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.
Hey there. I'm Dan Marks, your host and a partner in evp. Here we've got Tim Keith, our CEO, as a returning guest on the show today. So, so great to have you back, Tim. How are you?
[00:00:20] Speaker B: Great, Dan. Great to be back.
[00:00:22] Speaker A: Absolutely. And if you're wondering what Tim's fascinating fact about himself is, you could go back to the, the very first kickoff episode and check that out.
So today we're talking about loans and everybody's talking about loans right now, right?
[00:00:36] Speaker B: Yeah, yeah.
The industry's awash in liquidity and so it's a hot subject right now for certain.
[00:00:45] Speaker A: Yeah. And obviously the. So we're recording this the week of the Fed meeting. It'll go live in a few days. And so some of that may be changing as we think about interest rate environments and all those kind of things.
But I think there's, in just about any one of the planning scenarios that we're contemplating right now is there's still going to be a heavy need for loans by banks and credit unions all over the country. And so, Tim, what are some of the things, or just give us a sense of the perspective that we're talking from when we talk about loans and banking and credit unions.
[00:01:18] Speaker B: Yeah. So even in normal times, or what you might call static times, benchmarking yourself and key metrics against peers is always helpful, I think. But when we've come through a pandemic like we haven't seen really in our careers or lifetime, and the drop in interest rates is 0%, and then this massive wave of liquidity that creates so many shifting sands that the, the need to benchmark yourself to peers is greater than ever because it allows you to get a level set of how have these really unprecedented shifts in some of our metrics compared and contrast with what others have seen during the same period.
What we have in Infusion is very deep and wide normative data sets. One is our national normative, which is a set of statistics on how consumers and businesses are consuming retail banking products.
That database is updated every day with fresh data we take in from banks and credit unions all across the country.
It's built on more than 8 billion data points. So it has a very deep statistical history to it.
And so being able to run the same set of statistics on an individual client data set at a point in time and compare that to the norms really helps clients get a sense of where, where Are we starting our planning process from relative to our peers at this particular point in time? What are our most distinctive institutional strengths?
Where are our gaps? How do those gaps correspond with the areas we're looking to grow? Lending, for example, and what are our threats, our attrition risk factors that are elevated and maybe greater than they were 18, 24 months ago. And so our national normative data set is a really key asset in baselining yourself for a planning process.
The norm is essentially almost an exact replication of the United States in terms of community financial institutions and representation of different markets and different size institutions. We don't have the top 10 banks in there. You know, they skew the numbers because they're their own animals really, in terms of how they're constructed. So that's one data set we have. The other data set that makes the national norm immediately actionable in projectable ways is our campaign tracking norm, which is a compiled results of different outreach, marketing, sales campaigns. And that's also updated every week as we're getting campaign results in from different institutions across the country. And so we can go in that database and say, okay, let's look at home equity cross sell campaigns from the second quarter of 2021 where the rate offered was between 299 and 499 and the markets represented our X or Y. And we can get a very finger on the pulse of the trends and response rates, average balances, halo effects, what segments are responding more, less aggressively or strongly compared to historical trends.
When you put that together with a national norm, it becomes a highly predictive way of assessing an individual institution's opportunity at a point in time based on a prescribed set of tactics and strategies you might consider undertaking.
[00:05:02] Speaker A: Yeah, in that context, we have a perspective on all these banks, credit unions all over the country and so can be, you know, have a sense of where are the macro factors and then where those sort of differ at an institution or geographic level. You know, so obviously there's that provision that there are differences in particular areas, but what are some of those kind of big picture, the banks and credit unions that we see growing loans faster?
[00:05:28] Speaker B: Yeah, I think you start with just the changes in our operating environment and confronting those realistically. So in other, particularly customer engagement. And so when we think about growing loans, you can think about a couple of key aspects. You can think about the blunt instrument of price or rate.
And so in other words, you know, you could take a strategy to try to buy the market, which of course costs money in terms of margin and as literally the definition of a blunt instrument. And so just getting those rates out there is expensive.
And then giving away margin to buy a share is expensive.
A more profitable and sustainable way to grow is by relationship expansion, where you are growing the share of wallet of your existing, particularly transaction checking customers who are buying not based on primarily price propositions, but based on trust and based on history and relationship. So I have a confidence that you're going to take my application seriously.
We've done business together for years.
Even if I have to pay a little bit more, I have a comfort level, a security blanket in banking with you versus some online lender who doesn't know me. And I don't have a history with.
The clients that are most successful now, not just in terms of volume growth, but in terms of growing profitably, are those that are really applying the disciplines to identify their opportunities to mine their checking base, to grow new loans, but also to systematically look for opportunities to extend and expand current borrowing relationships. For example, adding a home equity to a mortgage relationship or adding a mortgage to an auto loan relationship. You know, these sorts of. There's a lot of different aspects of that. So mine the checking base for growth using proven data analytics where you're relying on the data in the relationship, not pure price, and then looking for opportunities to extend and expand current borrowing relationships where you've already approved that customer once, at least once, sometimes on the same property.
And so the customer has a comfort level, you have a comfort level from a risk and underwriting perspective. That's the way to go. That is a prioritized way to assess opportunity.
And those are the clients that are having the most success, not just on growing the volume of loans on their books, but also growing in ways that we're preserving margin to the degree that we can.
[00:08:04] Speaker A: Yeah, for sure. And so you talked, I think you have behind you the chart that kind of illustrates how those needs work together. Can you talk more about that?
[00:08:14] Speaker B: Yeah. So the concentric circles that are kind of over my right shoulder represent the three basic sources of income for a retail bank. So we buy deposits from depositors, hopefully as cheaply as we can buy them.
We sell loans to borrowers while we manage our risk. We generate fees from transactors while we manage the expense of servicing our accounts.
You have broad segments of customers that are in each of those categories, that are producing income in each of those categories. And the overlap of the circles represents the relational nature of banking customers that are producing multiple different types of profitability or income. If you look in the center of the circles Customers that are producing deposit, loan and transactional income are typically four or five, six times more profitable than your average customer. And your controllable retention rates are virtually 100% per year. These are also the customers that tend to be less price sensitive because again they're buying based on relationship, not based on pure price propositions.
So to illustrate what I was discussing earlier about mining the checking base, extending and expanding current borrower relationships, simply taking folks from the transactor circle who have an active checking relationship, so they have propensity to buy factors institutionally based on their engagement with your mobile app, online banking, the debit card on a day to day, week to week basis, and they have balance levels that indicate credit capacity, but you don't have that borrowing relationship. So proactively asking those customers for their lending business and moving them from the transactor only circle into the overlapping, transacting active borrower circle is a way of growing earning assets, growing loans at the same time that you're expanding relationships into more primary categories, ultimately towards the center of the circle, where not only we have more profitable relationships, but higher retention, less price sensitivity. So there's various patterns of migration represented by these circles.
And so if you think about it, a growth strategy, a way of thinking about a growth strategy is to attract customers directly into these profit generating categories and then migrate them to overlapping, ultimately to the center of the circle through product sales.
The key to that is not some silver bullet strategy. It's getting a base hit every day by meeting the needs of customers day to day as they enter the market for credit, as opportunities present themselves in the data that we can then react to with proactive forms of outreach. So that's really the, that's a discipline. The one word to describe that is the discipline to take data, apply proven analytics techniques, identify these opportunities to migrate customers through product sales, act on those opportunities, measure the impact of your actions, adjust course based on what you learn. That's really the process that is then that's the discipline that the high performing clients that are growing loans right now are managing versus those that are trying to figure out what to do.
[00:11:27] Speaker A: You talk about this really this data mining approach, understanding the different needs of different customers and how that can translate to the balance sheet. How does that, is that the same or different at different points in the customer member's life cycle?
[00:11:40] Speaker B: Part of the mindset essentially or part of what's going on is just the fact that customer needs change and evolve over time.
So you get a new checking customer who is maybe new to your market or they got charged a fee at their other bank and they're looking for alternatives so they open a checking account with you.
At that point they don't have other financial needs, let's say. But 18 months later they're looking for a home or they are looking to do a home improvement project, or they need a car or they're thinking about buying an rv.
These different events occur in individual customers lives based on individualized events, Some of which are predictable, some of which are not. I had to buy a car last year because someone hit me and totaled the car that I had, which I liked. I didn't want to buy another car, but I was forced to. So to go out and find a provider who can do that loan.
And so whereas in other cases you have customers that are saving up money to buy a mortgage for down payment on a mortgage where it's more of a planned thing. So being able, that's why taking data that's updated consistently, looking for data elements that predict these changes in buying behaviors and then acting on those, those changing data points is really critical. And part of what you're doing in that process is awareness building.
So for example, you can use deposit data, very predictive of active credit behaviors and also credit capacity. So I've identified my active credit segments and then get my lending messages out on a consistent frequent basis.
I'm building awareness in these populations that we have quality products and rates available and at the same time increasing likelihood of being in front of borrowers as they enter the market for credit at different points in time in different categories.
That is so critical, especially with customers not coming to branches anymore to make it easy for customers to raise their hand and say I am in market, tell me more about this product or service. So we get ourselves in the consideration set versus having a customer who likes us, who's been with us, who has a checking account, let's say, and who is quality credit risk enters a market for credit. We're not top of mind with them. They end up considering other lenders and we never even get in the consideration set. The risk of that scenario is greater than it's ever been because of the growing plethora of online lenders who, who have very efficient processes for approvals and funding of loans online. So it makes it more imperative than ever to be proactive in communicating with customers so we don't miss those opportunities.
And also to take an omnichannel approach where we have those messages that we are sending. Customers are digital in nature, where they can Click.
They don't have to come to a branch or call a phone number. They can click, find out more information and start an online account opening process.
Those sands are shifting under our feet and making this planning process and these disciplines more critical because of the changes in the operating environment than they were even two, three, four, five years ago.
For sure.
[00:15:16] Speaker A: We talked a lot about how an anchor of this best practice loan growth strategy is a very relevant cross sell strategy. How does acquisition play in?
[00:15:28] Speaker B: Great question. You know, the customer you're acquiring today is the customer you're cross selling tomorrow.
And for most banks and the majority of credit unions, the majority of new customers or new members are checking members. So if you think about that, if your volume of new checking customers declines, then it's going to affect loan growth because checking becomes the feeder source. It's the largest feeder source for growing loans over time.
And so one of the things outside of the liquidity way, the second largest impact on basic metrics that we've seen in the data is new household formation since the pandemic.
New household formation rates dropped in half during the pandemic compared to pre pandemic benchmarks. And that's not surprising. You have, you know, branches closed appointment only banking. You have customers limiting the scope of activities they're undertaking because of the pandemic. So your new household volumes are dropping. So short term obviously that creates issues, but longer term that makes the challenge of growing loans even greater because it's reducing the pool of households that we can market to. And by the way, new households are twice as responsive to loan offers as tenured households. So it really impacts our ability to grow loans, not just checking when our new household volumes start to drop off.
That I think is both an opportunity and a need for most institutions right now is to put a really renewed and significant focus on getting new household volumes back to pre pandemic levels. Trying to tap into some pent up demand out there for folks who might have moved their banking relationship but didn't because of the pandemic. And that's not going to.
It's not just a checking growth strategy, but it's a very important feeder to be able to grow loans at the same time. So acquisition needs to be a critical part of this strategy.
The other thing I would say about this is your acquisition strategy needs to be fully integrated with your onboarding and cross sell strategy.
From just a continuity of communication perspective, the prospective customer you're talking to today is the customer you're onboarding, tomorrow is the customer you're cross selling six months from now, the more continuity you have in the brand messages, the values, the look, feel, just the general communication, the more effective that overall process is going to be.
So a fully integrated acquisition onboarding cross sell strategy is really critical to this discipline of loan growth and having marketing really being able to drive analytics and marketing, be able to drive sustained growth over time.
[00:18:30] Speaker A: Do you have to take outsized underwriting risk to grow loans?
[00:18:35] Speaker B: You don't. This is a typical scenario, but the standard deviations aren't great on this. So it's, it's, it's broadly typical. I would say in that scenario is 70% of households have checking, 50, sometimes 55% of those only have checking. And so, and then within that 50% of single service checking you can do a stratification. And 30, 40% of those have checking balances that indicate strong credit capacity, you know, in other words low credit risk. And so the overwhelming majority of banks and credit unions have substantial capacity within their existing customer base for loan growth.
Among single service transacting checking relationships where you not only get high performing loans based on the recurring direct deposits and check checking balance capacity, they have to service those loans, but with the same dollar you spend to get that loan, you attach a multi year anchor on the checking relationship in terms of retention. So in other words, if I have a checking household that keeps 10 to $15,000 in their checking month to month, that's a profitable checking account. If I sell them a loan, I get a high performing loan, but at the same time I put a multi year anchor on that checking, whether that's a 10 year home equity loan or 30 year mortgage or 5 year auto loan, whatever it is. And so anytime I can spend the same marketing dollar to get a high performing loan, reduce single service usage and put these anchors on my checking, my most profitable checking relationships, that's a dollar I'll spend every day of the week. There are very few banks and credit unions who are really tapping that opportunity in a comprehensive way. Virtually every institution has significant opportunities in those populations to grow. And, and again I go back to what I said earlier. Those are also folks that don't tend to demand the same type of market rate to buy because they're buying based on trust and relationship.
[00:20:42] Speaker A: We talked a lot about some best practices in loan growth. It's all about data really understanding granular, really an opportunity assessment. If somebody listening to this wanted to get an opportunity assessment, what would that look like and what would they get out of it?
[00:20:59] Speaker B: Great question. An opportunity assessment is Essentially a comprehensive SWOT analysis of your customer base using detailed peer group comparisons and trend analysis. And it's about a 40 page, 45 page written document and are able to not only share the statistics from the assessment, but also really make an effort to cross pollinate what we're hearing from your peers about what's working and what's not working in the industry. So what we need to do an assessment is a standard set of data fields that are typically readily available. We typically do a 15, 20 minute call between our data team and your data team just to walk through the request. Almost never have trouble getting what we need to do the assessment. What you get in the assessment, beyond just data points and peer group comparisons and gap analyses, is a detailed set of recommendations on strategies and tactics you can undertake to grow your institution.
Those recommendations are informed by an interview we do with you prior to the assessment on what your key priorities are. Then those recommendations, which in many cases can improve things you're already doing without engaging infusion, but in many cases also are opportunities to engage with infusion on an ongoing basis.
But those recommendations are accompanied by detailed pro forma of projected account and balance impact over a 12 month set of recommended tactics and strategies, along with ROI projections based on associated costs. So the thing I like the most about the assessment compared to other forms of analytics that are out there is it's actionable data and it comes with an action plan. That's a menu of things you can look at and say, okay, based on this menu, let's focus in on these three or four opportunities in the data. This is a great time of year if you're on a calendar fiscal planning cycle, which most clients are to be doing an assessment because it gives you really a great complement to the other budget planning you're doing. And again, it's very actionable plans where you can plug those pro forma projections into your overall growth plan.
[00:23:12] Speaker A: Well, Tim? Yeah, great conversation as always. So any closing words of wisdom?
[00:23:17] Speaker B: I would just say as an ex banker, just like you, Dan, who's been through multiple planning cycles in different environments, planning is always challenging, but it's more challenging than it's ever been.
And having a third party who has been there, who knows what that process looks like, who speaks the language and who can bring third party data assets to the process, that's more important than it's ever been to coming up with a plan that's realistic, a plan that's affordable, and a plan that is comprehensive and takes into account everything you might consider doing. And what your peers have been doing successfully. So I love the opportunity to do an assessment for any banks, credit unions out there who are interested.
[00:24:08] Speaker A: 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 Apple. 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.
