelligence companies and fintech platforms want banks to pay enormous sums of money to help identify products and services for customers. Having given away all manner of financial tools, products and advice, they’re now pursuing bank customers by offering demand and savings deposits, mortgages and loans. Some of the biggest names in technology are joining the fray as well: Facebook, Apple, Alphabet’s Google and Uber Technologies, among others.

Customers aren’t necessarily getting more savvy, but technology is.

A venture capital firm we work with that invests in fintechs was very clear that most online financial tools are merely marketing devices used to poach customers and grow assets. Often these tools expose a problem in a customer’s existing account and offer an immediate remedy if the customer transfers accounts to them. This isn’t necessarily good for the customer, but can be devasting to a bank.

Pushing product is difficult; providing solutions is far more rewarding — and efficient.

Recently, we met with a regional bank that has over 80 retail branches and offers wealth management as part of their service model. They have only 17 financial advisors to service customers in their home state. They confessed that of only 27% of their wealth management clients have a retirement account with the bank.

Only 27%. How is this possible? Is it because they don’t sell retirement accounts? Or is it because they don’t know their customers? After all, who doesn’t need a retirement account?

Another bank we work with wondered if they should start offering business credit cards. They didn’t understand their customers’ needs well enough to decide what products would address those needs or wants, so they opted to pitch a credit card offered by a vendor.

One of the industry’s largest digital banks confessed to us they are considering adding a human element to their arsenal, seeing a need for a digital/human hybrid approach. They’ve realized that society is moving to digital, but also recognize there is not enough value in digital alone.

The COVID-19 crisis will accelerate the shift to digital. If brick and mortar banks are going to survive, and even thrive, they need a digital component that complements their human element. Throwing money at new technology that pushes products that customers may or may not want or need will only lead to costly and disappointing results.

Banks need tools that develop and deepen customer relationships and make it possible to offer real solutions, as opposed to pushing products they hope will increase revenue.

Accenture recently released a study with five key findings about customer expectations. They are:

  1. They want integrated propositions addressing core needs.
  2. They want a personalized offering.
  3. They are willing to share data with providers in return for better advice and more attractive deals.
  4. They want better integration across physical and digital channels.
  5. Their trust in financial institutions is increasing.

Essentially, customers want personal offerings that serve their core needs and delivered in the medium they choose. Banks that want to grow revenue and increase retention shouldn’t continue to “push the pen.” They should find and offer digital/human hybrid models to help customers self-discover solutions.