Episode Transcript
[00:00:00] Speaker A: Hey everybody. You're listening to Top Quartile where we bring you stories from the front lines of growth in community focused financial services.
Well, welcome back to Top Quartile. So excited to have Tim back on the show. Tim is a frequent guest as the CEO and one of the founders at Infusion. And so if you're interested in Tim's fascinating fact, you can check the very first welcome episode by searching the welcome Top Quartile. Tim, so glad to have you back on the show.
[00:00:26] Speaker B: It's great to be back. Always enjoy this.
[00:00:28] Speaker A: We were just talking about one of the highlights of our week when we get to do these. Well, so in our series here, it's great to have guests from outside the industry.
One of the hot topics is deposit growth. We haven't basically talked about deposit growth for two years and with all the liquidity in play, some people are surprised that we're even talking about it now. But we're seeing some really interesting trends as we talk to clients. So Tim, what are some of those highlights, those conversations or high level trends you're seeing?
[00:00:57] Speaker B: It's really fascinating. I think one of the vantage points we have that's unique is we're looking at data and talking to clients in the context of their data every day, every week, every month.
And as you indicated up until maybe 60 days ago, maybe 90 at the outside, 100% of the conversations were how can we drive greater loan growth to absorb the massive amounts of liquidity that have come into the market over the last two years? That is really turning on a, I think quicker than most people expected. Really almost like whiplash. We've had more deposit conversations in the last 60 days than we've had in the last two and a half years.
And I think clients are surprised at how quickly the liquidity wave that they experienced has receded and how quickly inflation and I guess other factors have eaten into liquidity. I think it's a combination of loan growth has been really strong the last two years in various categories, so that's absorbed some of it. And then of course, inflation is eating into the additional buffer of federal money that consumers had in their checking and savings accounts.
So it's a fascinating thing.
And then you add to that with rates going up as aggressively, if they've gone up in the last six months, the competition for deposit pricing has already started. I mean, in most markets and I travel the country every week.
I saw last week a 3% 14 month CD on a branch poster. Like, wow, we're already at 3% on a CD that's less than two years. So really surprising and almost startling how quickly institutions have shifted. Not all institutions are there. I think it was going to be kind of fragmented. On those that are still looking for loans. I talked to one this morning that's still looking for loans versus those that are already having deposit issues.
[00:02:49] Speaker A: And then of course one interesting factor is clients that may have some of that liquidity tied up match funding securities with fixed durations. And then I think there's also some really forward looking clients that we've talked to that are just trying to get ahead of the curve. They're saying, hey, look, if rates are going to rise, if I could raise funding now in a systematic way and kind of spread out some, maybe I can lock in funding that I don't need as much today, but I'll really need in a year or two. And if I could get that at today's rates, I might like that cost of funds forward. So there's all these factors that we're talking about that are driving the conversation. One of the advantages we have is long time in the industry, 20 and 30 years, multiple rate cycles. So Tim, what are some of the echoes you might see from what we're seeing today versus previous rising rate environments?
[00:03:38] Speaker B: Yeah, I mean the first thing to say is there's always some differences and we're not sure exactly how this is going to be different. But you can set your watch by I think some things. This is the third rising rate cycle we've had in 20 years. If you go back to the 04 to 0607 cycle, we had 14 consecutive Fed meetings with an increase, although those were all 25 basis point increases. Then we had the abbreviated rise up to 250 on the fed funds in 1617. And so one of the things you can set your watch by is our finance partners within our institutions having an immediate paranoia almost, maybe that's too strong of a word, but maybe not about repricing risk rates going up, especially as aggressively they're going up now. And when you've had all this money pile up in non interest and nominal interest rate buckets over the last two or three years, really two and a half years since rates dropped to zero. If you're a finance person and you're trying to manage cost of funds and net interest margins, it's natural and reasonable to be concerned about repricing. But that ends up triggering some, I think some, some folks outsmarting themselves a little bit. And what I mean by that is okay, we're concerned about Repricing, that's premise one. Then therefore repricing bad new money good.
So let's get, let's require new money to get any kind of pricing that we offer on our CDs and money market accounts. The problem with that is the cost of acquiring new money in terms of the interest rate you have to pay is a greater actual financial cost compared to what you could pay for wallet share expansion than the actual repricing. As an example, if I could offer a 12 month CD at 2% instead of 2.5% and still get the funding I'm looking for, when you multiply 50 basis points times the chunk of funding that you draw based on that price, it's a way larger cost than if you reprice 20 or 30 or 40% of the balance even by cross selling that product to someone who already has money with you and they'll move some of that money from those funds. So, but no one does the math to say price sensitivity difference compared to repricing cost. And so a different way to say what I just said is if you focus on folks that already have a high propensity to buy savings products from you, you can offer them more modest price points to get them to move money from other institutions compared to what you have to offer someone who has a low propensity to buy where you'll get 100% new money, but at a much thinner margin. And by the way, aside from the fact that the margin's thinner when you sell that product at 250 instead of 2%, it's harder to retain when they buy it at 25012 months later than if they bought at 2% because the expectation of the go to of the renewal rate is greater than when they bought a 250 than 2%. So you create more downstream stress in terms of retention of that money versus more sustainable growth based on more modest price points where you leverage propensity to buy factors in your growth equation. Instead of doing kind of the knee jerk repricing bad new money good and end up overpaying for new money.
[00:06:58] Speaker A: That's certainly one of the fundamentals and echoes. What are, what are maybe some of those things that might be different this time? To your point about there's some things that are the same, some things are different.
[00:07:06] Speaker B: One thing that is different is the aggressiveness of the increases that we're seeing. And I think this contributes to the risk of overpaying because consumers are continually adjusting expectations. They've gotten used to 0% interest rates to jump straight out to 3% without really doing some disciplined test and learn on where consumer acceptance is in different levels of propensity to buy segments is an easier mistake to make when rates are going up aggressively. I think also because this is a more aggressive situation and inflation is so much higher, we don't know what the impact's going to end up being on loan demand as borrowing cost increase. And that makes it trickier to ensure that you can put the money to use and still make a positive margin. I think that's reflected, I think if you look at the back half of the yield curve, where it flattens and even drops, rates drop because there's assumptions that the Fed would have to cut rates at some point to deal with a recession. And so there are ways to respond to all of that. But it comes back to the fundamental point of relationship based wallet share growth is a more sustainable and smarter strategy than the blunt instrument of price or rate, which again creates margin issues, creates long term retention issues. And so every way you think about it, a more data driven approach where we take the fundamentals of effective database marketing and apply them in this particular context. It just makes so much more sense when you look at not just the general situation of rising rates, but particularly what we're dealing with this time around.
[00:08:42] Speaker A: To go back to before either one of us were in banking in the 70s and early 80, 81, to get to the kind of interest rate and inflation environment we're talking about today.
And there was a lot different consumer behavior, right? No Internet, all those things are different. So you raised a great point around the fundamentals of starting with your own relationships and being targeted. So what are some of the differences between growing interest bearing deposits from current households, current customers, current members, versus having to go really wide where you're reaching mostly prospects.
[00:09:20] Speaker B: I'll say two things on that. One kind of a truism and another just an illustration.
So the truism is the single most consistently predictable thing I've seen in 30 years of doing this for hundreds of clients. And that is the more they have with you, the more they have somewhere else. So I think sometimes it's tempting to think, well, the people that already have 100,000 with me, we already have their wallet. It's actually the exact opposite. It's the 8020 rule. The more they have with you, the more they have somewhere else. We see it so consistently for small credit unions and large commercial banks, you see the same exact dynamic consistently playing out.
So what that means in practical terms is, and in the context of this discussion is there's wallet share opportunities with your existing high deposit households and those households. So that's a capacity indicator, but there's also propensity indicators there. High deposit checking households have made a commitment to your bank that is significant, that represents a general affinity for your institution. If they're transacting with an active debit card and they're in your mobile app regularly, those are propensity to buy factors that would translate to their willingness to move money to you at reasonable price points. And so that's where you kind of put those capacity propensity factors together in terms of existing customer wallet share expansion, marketing versus non customers who may be aware of you in some general sense. They may drive by your branch occasionally, they may have seen your branding in different media. But if they don't have a relationship with you, there's a low propensity factor and you have to make up the gap in propensity with price. It's just a simple concept. There's a continuum between price and propensity that directly relates to how much volume versus margin you can, you can generate through a particular offers for products at points in time.
So the example this I think is such a great illustration of this concept. We had a client back during the 16:17 cycle doing a good bit of commercial lending, needed deposits badly, put together a CD offer that was pretty aggressively priced. And so they call us out of the blue and say, hey, we've created this campaign file. Can you guys execute this campaign and then track the results for us? And we said, sure, can you tell us about the file? And they said, yeah, here's what we did. We took our existing depositors and we appended their liquid net worth. And any household where their liquid net worth was five times or more greater than the current deposit level, that's who we selected.
So you can just see the spreadsheet on someone's desktop where they're doing the math on what is the new money possibility based on the money they have somewhere else, who versus a repricing of what they have here. And how do I create an algorithm that's going to optimize that equation? The problem with that approach is it doesn't take into account propensity to buy only capacity. So what ended up happening when we track the result is households that already had 50,000 or more with the bank prior to the campaign made up 12% of the campaign, but they counted for 90% of the volume generated from the campaign. Households that had less than 10,000 with the bank made up 80% of the campaign and produced 1% of the impact. Essentially a complete waste of money.
And so it showed in every way you looked at it, it showed the fact that they've already given you 50 is way more predictive of their likelihood to give you another 50 or 100 or 150 than the fact that they have 500 somewhere else.
So something kind of a smart comment that I'll make sometimes to clients is, you know, Bill Gates has billions of dollars, but he's not putting it in your bank, except maybe agreed to pay them 25%. You might actually get some of his money. And that's kind of the point. In this particular example, this client could have paid a lower rate to get the money they got because the people that were buying it were committed to the institution and would have probably accepted 25 or 50 basis points less than what they paid, which again, gives you a better margin, but also reduces your downstream stress and increases your downstream retention. So it's a good illustration that it's fairly easy to identify people who have money to bring you, but the action is all on the propensity to buy a factor. And that's where you can really create a sustainable growth strategy versus one that creates continual stress on your funding base.
[00:13:52] Speaker A: It's not an either or thing. Right. So your point is starting with the relationships with the highest propensity will get the biggest, the best return, basically, at some of the best pricing. If you think of kind of a layer cake, the foundation is perhaps the tastiest part, but you can build the cake higher if you want to spend more. And so that's where the ability to segment the message and reach a very specific audience. We talked about it with this, I mentioned this story last, rising rate environment. I was all excited about having digital billboards so that we could segment the message and react quickly by market. Well, now we don't have digital billboards. We have the ability to precisely deliver the message, discrete messages to individual households across a number of channels. So much more rapidly than mail. So talk about targeted marketing a little bit more, Tim.
[00:14:42] Speaker B: You know, one of the things I've been pointing out to clients is in a digital banking world where customers don't come to branches anymore, your rate card, the old rate card that used to be in the drawer, that had your different CD terms and rates and your money market tiers and the prices, it's kind of a thing of the past. And in a lot of respects, in a practical sense, marketing is your rate card because it is the vehicle by which you share pricing with different audiences. And with the advent of digital marketing where we can target lists that are modeled out based on these different pricing scenarios with particular offers, measure the impact of the engagement and then the ultimate purchase activity. It allows us to integrate marketing with our portfolio management or even price committee Alco functions and use a disciplined measurement process to optimize price. New money retention factors and to your point, volume's always the X factor. So efficiency in terms of net interest margin is great. But if it doesn't get you enough funding to fund your balance sheet, then you've got to calibrate, you've got to recalibrate. And so that's the point of doing the hard work to model out these different scenarios in a targeted environment versus again, billboard's a great example where you can't hide that from your existing households who are sleeping versus a targeted approach where you can share price points with defined audiences based on these different factors. And so we have some really unique data assets that allow us to run scenarios for clients to say, okay, here's an audience you can target with an upper this particular offer. You can expect to see this sort of net deposit growth overall volume in these rate term combinations. Here's scenario B and C. You can look at the trade offs between volume and margin and repricing and so forth. A recent client where we did this analysis showed on a 36 month CD if I offer 275 vs 225 I get more volume. But a lot of the volume comes from greater repricing because if I offer that I'm going to wake up more of my own customers.
And the actual when you blend out all of the cost of funds versus repricing impacts, the 225 is a 1.2 and for this particular client was 1.2 million less expensive in net interest expense than the 275 scenario. But a lot of clients are just right, jumping right to the 275 without doing the due diligence to run these different scenarios in part because they don't have the data to really assess scenario A, B and C and D based on specific targeted segments and marketing outreach as you were describing.
[00:17:32] Speaker A: Yeah. So when I think about this conversation, I hope that this has reinforced some key takeaways that we love partnering with clients and if you're interested in becoming a client and having a conversation, we'd love to talk to you. The key takeaway is when we, when we apply the data assets of the perspective across the industry along with the history of different types of campaigns. We can help you get your funding needs at probably a lower cost than you believe you can and a more sustainable, more sustainable, more robust way where you don't have these big lumpy tranches of promotional pricing out there. It creates problems from an alco management. So love to have the conversation and talk about how to bring to bear the analysis and the practical experience on what there may be capabilities you may just not be aware of. On the intersection of data and targeted messaging delivery and tracking results.
[00:18:28] Speaker B: Yeah, I believe very strongly we can save you an interest expense more than our entire cost and the marketing essentially becomes free because what you would have spent to promote overpriced products through other channels ends up going away. And then we're able to promote it and save more than our cost and interest expense through smarter pricing strategies. Let me add one other thing to this equation too, which is retention.
The worst place in the world to be is having a hole at the bottom of the bucket and replacing really efficient funding and relationship based funding with price based funding at the top. That's a really bad place to be because that just equals market compression over time. So one of, one of my, another one of my smart Alex sayings is hoping and praying that customers don't wake up as rates rise is not a strategy. But that is the default mode for a lot of people right now. Even if you're not in a deposit growth mode quite yet, your customers see competitive pricing and your balance sheet if it's like everyone else's, and every single one I've ever looked at, which is hundreds, 5% of households control 65% of deposits, something like that, 25% control 95%. With those high deposit households see competing offers, you can't put your head in the sand and pretend that those things are not going to attract their attention. So proactive marketing not only allows you to grow in sustainable ways, but it retains dollars that might otherwise leave you. If you disabuse yourself of the notion that doing nothing maintains a status quo, that's the false assumption. So I'll say that last thing I'll say here too is just to put a finer point on the data asset we have, we track campaigns every day for clients all across the country. We have a campaign tracking database built on more than 100 million marketing contacts. And so what we're able to do is to go in and look at how consumers are actually responding to different price points on rate term in different segments. And that's what allows us to model out and say, for a particular client's mix of segments and their responsiveness to different price points, here is the approach that's going to get you the volume you need at the most efficient cost of funds possible. And then we're going to wrap that around with measurement and including net deposit flows and new money calculations that allow us to even further refine based on your actual results. And so that's the type of partnership that we have with our clients and have had for 15 years and we've also lived it as bankers. And so we have those scars as well and that history and experience. So love, if you're not already doing business with, love to take a look at your numbers and give you our opinions and some scenarios that you can work with. And everything is rooted in data.
[00:21:18] Speaker A: Well said. Love to get in touch and thanks for listening to this episode of Top Quartile.
That's it for today on Top Quartile. If you haven't already, be sure to subscribe to Top Quartile wherever you find podcasts on any podcast app. And while you're at it, we'd really appreciate a five star rating. And if you're interested in getting an opportunity assessment, head over to infusionmarketinggroup.com to learn more. Thanks for listening.
