How to Attract Consumers in the Face of a Recession

Fears of a recession in the United States have been growing.

For the first time since 2020, gross domestic product shrank in the first quarter according to the advance estimate released by the Bureau of Economic Analysis. Ongoing supply chain issues have caused shortages of retail goods and basic necessities. According to a recent CNBC survey, 81% of Americans believe a recession is coming this year, with 76% worrying that continuous price hikes will force them to “rethink their financial choices.”

With a potential recession looming over the country’s shoulders, a shift in consumer psychology may be in play. U.S. consumer confidence edged lower in April, which could signal a dip in purchasing intention.

Bank leaders should proactively work with their marketing teams now to address and minimize the effect a recession could have on customers. Even in times of economic uncertainty, it’s possible to retain and build consumer confidence. Below are three questions that bank leaders should be asking themselves.

1. Do our current customers rate us highly?
Customers may be less optimistic about their financial situations during a recession. Whether and how much a bank can help them during this time may parlay into the institution’s Net Promoter Score (NPS).

NPS surveys help banks understand the sentiment behind their most meaningful customer experiences, such as opening new accounts or resolving problems with customer service. Marketing teams can use NPS to inform future customer retention strategies.

NPS surveys can also help banks identify potential brand advocates. Customers that rate banks highly may be more likely to refer family and friends, acting as a potential acquisition channel.

To get ahead of an economic slowdown, banks should act in response to results of NPS surveys. They can minimize attrition by having customer service teams reach out to those that rated 0 to 6. Respondents that scored higher (9 to 10) may be more suited for a customer referral program that rewards them when family and friends sign up.

2. Are we building brand equity from our customer satisfaction?
Banks must protect the brand equity they’ve built over the years. A two-pronged brand advocacy strategy can build customer confidence by rewarding customers with high-rated NPS response when they refer individual family and friends, as well as influencers who refer followers at a massive scale.

Satisfied customers and influencer partners can be mobilized through:

Customer reviews: Because nearly 50% of people trust reviews as much as recommendations from family, these can serve as a tipping point that turns window-shoppers into customers.

Trackable customer referrals: Banks can leverage unique affiliate tracking codes to track new applications by source, which helps identify their most effective brand advocates.

3. What problems could our customers face in a recession?
Banks vying to attract new customers during a recession must ensure their offerings address unique customer needs. Economic downturn affects customers in a variety of ways; banks that anticipate those problems can proactively address them before they turn into financial difficulties.

Insights from brand advocates can be especially helpful. For instance, a mommy blogger’s high referral rate may suggest that marketing should focus on millennials with kids. If affiliate links from the short video platform TikTok are a leading source of new customers, marketing teams should ramp up campaigns to reach Gen Z. Below are examples of how banks can act on insights about their unique customer cohorts.

Address Gen Z’s fear of making incorrect financial decisions: According to a Deloitte study, Gen Z fears committing to purchases and losing out on more competitive options. Bank marketers can encourage their influencer partners to create objective product comparison video content about their products.

Offer realistic home-buying advice to millennials: Millennials that were previously held back by student debt may be at the point in their lives where their greatest barrier to home ownership is easing. Banks can address their prospects for being approved for a mortgage, and how the federal interest rate hikes intersect with loan eligibility as well.

Engage Gen X and baby boomer customers about nest eggs:
Talks of recession may reignite fears from the financial crisis of 2007, where many saw their primary nest eggs – their homes — collapse in value. Banks can run campaigns to address these concerns and provide financial advice that protects these customers.

Banks executives watching for signs of a recession must not forget how the economic downturn impacts customer confidence. To minimize attrition, they should proactively focus on building up their brand integrity and leveraging advocacy from satisfied customers to grow customer confidence in their offerings.

The Future-Proof Response to Rising Interest Rates

After years of low interest rates, they are on the rise — potentially increasing at a faster rate than the industry has seen in a decade. What can banks do about it?

This environment is in sharp contrast to the situation financial institutions faced as recently as 2019, when banks faced difficulties in raising core deposits. The pandemic changed all that. Almost overnight, loan applications declined precipitously, and businesses drew down their credit lines. At the same time, state and federal stimulus programs boosted deposit and savings rates, causing a severe whipsaw in loan-to-deposit ratios. The personal savings rate — that is, the household share of unspent personal income — peaked at 34% in April 2020, according to research conducted by the Federal Reserve Bank of Dallas. To put that in context, the peak savings rate in the 50 years preceding the pandemic was 17.7%.

These trends became even more pronounced with each new round of stimulus payments. The Dallas Fed reports that the share of stimulus recipients saving their payments doubled from 12.5% in the first round to 25% in the third round. The rise in consumers using funds to pay down debt was even more drastic, increasing from 14.6% in round one to 52.3% in round three. Meanwhile, as stock prices remained volatile, the relative safety of bank deposits became more attractive for many consumers — boosting community bank deposit rates.

Now, of course, it’s changing all over again.

“Consumer spending is on the rise, and we’ve seen a decrease in federal stimulus. There’s less cash coming into banks than before,” observes MANTL CRO Mike Bosserman. “We also expect to see an increase in lending activities, which means that banks will need more deposits to fund those loans. And with interest rates going up, other asset classes will become more interesting. Rising interest rates also tend to have an inverse impact on the value of stocks, which increases the expected return on those investments. In the next few months, I would expect to see a shift from cash to higher-earning asset classes — and that will significantly impact growth.

These trends are unfolding in a truly unprecedented competitive landscape. Community banks are have a serious technology disadvantage in comparison to money-center banks, challenger banks and fintechs, says Bosserman. The result is that the number of checking accounts opened by community institutions has been declining for years.

Over the past 25 years, money-center banks have increased their market share at the expense of community financial institutions. The top 15 banks control 56.2% of the overall marketshare, up from 40% roughly 25 years ago. And the rise of new players such as fintechs and neobanks has driven competition to never-before-seen levels.

For many community banks, this is an existential threat. Community banks are critical to maintaining competition and equity in the U.S. financial system. But their role is often overlooked in an industry that is constantly evolving and focused on bigger, faster and shinier features. The average American adult prefers to open their accounts digitally. Institutions that lack the tools to power that experience will have a difficult future — regardless of where interest rates are. For institutions that have fallen behind the digital transformation curve, the opportunity cost of not modernizing is now a matter of survival.

The key to survival will be changing how these institutions think about technology investments.

“Technology isn’t a cost center,” insists Christian Ruppe, vice president of digital banking at the $1.2 billion Horicon Bank. “It’s a profit center. As soon as you start thinking of your digital investments like that — as soon as you change that conversation — then investing a little more in better technology makes a ton of sense.”

The right technology in place allows banks to regain their competitive advantage, says Bosserman. Banks can pivot as a response to events in the macro environment, turning on the tap during a liquidity crunch, then turn it down when deposits become a lower priority. The bottom line for community institutions is that in a rapidly changing landscape, technology is key to fostering the resilience that allows them to embrace the future with confidence.

“That kind of agility will be critical to future-proofing your institution,” he says.

7 Ways Banks Can Benefit From Data Analytics

A version of this article originally appeared on the KlariVis blog.

There is a pervasive data conundrum throughout the financial services industry: Banks have an inordinate amount of data, but antiquated and siloed solutions are suppressing incredible, untapped opportunities to use it.

Data analytics offer banks seven distinct and tangible benefits; it’s essential that they invest adequate time and resources into finding the right solution.

1. Save Valuable Time
Time is money. Investing in data analytics can streamline operations and saves employees time. The right solution organizes data, eliminates spreadsheets, freeing up the gray space in any organization. Employees can quickly locate what they’re looking for, allowing them to focus on the tasks that are most meaningful to the institution. Instead of organizing and sifting through data, they can spend more time analyzing the information, making strategic decisions and communicating with customers.

2. Secure Compliance, Risk Management Features
Data analytics improves overall bank security. The regulatory environment for financial institutions is complex, and regulatory non-compliance can lead to major fines or enforcement actions for banks. Data analytics incorporates technology into the compliance and risk management processes, improving bank security by reducing the likelihood of human error and quickly detecting potential cases of fraud.

3. Increase Visibility
Data silos in banks are often a result of outdated data solutions. Additionally, granting only a few people or departments access to the full set of data can lead to miscommunication or misinformation. Data analytics solutions, such as enterprise dashboards, give financial institutions the ability to see their full institution clearly. Everyone having access to the same information — whether it be individual branch performance or loan reports —improves customer service, internal communication and overall efficiency.

4. Cut Down on Costs
There is a high cost of bad data. Bad data can be inaccurate, duplicative, incomplete, inaccessible or unusable. Banks that aren’t storing or managing collected data appropriately could be wasting valuable company resources. They could also incur bad data costs through inconclusive, expensive marketing campaigns, increased operational costs that distract employees from important initiatives or customer attrition. By comparison, an updated enterprise data solution keeps employees up-to-date and can reveal new growth opportunities.

5. Create Detailed Customer Profiles
All financial institutions want to know their customers better. Data analytics help generate detailed profiles that reveal valuable information, such as spending habits and channel preferences. Banks can create highly specific segments with these profiles and pinpoint timely cross-selling opportunities. The right data solution makes it easier to gather actionable insights that improve customer experience and increase profitability.

6. Empower Employees and Customer Experience
Empowered employees improve the customer experience; happier customers contribute to empowering employees. A powerful part of this cycle is data analytics. Data analytics produce actionable insights that save employees’ time so they can focus on what’s important. Banks can send timely, data-based relevant messaging, based on customer-expressed preferences and interests.

7. Improve Performance
More time spent connecting with customers allows employees to build a deeper understanding of their financial needs and ultimately improve the bank’s performance. The right data analytics solution leads to a more productive and profitable financial institution. In this increasingly competitive financial landscape, employee and customer experience are vital to every financial institution. Customers expect seamless communication and digital experiences that are secure and intuitive; employees appreciate work environments where their work contributes to its overall success. Using data to its fullest potential allows banks to make better strategic decisions, identify and act upon growth opportunities, and focus on their customers.

How to Keep Existing Customers Happy

Many consumers already have an established relationship with a trusted bank that provides familiarity and a sense of reliability. If they find value in the bank’s financial support, they tend to stick around.

That makes existing customers essential to a bank’s future growth. However, in today’s landscape, many financial institutions focus on acquiring new customers, rather than satisfying the needs of their existing customer base. Data shows that although existing customers make up 65% of a company’s business, 44% of companies focus on customer acquisition, while only 16% focus on retention.

While acquiring new customers is vital to the growth of a financial institution, it is crucial that the existing customers are not left behind. Nurturing these relationships can produce significant benefits for an organization; but those who struggle to manage what is in house already will only compound the issues when adding new customers.

While acquiring customers is important to growing portfolios, loyal customers generate more revenue every year they stay at a bank. New customers might be more cautious about purchasing new products until they are comfortable with the financial institution. Existing clients who are already familiar with the bank, and trust and value their products, tend to buy more over time. This plays out in other sectors as well: Existing customers are 50% more likely to try new products and spend 31% more, on average, compared to new customers, according to research cited by Forbes.

Existing customers are also less costly as they require less marketing efforts, which frees up resources, time, and costs. New customer acquisition costs have increased by almost 50% in the past five years, which means the cost of acquiring a new customer is about seven times that of maintaining an existing relationship.

Additionally, loyal customers act as mini marketers, referring others to their trusted institution and increasing profit margins without the bank having to advertise. According to data, 77% of customers would recommend a brand to a friend after a single positive experience. This word-of-mouth communication supplements bank marketing efforts, freeing up resources for the customer acquisition process.

So how can banks improve their customer retention rate?

Be proactive. Banks have more than enough data they can use to anticipate the needs of existing customers. Those that see this data as an opportunity can gain a more holistic view into their existing client base and unlock opportunities that boost retention rates. For instance, lenders can use data like relative active credit lines, income, spending patterns and life stages to cultivate a premium user experience through personalized offers that are guaranteed and readily available. A proactive approach eliminates the potential of an existing customer being rejected for a loan — which happens 21% of the time — and allows them to shop with confidence.

Promote financial wellness. Having this insight into customers also allows banks to boost retention rates through financial wellness programs that help equip them with opportunities to enjoy financial competency and stability. Did they move to a new state? Did they have a baby? Do they have a child going off to college? Banks can acknowledge these milestones in their customers’ financial lives and tailor communication and relevant recommendations that show their support, create long-lasting and trusting relationships, and help the bank become top of wallet when the customer purchases a product or service.

Put the customer in the driver’s seat. Banks can present existing customers with a menu of products and services immediately after they log onto their online banking portal. Customers can weigh a range of attractive capabilities and select what they want, rather than receive a single product that was offered to tens of thousands of prospects with hopes they are in the market. This removes the fear of rejection and confusion that can occur when applying through a traditional lending solution.

Be a true lending center. If banks want to distinguish their online and mobile banking platform as more than a place to make transfers and check balances, they must provide branch and call center staff with the tools to evolve into a true lending center for customers. Existing customers should be able to find support and guidance inside their online banking accounts, apply for and receive appropriate products, make deposits, and so much more from the palm of their hand.

To remain a standard in their communities, banks must recognize the true value behind customer retention. This can help banks not only secure a prime spot in its customers’ financial lives but grow loan portfolio, boost engagement and gain or retain a strong competitive edge.

FinXTech’s Need to Know: Elder Finances

There’s a bit of a conundrum in the financial technology space. As more services move to the digital realm, the premise is that they become more accessible and relevant to a broader audience — specifically, millenials and Gen Z.

But self-servicing digital experiences don’t necessarily benefit an aging population.

A 2016 study from the U.S. Census Bureau reports almost 50 million adults 65 years and older are living in the U.S. That number is projected to surpass 100 million by 2060, which will outnumber the amount of children under 18 in the U.S.

There is no set age that represents an older adult’s inability to manage their finances — I know friends today who handle their parents’ finances while they are in their mid-forties, and also have a colleague whose father can still write checks at 90. Banks have an opportunity to facilitate the transition of financial management from adult to caregiver, and ensure that those customers stay with the bank.

Fintechs that specialize in the management and monitoring of elder finances can help banks ease the burden of that transition.

There are three main ways that fintechs can work with banks in this space: They can provide a digital banking platform tailored toward elder populations, they can monitor transactions for fraud and they can provide financial advisory services or planning.

Banks can work with fintechs to provide a digital banking interface that organizes elder finances for account holders. Managing insurance, retirement, medical, housing and emergency costs can feel next to impossible for caregivers who suddenly gain access to elder accounts. But, being able to access and manage those accounts from one platform could save time and prevent a potential headache.

Carefull is one such digital banking platform. Accounts can be set up by the elder themselves, with assistance or by a caregiver. From the platform dashboard, users can access past and future bills, income, deposits, assets and transactions made. An extra layer of transaction and fraud monitoring alerts users when suspicious activity is detected.

Multiple users can be added to the account on a view-only basis, and transactions can not be initiated or carried out by anyone except the elder within the Carefull platform. Users can even connect with financial advisors and planners within the bank.

Elder fraud can be extremely difficult to spot, and increasingly common. A 2019 report from the Consumer Financial Protection Bureau looked at Suspicious Activity Reports (SARs) that dealt with elder financial exploitation from 2013 to 2017. The study found that filings quadrupled within those four years, and that those reported accounted for only a fraction of incidents.

When elder fraud occurs — whether it be malicious (from a bad actor), a crime of opportunity (from a caregiver) or a self-induced mistake (falling for a phishing scam) — the losses are apparent. The average lost in each SAR totaled $34,200. Losses were greater when the elder knew the perpetrator versus a stranger: $50,000 compared to $17,000.

EverSafe works as a second set of eyes on bank, investment, retirement and credit card accounts. Its analytics technology looks for irregularities within transactions, transfers or withdrawals made from each account, and sends alerts to a trusted caregiver, whether it be a spouse, child or hired help. EverSafe, with a partner bank, can also help guide families through remediation processes when fraud or theft occurs, and in some cases will reimburse lawyer fees.

Banks can take a proactive approach with aging populations with fintechs that offer advisory services — assisting with in-person advisors or through artificial intelligence. Genivity’s HALO platform operates as a software-as-a-service solution that helps bank customers plan for the biggest risks to their longevity, health and finances. Each customer receives a personalized report that includes how many years they are expected to live with assistance and its cost, including out-of-pocket expenses.

Full reports are given to financial advisors, so that clients are incentivized to speak with them about their future financials. HALO can be white-labeled and embedded directly into a bank’s digital platform.

Banks will have to strengthen their reactive and proactive strategies when it comes to protecting and catering to aging populations — and partnering with a fintech may be the best way forward for many. Doing so may help banks accumulate life-long customers across generations.

Carefull, EverSafe and Genivity are all vetted companies for FinXTech Connect, a curated directory of technology companies who strategically partner with financial institutions of all sizes. For more information about how to gain access to the directory, please email finxtech@bankdirector.com.

The Cannabis Banking Opportunity

Legalized cannabis continues to gain momentum across the United States, but banks may be left out of the opportunity if they lack a strategy to service the space. As this demand grows, banks can leverage their risk and compliance teams to build new revenue opportunities. In this video, Kevin Hart, the founder and CEO of Green Check Verified, explains how banks can formulate a cannabis banking program that fits into their overall strategy and risk management appetite.

  • Outlook for Future Growth
  • Direct and Indirect Cannabis Banking
  • Crafting a Scalable Program

The Topic That’s Missing From Strategic Discussions

As of Oct. 8, 2021, the U.S. experienced 18 weather-related disasters with damages exceeding the $1 billion mark, according to the National Oceanic and Atmospheric Administration (NOAA). These included four hurricanes and tropical storms on the Gulf Coast — the costliest disaster, Hurricane Ida, totaled $64.5 billion, destroying homes and knocking out power in Louisiana before traveling north to cause further damage via flash flooding in New Jersey and New York. Out West, the financial damage caused by wildfires, heat waves and droughts has yet to be tallied but promises to be significant. More than 6.4 million acres burned, homes, vegetation and lives were destroyed, and a hydroelectric power plant outside Sacramento even shut down due to low water levels.

These incidents weren’t unique to 2021. In fact, the frequency of costly natural disasters — exceeding $1 billion, adjusted for inflation — have been ticking up since at least the 1980s.

 

Scientists at the NOAA and elsewhere point to climate change and increased development in vulnerable areas such as coastlines as the cause of these more frequent, costlier disasters, but bank boards aren’t talking about the true risks they pose to their institutions. Bank Director’s 2021 Risk Survey, conducted in January, found just 14% of directors and senior executives reporting that their board discusses the risks associated with climate change at least annually. An informal audience poll at Bank Director’s Bank Audit & Risk Committees Conference in late October confirmed little movement on these discussions, despite attention from industry stakeholders, including regulators and investors that recognize the risks and opportunities presented by climate change.

These include acting Comptroller of the Currency Michael Hsu, who on Nov. 3 announced his agency’s intent to “develop high-level climate risk management supervisory expectations for large banks” above $50 billion in assets along with guidance by the end of the year. He followed that announcement with a speech a few days later that detailed five questions every bank board should ask about climate change. While his comments — and the upcoming guidance — focus on larger institutions, smaller bank boards would benefit from these discussions.

Hsu’s first two questions for boards center on the bank’s loan portfolio: “What is our overall exposure to climate change?” and “Which counterparties, sectors or locales warrant our heightened attention and focus?” Hsu prompts banks to dig into physical risks: the impacts of more frequent severe weather events on the bank’s markets and, by extension, the institution itself. He also asks banks to look at transition risks: reduced demand and changing preferences for products and services in response to climate change. For example, auto manufacturers including General Motors Co. and Ford Motor Co. announced in November that they plan to achieve zero emissions by 2040; those shifts promise broad impacts to the supply chain as well as gas stations across the country due to reduced demand for fuel.

Consider your bank’s geographic footprint and client base: What areas are more susceptible to frequent extreme weather events, including hurricanes, floods, wildfires and droughts? How many of your customers depend on carbon intensive industries, and will their business models be harmed with the shift to clean energy? These are the broad strategic areas where Hsu hopes boards focus their attention.

But the changes required in transitioning to a clean economy will also result in new business models, new products and services, and the founding and growth of companies across the country. It’s the other side to the climate change coin that prompts another question from Hsu: “What can we do to position ourselves to seize opportunities from climate change?

Some large investors agree. In Larry Fink’s 2021 letter to CEOs, the head of BlackRock reaffirmed the value the investment firm places on climate change, noting the opportunities along with the risks. “[W]e believe the climate transition presents a historic investment opportunity,” he wrote in January. “There is no company whose business model won’t be profoundly affected by the transition to a net zero economy – one that emits no more carbon dioxide than it removes from the atmosphere by 2050. … As the transition accelerates, companies with a well-articulated long-term strategy, and a clear plan to address the transition to net zero, will distinguish themselves with their stakeholders.”

Some banks are positioning themselves to be early movers in this space. These include $187 billion Citizens Financial Group, which launched a pilot green deposit program in July 2021 that ties interest-bearing commercial deposits to a sustainable-focused lending portfolio. The challenger bank Aspiration launched a credit card in November that plants two trees with every purchase. And $87 million Climate First Bank opened its doors over the summer, offering residential and commercial solar loans, and financing environmentally-friendly condo upgrades. Climate First is founder and CEO Kenneth LaRoe’s second bank focused on the environment, and he sees a wide range of opportunities. “I call myself a rabid environmentalist — but I’m a rabid capitalist, too,” he told Bank Director magazine earlier this year.

 

Select Green Initiatives Announced in 2021

Source: Bank press releases and other public information

Climate First Bank (St. Petersburg, Florida)
Specialized lending to finance sustainable condo retrofits and residential/commercial solar loans; contributes 1% of revenues to environmental causes.

Citizens Financial Group (Providence, Rhode Island)
Launched pilot green deposit program in July 2021, totaling $85 million as of Sept. 30, 2021.

Aspiration (Marina Del Rey, California)
Fintech introduced Aspiration Zero Credit Card, earning cash back rewards and planting two trees with every purchase.

JPMorgan Chase & Co. (New York)
Designated “Green Economy” team to support $1 trillion, 10 year green financing goal.

Bank of America Corp. (Charlottesville, North Carolina)
Increased sustainable finance target from $300 million to $1.5 trillion by 2030.

Fifth Third Bancorp (Cincinnati, Ohio)
Issued $500 million green bond to fund green building, renewable energy, energy efficiency and clean transportation projects.

 

Boards that don’t address climate change as a risk in the boardroom will likely overlook strategic opportunities. “Banks that are poorly prepared to identify climate risks will be at a competitive disadvantage to their better-prepared peers in seizing those opportunities when they arise,” Hsu said.

Hsu offered two additional questions for bank boards in his speech. “How exposed are we to a carbon tax?”references the price the U.S. government could place on greenhouse gas emissions; however, he also stated that the passage of such a tax in the near future is unlikely. The other, “How vulnerable are our data centers and other critical services to extreme weather?” certainly warrants attention from the board and executive team as part of any bank’s business continuity and disaster recovery planning.

Most management teams won’t be able to answer broader, strategic questions on climate initially, Hsu said, but that shouldn’t keep boards from asking them. “Honest responses should prompt additional questions, rich dialogue, discussions about next steps and management team commitments for action at future board meetings,” Hsu stated. “By this time next year, management teams hopefully should be able to answer these questions with greater accuracy and confidence.”

Three Steps to Building a Commercial Card Business In-House

As the economy recovers from the impact of the Covid-19 pandemic, community banks will need to evaluate how to best serve their small and medium business (SMB) customers.

These companies will be seeking to ramp up hiring, restart operations or return to pre-pandemic levels of service. Many SMBs will turn to credit cards to help fund necessary changes — but too many community banks may miss out on this spending because they do not have a strong in-house commercial card business.

According to call reports from the Federal Deposit Insurance Corp., community banks make up half of all term loans to small businesses, yet four out of five have no credit card loans. At the same time, Accenture reports that commercial payments made via credit card are expected to grow 12% each year from 2019 to 2024. This is a significant strategic opportunity for community bankers to capitalize on the increased growth of cards and payments. Community bankers can use commercial cards to quickly capitalize on this growth and strengthen the relationships with existing SMB customers while boosting their local communities. Commercial credit cards can also be a sticky product banks can use to retain new Paycheck Protection Program loan customers.

Comparing Credit Card Program
Many community banks offer a branded business credit card program through the increasingly-outdated agent bank model. The agent bank model divorces the bank from their customer relationship, as well as any ability to provide local decisioning and servicing to their customers. Additionally, the community banks carry the risk of the credit lines they have guaranteed. In comparison, banks can launch an in-house credit card program within 90 days with modern technology and a partnership with the right provider. These programs require little to no upfront investment and don’t need additional human resources on the bank’s payroll.

Community banks can leverage new technology platforms that are substantially cheaper than previous programs, enabling issuers to launch products faster. The technology allows bank leaders to effortlessly update and modify products that cater to their customer’s changing needs. Technology can also lower customer acquisition and service costs through digital channels, especially when it comes to onboarding and self-service resources.

More importantly in agent bank models, the community bank does not underwrite, fund or keep the credit card balances on its books. It has little or no say in the issuing bank’s decisions to cancel a card; if it guarantees the loan, it takes all the risk but receives no incremental reward or revenue. The bank earns a small referral fee, but that is a fraction of the total return on assets it can earn by owning the loans and capturing the lucrative issuer interchange.

Bringing credit card business in-house allows for an enhanced user experience and improved customer retention. Community banks can use their unique insight to their SMB customers to craft personalized and tailored products, such as fleet cards, physical cards, ghost cards for preferred vendors or virtual cards for AP invoices. An in-house corporate credit card program gives banks complete access to customer data and total control over the user experience. They can also set their own update and product development timelines to better serve the changing needs of their customers.

Three Steps to Start an In-House Program
The first step to starting an in-house credit card program to build out the program’s strategy, including goals and parameters for credit underwriting. The underwriting strategy will establish score cutoffs, debt-to-income ratios, relationship values and other criteria so automated decisions reflect the policies and priorities of the bank. It is important to consider the relationship value of a customer, as it provides an edge in decision making for improved risk, better engagement and higher return. If a bank selects a seasoned technology partner, that partner may be able to provide a champion strategy and best practices from their experience.

Next, community banks should establish a long-term financial plan designed to meet its strategic objectives while addressing risk management criteria, including credit, collection and fraud exposures. It is important that bank leaders evaluate potential partners to ensure proper fraud protections and security. Some card platform providers will even share in the responsibility for fraud-related financial losses to help mitigate the risk for the bank.

The third step is to understand and establish support needs. These days, a strong account issuer program limits the bank’s need for dedicated personnel to operate or manage the portfolio. Many providers also offer resources to handle accounting and settlement, risk management, technology infrastructure, product development, compliance and customer service functions. The bank can work with partners to build the right mix of in-house and provided support, and align its compensation systems to provide the best balance of profitability and support.

Building an in-house corporate credit card program is an important strategic priority for every community bank, increasing its franchise value and ensuring its business is ready for the future.

In a Challenging Earnings Climate, There Is No Room for Lazy Capital

The persistently challenging earnings environment stemming from a stubbornly flat yield curve requires bank management teams examine all avenues for maximizing earnings through active capital management.

The challenge to grow earnings per share has been a major driver behind more broadly based capital management plans and playbooks as part of larger strategic planning. Management teams have a number of levers available to manage capital. The key as to when and which lever to pull are a function of the strategic plan.

A strong plan predicated on staying disciplined also needs to retain enough nimbleness to address the unforeseen and inevitable curveballs. Effective capital management is, in large part, an exercise in identifying and understanding future risks today. Capital and strategy are tightly linked: A bank’s strategic plan is highly dependent on its capital levels and its ability to generate and manage it. In our work with clients, we discuss and model a range of capital management techniques to help them understand the costs and benefits of each strategy, the potential impact on earnings per share and capital and, ultimately, the potential impact on value creation for shareholders.

Bank acquisitions. M&A continues to offer banks the most significant strategic and financial use of capital. As internal growth slows, external growth via acquisitions has the ability to leverage capital and significantly improve the pro forma company’s earnings stream. While materially improved earnings per share should help drive stock valuation, it is important to note that the market’s reaction to transactions over the last several years has been much more focused on the pro forma impact to capital, as represented by the reported dilution to tangible book value per share and the estimate of recapturing that dilution over time, alternatively known as the “earnback period”.

Share repurchases. Share repurchases are an effective and tax-efficient way to return excess capital to shareholders, compared to cash dividends. Repurchases generally lift the value of a stock through the reduction in shares outstanding, which should increase earnings per share and the stock price. They’re generally favored by institutional owners, and can make tremendous sense for broadly held and liquid stocks. They can also be very effective capital management tools for more thinly traded community banks with growing capital levels, limited growth prospects and attractive stock valuations.

Cash dividends. Returning capital to shareholders in the form of cash dividends is generally viewed very positively both by the industry and by investors. Banks historically have been known as cash dividend paying entities, and the ability and willingness to pay them is often perceived as a mark of a healthy and stable company. Cash dividends are often viewed as more attractive to individual shareholders, where quarterly income can be a more meaningful objective in managing their returns.

Business line investment. Community banking at its core is a spread dependent business. The ability to diversify the revenue stream through development or acquisition of a fee generating business can be an effective and worthwhile use of capital. Common areas of investment include mortgage banking, wealth management, investment products and services, insurance and the lift out of lending teams. A recent development for some is investing in technology as an offensive play rather than a defensive measure.

Capital Markets Access. Effective capital management plans also consider the ability to access the capital markets. In the community banking space, accessing capital is not always a foregone conclusion.  Community banks need to remain alert to market conditions and investor appetite. Over the past couple of years, the most common forms of capital available have been preferred equity and subordinated debt. It’s our view that for banks of a certain size and market cap, it’s a prudent capital management strategy to file a shelf registration, or Form S-3. The optionality provided by having a shelf registration far outweighs the concern that the shelf itself suggests a shareholder dilutive activity is on the horizon.

There are a couple of guidelines that managements should bear in mind as they develop their capital management plans. First, the plan needs to be realistic and achievable; there is limited value in building a plan around an outcome that is unrealistic. Second, don’t look a gift horse in the mouth. If there is credible information from trusted sources indicating that capital is available, get it.

It’s important to note that these capital management activities can be utilized individually or in combination. An acquisition may necessitate the need to access the capital markets. Or given the relative inexpensiveness of sub debt, raising some for the purpose of a share repurchase could make sense. A strong capital management plan can position a company to manage through the good times and maybe, more importantly, the challenging times.

Honing Your Strategic Vision

The financial institutions examined in Bank Director’s 2021 RankingBanking study, sponsored by Crowe LLP, demonstrate the fundamentals of successful, long-term performance. What can we learn from these top performers — and how should bank leaders navigate today’s challenging environment? Crowe Partner Kara Baldwin explores these issues, based on the lessons learned in the RankingBanking study, and shares her own expertise. To view the complete results of the 2021 RankingBanking study, click HERE.

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