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.
Welcome back to Top Quartile. Always great to talk to Tim, who's a frequent guest for good reason. So Tim, welcome back to the show.
[00:00:17] Speaker B: Always enjoy it.
[00:00:20] Speaker A: All right. It's kind of crazy to think that we're halfway through 2023 and so this is a, you know, just a good time. There's a lot of movement in the industry.
I don't think anybody had, you know, near deposit panic on their 2023 bingo cards.
But that, you know, of course was an eventful part of the first part of the year. But let's talk. So we're talking today about just what are some of the key trends we're seeing in the industry as we meet with, you know, banks and credit unions all over the country. And so. So Tim, what are you seeing as you talk to folks all over the country?
[00:01:00] Speaker B: Yeah, I think it's been really interesting. I've had the opportunity to present at different conferences and interact with a wide range of different bankers, large and small organizations.
I would say generally speaking, there's been kind of a capitulation, a process of capitulation that deposits are going to reprice. There's nothing you can do to prevent it.
Penetration rates and average balances for what had been debt categories, CDs, money market savings accounts are going to return to quote, normal levels, which frankly we haven't had normal levels probably since the early 2000s.
And so because it's been that long, I think there was and because of the rapidity of the rate increases, there's a little bit of denial going on that this was actually going to happen.
But you can look at all the earnings reports and see the cost of funds and how aggressively it has increased. And I think the capitulation is essentially a recognition that mount customers don't wake up as rates rise is not going to work as a strategy.
And so I think that's the biggest thing is just.
And then kind of, kind of coming to grips with that and saying, okay then what is a strategy? If hoax not a strategy, what is a strategy?
I think initially in this cycle, rates are going up, you start to see pricing out there a lot more longer term CDs, which made some sense. If I can lock someone in on the front end of a rising rate cycle to a longer term, that's going to pay off. And I've heard some clients say, you know, that's really paid off for Them where they were able to lock in some 3% money and long term CDs won't mature for another year.
I think probably around November, December, January, more of that started to shift to short term CDs because you started to have kind of a cresting of the rate environment. So, so I think a shift there to shorter term maturities. And then most recently the trend has been more towards money market savings accounts where there's more flexibility if rates are basically near where they're going to end up.
You know, being able to grow a liquid category where you have more control, you know, over the next months and years of your pricing by tier and your tier structure overall based on what the Fed actually does, what rates actually do compared to what we think they're going to do.
I think, you know, has been more trend, so broad trend going back again year and a half from long term CDs, short term CDs now into more liquid savings.
That again as general, there's obviously exceptions based on match funding and other balance sheet, you know, individualized balance sheet needs.
So I think those two things, just the capitulation of the industry that this is going to happen and that's already happening and you know, hope is not going to prevent it from happening and then adjusting, you know, course as rate as that cycle has kind of worked its way through towards hopefully the end of the cycle or near the end of the cycle. It's been really fascinating to watch.
[00:04:42] Speaker A: Yeah. And so we think about,
[00:04:48] Speaker B: you know,
[00:04:48] Speaker A: all that phenomenon you talked about, you know, the fact that somebody hoping is not hoping somebody doesn't wake up is not a strategy because everybody's advertising. And so if we're seeing, if a client is not proactively talking about the options they can offer, then that person is. Well, first of all, there are some people that are just completely still asleep.
They're tuned out to everybody. But for those people who are waking up, if, if we're not, you know, proactively messaging to them, then we risk, you know, having those funds walk out the door, particularly for those less sticky clients or even hot money type situations. So what, you know, what, what are the things that are maybe the kind of current best practice in raising deposits efficiently and effectively.
[00:05:41] Speaker B: Yeah, it's interesting. I was thinking about this the other day. You know, all of the talk and billions of dollars spent on customer relationship management over the years, over really the last 20, 25 years in the industry. I mean you're talking about billions of dollars in, in software expenses and focus, you know, strategic Focus committees. All of this customer relationship management, all the, you know, the need for good CRM is back with a vengeance. You know, when you go through three years where half your balance sheet is essentially, you know, doesn't require active management because rates are 0% and no one's paying anything.
You, you know, it's Customer relationship management takes on different importance or lack of importance because a whole range of needs are, are not being addressed in a competitive way across the market.
So when you say okay, now you have to compete for deposits.
Wait, what's getting exposed is what's the relative strength of your, the relationships you have with your customers and those who have been good at CRM and focused on it consistent with personalized targeted outreach marketing. Sales are benefiting now because they're better able to hold on to the deposits that they have.
Customers are willing to stick with them because they're committed to them.
Those deposits are anchored by transactional relationships and day to day engagement and mobile apps and debit card usage.
Checking account relationships that are anchored by credit with the same institution.
Fundamentally different situation than deposit dollars that are, have been sitting out there earning nothing that are not anchored by a transactional relationship or other broader set of needs met in that relationship. Those that's the money that's moving.
And it's interesting when you look at bank versus credit Union. You know all credit unions have some degree of single service savings legacy and there's a lot, you know, depending on the SEG and history. Some of that is if it's an educational seg. Some of your retired teachers who have had always kept their money in a, in a share account just sat there forever.
And, and so you have kind of that dynamic and if that, those, that is those dollars, if they are not you know accompanied by transaction relationship anchored by a CD or a loan are moving out for better rates because there's no loyalty there, there's no relationship there to anchor it. So that again customer relationship management without a relationship is portfolio management. I guess I don't know what you call it on the bank. That's really interesting. This is kind of come up kind of an interesting phenomenon just in terms of the last few years in the run up to 250 on the fed funds in 17, 18, 20, 19. Even a lot of banks when fed funds were at 200 basis points or 250 did a lot of money market savings promos because they can offer 2%, 2 and a half percent, maybe 3% and fund commercial loan growth and other things that we're doing.
And then when interest rates dropped to 0% in March 2020, that money basically froze for three years and it is unfreezing rapidly. So, you know, people that responded to these money market promo offers back in that period are waking up, they're saying, I'm not, you know, I'm not earning anything on this money. These people over here offering 5%, I'm going to move the money into liquid account, I can move it today.
And so if you have been consistent on cross selling checking accounts to high priority households, particularly high depositors who are fighting your balance sheet and don't have a checking, you're way better off than if you haven't been doing those things.
But it's not too late, it's not too late to start and it's prioritized personalized outreach.
And not to belabor the point, but I'll add one more element to this.
When all of this was happening with rates, which is creating all of this stress on funding levels at the same time that was happening, banking has become a digital business.
And SAP found this out when they didn't have the strength of relationships they probably wish they would have had. And the money could be moved almost instantly through digital channels.
And so when you think about the portfolio management, customer management integration that I've been talking about and you overlay the digital component and the fact that you're not talking to customers and branches anymore and you're not talking to customers on the phone anymore, if you're not proactively communicating with your customers about their financial needs and about your deposit offerings in particular, you're going to see attrition at a dollar and a relationship level because these customers are exposed to, as you've said, to competing offers. You have these online savings accounts that are low friction, well priced, and if we're not out there actively talking to customers about what we have to offer, the silent attrition will kill you.
That's what killed us in the 04 to 07 cycle when you and I worked together at First Tennessee. It's not the person complaining in the branch about their CE rate, it's the person who moved 60 or 80,000 out of their money market account and never told anybody, never gave us to keep the business. So making it easy for customers to let us know, I'm thinking about moving my money, I'm in market.
And here's what we have to offer is critical, more critical than it's ever been as our businesses become digital and as rates have raised the stakes for deposit competition.
[00:12:06] Speaker A: Yeah, and one of the things I think is really interesting is in that, in that relationship segment, you know, one of the constants of banking is there's always the hot money. So people know there's hot money. You know, maybe in the branch world where somebody was coming in and shot or you know, calling and shopping CD rates, you had a pretty good sense of who the hot money depositors were because they're the ones calling, you know, every week asking about rates.
But, but you didn't have a good sense of the, the sort of, the sort of that silent attrition like you were, like you were saying with, with the did with the proactive outreach. It's kind of interesting. One of the things we've seen is the more proactive you are with a competitive but more moderate rate.
It's a differentiating factor.
[00:12:46] Speaker B: Right.
[00:12:47] Speaker A: So you're, you, you're able to attract and grow relationships and those people that are not necessarily looking for the, the highest rate in the market, but yeah, those people are the ones who are leaving and so, and so you're able to, to at least manage this repricing. So it's not necessarily as extreme as if you're going out to, you know, top of the market bank rate type stuff where you're, where you're, you know, basically. I mean it's, I mean top of the market pure digital origination bank rate plays is, is basically a wholesale funding in granular chunks.
[00:13:21] Speaker B: It is, yeah. Right, right.
[00:13:24] Speaker A: And yeah, and so that's the difference between a relationship strategy versus a, you know, a wholesale funding strategy. And there's flavors of wholesale funding.
I think the, the, the, the bank rate by deposits at the highest rate from people who have no other relationship with you is, is a form of that.
[00:13:43] Speaker B: Yeah, for sure. And you know, I talk about a lot the virtues of modest pricing. The virtues of modest deposit rate pricing are obviously better short term net interest margins number two, less stress downstream on retention of dollars.
Number three.
Interestingly, when you price more, more modestly, that's a good way to say it's going to say conservatively. Modestly, it's probably even better word.
You wake up fewer of your own sleeping customers. So in other words, if you're going to offer me 5%, okay, I'll move the money 375, 4%.
Maybe not. And there's a spectrum there on, you know, that sort of thing. So what we've seen in our campaign results where we track, you know, accounts open by people targeted for specific types of offers and how that relates to the change in overall deposits is when your price is more modest, your new money percentage increases, your repricing percentage decreases because you're waking up fewer of your own customers.
So everyone knows, everyone in the industry knows if you put a high enough rate in there, you can attract dollars. But especially right now where you know, the roller coaster and car maybe near the top, you know, of the hill, there's a ton of risk and overpricing right now.
And I think it's understandable the elasticity that got created in a short period of time in the pricing environment, almost guaranteed there will be some overpricing going on.
One of the interest now just isn't kind of half joking. But I've had clients kind of make fun of their competition, kind of deride them and then I'll ask them later on, well, how are you setting your deposit pricing? They'll say, well, we're, we're matching what they're paying down the street.
I thought you said they were idiots.
You know, why are you relying on them for your pricing strategy? You know, so the alternative is, and this is validated by the campaign results that we look at every day thinking about a spectrum where on one end you have propensity to buy or bringing deposits, on the other end you have rate.
And if the more that I'm gathering deposits on the high propensity end of the spectrum, the less I have to use rate to get the deposits, the more I have to go across to lower propensity buyers that to make up for the lack of propensity with rate.
So what are those propensity factors?
Some are institutional.
They have a large number of services with you, they're committed to, you have their transactional relationship.
Some are, you know, a demonstrated history of buying certain types of products or funding certain types of products, that sort of thing. So there's a lot of different indicators in the data that we see that show up consistently that can identify high propensity buyers. So to your point, high frequency in those high propensity segments with more modest pricing is more sustainable growth and it's less of turn on a high rate, see what happens, turn it off real quick when you get around funding, that's a bad strategy. It's not sustainable versus a more relationship driven, data driven approach.
More like what we do on the lending side where we, you know, we price loans down to the basis point based on data on risk and you know, other factors with deposits we can do that, you know, but. And we had infusion. Have you really unique campaign results Data to help us zero in on the trade off between volume and price and new money, repriced money retention halo effects, that sort of thing.
[00:17:39] Speaker A: Yeah. And so increasingly people are, you know, getting bombarded with messages from different type of providers. You know, there's always been a sense of, there's some competition of, you know, I mean customers are choosing people.
You know, I think smart guy said that, you know, these, these, these, you know, don't talk about cash cow funding. You know, people have, people have feelings in our messaging. And so you know, people are choosing from a lot of different providers. You know, banks, credit unions, even fintech types type stuff, direct banks.
So with what we see, is there, is there a difference in approach or between banks and credit unions for example?
[00:18:24] Speaker B: That's a good question.
I think a lot of the differences, I think the banks struggle a little bit more with concentration because the more commercial orientation of the business model leads to you know, more really high balance account holders, you know, and commercial deposits also that it can be more volatile.
So I think that's part of what goes on there. I think there is a loyalty factor with credit unions that you know, relates to the whole nature of that business model that probably helps them a little bit on retention.
So those are some factors as well.
I go back to that, you know, that savings component of credit unions is a larger piece and so that's been a blessing I would say for credit unions is to have a larger chunk of funding mix and traditional savings which is priced very modestly.
So they're probably taking more of a hit that money moving out.
Whereas banks don't have typically that level of funding in that particular bucket. So there's some nuances with retention and how that's affected and repricing based on essentially funding mix because of the business model of accredited universal bank. And also the concentration piece is also a key piece. One thing I would say going back to the customer relationship management component and just been in the industry as long as you and I have been in the industry, you know, we, you can, we can roll our eyes, you know, all the talk about relationship banking. Most banks are still run by alcohol, but it doesn't have to be an either or.
And so we have some really unique ways of integrating essentially CRM metrics with balance sheet portfolio metrics where you can bring the two together and really understand your exposure, your risk exposure but also your upside, potential for growth specifically. And this is a really over a little bit oversimplified but if you look at the typical makeup of the deposit base of a credit union or bank.
The largest population and you know, almost across the board are people who have a checking account with you where you don't have their savings wallet.
And that's a, every client out there, credit union, bank, has a meaningful population in that bucket.
And when you start to stratify those checking balances, you find populations that are almost guaranteed to have savings dollars somewhere else.
And so what you're able to do is to leverage the propensity factor associated with the checking account to go capture that savings wallet by using more modest pricing versus going out to the street and asking for new money. Oh great, I'm going to get 100% new money. Yeah, but you're going to have to pay 100 basis points more to get it.
So what have you really accomplished? And you're going to have more stress when that money matures because new money buyers have less loyalty to you.
Those that have demonstrated a willingness to bring me deposits in the, in the past are less resistant to bringing you more and are more likely to stick with you in the future. So a lot of bankers have outsmarted themselves by trying to avoid repricing, by requiring new money.
And the cost of new money ends up being a much larger cost than the actual repricing costs when you actually look at it at the end of the day.
[00:22:17] Speaker A: Yeah. I think another really interesting metric that illustrates that concept is the differential and response rate between prospect and customer.
[00:22:27] Speaker B: Remember?
[00:22:28] Speaker A: Right. I mean we've done multiple, multiple campaigns with clients that are offering the same rate for both. And the customer response rate is a, is multiples higher than prospects. And so that just illustrates you have to work harder, all things else being equal, to attract that new money that has lower awareness, lower consideration by definition and, and have less, less impact. And so that's, you know, and, and there's a place for that. I mean obviously we're running campaigns with clients where that, you know, they, they want to both grow, they both want to expand current relationship and attract new.
But to your point, you have to be less, you don't have to be as desperate and pay absolute top of markets and get your funding.
If you have a balanced approach that considers expansion and acquisition as an example,
[00:23:21] Speaker B: your funding need is what your funding need is. And so volume is always a factor. The key to understand how the volume intersects with pricing to get what you need. But don't pay any more than you have to pay to get that level of funding at a point in time. And that's where marketing campaigns, especially digital, can Be, should, should be frankly an integrated, a key part of your toolkit for managing deposits because you can swap out rates in terms literally by the day on the fly based on the actual volume you have coming in and how your, your portfolio needs are shifting and changing and, but that requires a commitment to that process and a commitment to the discipline of the integration of the data analytics and the marketing to your alco process. I pointed out recently in a CFO forum for Massachusetts bankers that you can have the greatest alco process in the world. You can high five at the end of the meeting like, we got the perfect pricing strategy. You can put that on your rate cards and put it in every desk drawer of every branch. But if no one sees those rate cards, it does not affect your portfolio. So you have to have a way of making your strategy actionable. And in the digital banking world we live in today, it's going to require proactive outreach through digital marketing channels to make your strategy actually impact your portfolio.
[00:24:48] Speaker A: Yeah, I think one of the really cool things about digital marketing is it's not just, I mean some people think, okay, digital advertising means they're going to open the account online.
The reality is we're seeing digital have an impact probably larger in branch than even online now. You know, it's, it's, they may be calling their banker or emailing their banker after seeing the ad since it's, it's a relationship but it's, it's truly omnichannel.
Digital media influences both online and offline originations. We have clients that don't have actually any online origination and they're using a multi channel digital mix to drive, you know, banker and branch originations.
[00:25:31] Speaker B: So yeah, and one of the really interesting phenomenon within that category has been, you know, CDs pre pandemic, direct mail was really the dominant channel for CDs that the demographic that buy CDs wanted to bring in the postcard to the branch and make sure they got the rate that's on that postcard.
I think the pandemic forced a lot of folks to learn how to use digital banking tools, to use QR codes at restaurants to get access, a menu, all of this sort of thing. And so the campaigns we've done the Last year, year plus for CDs, the digital channels performance has substantially improved which is just a fascinating kind of broader trend of I think demographics as well as technology in a category that's, you know, let's face it, CDs are not the sexiest category. But even CD purchasing has become a digital, you know, has become a digital business compared to, you know, what it used to be.
[00:26:43] Speaker A: Well, I think one of the things that we, we've learned too that it can't just be a, it's digital but can't be a single channel digital. That's right, because particularly in, in the demographic that matches up well with CD buyers, you know, they may or may not be active on Facebook, for example, they may or may not have an email. And so by using a variety of channels, including in some cases you know, connected tv, you improve the chances you're, you're talking that to that audience if they're not active on know one particular channel and then also just the repeated message.
[00:27:12] Speaker B: So yeah, you know, and I, yeah, I just say to, to back that up. I mean we're a performance based company and so when we, we're paying to put marketing in the market and if we don't get results we have an expense but no, no revenue. We don't like that.
And so we, you know, we're always looking to optimize channel mix and we're committed to Omnichannel. And what we found is 95% of the time, maybe 98% of the time response correlates with number of ways I can show the message to the audience.
And so we are like hyper optimizing continually because it's fundamental to our business model. And that's the conclusion we've come to is Omnichannel might be a buzzword, but it's real. Then it works.
[00:28:03] Speaker A: All right. We talked a lot about deposits I want to make sure before we leave because loans are, you know. Loans are still a thing too, huh?
[00:28:11] Speaker B: Yeah.
I spoke on, on loans last week at a, at a conference in Indiana and part of that I went back and ran a quarter by quarter response rate curve for loan cross sell campaigns going back to Q1, 2020.
Response rates are down a little bit in Q4 and Q1 last year and Q1 this year from the previous 18, 24 months. But they're still at historic, historic averages. You know, they're maintaining very well and you could, the little bit of drop off we've seen, you could argue is that actually just tightened credit criteria versus demand. How much of that is demand versus credit? You know, a little bit more conservative underwriting, but we've seen loan volumes hold up really well.
I will say this, and it's the other side of the same coin that we just talked about on deposits.
If you're concerned a maybe a little bit about Liquidity. And so you're, you're trying to be a little less aggressive at growing loans because you're, you're funding issues or you're just concerned about, you know, risk and you want to, you want to be a little more careful with lending. The place to start is relationship based lending.
And when you go into your deposit base and again same analogy on the savings wallet I talked about earlier.
For every client out there, the largest population you have are checking households who don't have credit with you. And given that that's a sizable population for every client, there are all kinds of good opportunities in there to expand off the checking account into lending.
And the checking data is super predictive of both capacity to borrow as well as likelihood to have credit need.
Obviously the higher the checking balance, the more likely they are to pay their loan consistently. That's you know, pretty obvious statement. But on the flip side, you know, propensity to buy corollines with deposits low to high as well. So when you look at your high deposit household to for most institutions it's 30% of households controlling 95% of deposit funding.
If I'm able to add a home equity to that relationship, not only do I get a high performing credit among people who tend to have high property values and chunks of lendable equity, but I also put a 10 year anchor on that checking account in the form of the loan term. So anytime I spend $1 to grow loans, I get a high performing asset on the balance sheet and with that same dollar I make a significant improvement and retention of a high deposit relationship. I want to spend that dollar every day of the week.
Most clients are not fully taking advantage of that opportunity. So it's all about prioritization to me with lending, you know, how aggressively are you trying to grow and based on that, start with the most targeted relationship rooted and then see how far they get you and then build from there. And one of the side benefits of that is your relationship based buyers are buying loans based on history, trust relationship and not based on Whether your rate is 25 basis points higher or lower.
It's not a price base, it's relationship based, it's trust based. You know me, you're going to consider my application seriously. You've met my needs in the past.
Very different than you're offering 475. They're offering 450 down the street. You know, that's not what we're talking about. We're talking about building off of relationship. So parallel kind of the other side of the same coin of the deposit gathering.
And the rationales are different, you know, risk management and quality growth and so forth. But the retention benefits of expanding relationships are the same. Yeah. If I expand the savings wallet or if I'm expanding into a lending relationship off that transactional relationship. Same principles.
[00:32:17] Speaker A: Yeah, for sure. So that's, that's where it kind of works together. If you help expand, you know, even if you have. Even if the need is a little bit more skewed towards deposits continuing to do, you know, high quality loan growth can sort of meet both needs, help expand margins, you know, perhaps replace runoff from lower margin loans, as well as defend that relationship, you know, defend and grow the deposit relationship. So, yeah, it's great. I mean, kind of reminds. To me, it's a reminder that this business is a matter of sort of growing the balance sheet holistically.
And if anything, this year has reminded us that relationships matter a lot more than, you know, wholesale funding, uninsured deposits. Lumpy.
[00:33:09] Speaker B: Yeah. And I think, to put it succinctly, you know, there's one of the most.
One of the more prominent words in the current currency of discussions on a lot of subjects is sustainability.
Sustainable deposit growth is rooted in relationships, period.
[00:33:25] Speaker A: Well said.
[00:33:25] Speaker B: Not price. Not price, but relationships.
[00:33:29] Speaker A: Yeah. And building relationships means meeting those needs proactively.
[00:33:33] Speaker B: Right.
In a digital banking world that requires a focused effort of outreach, consistent outreach.
[00:33:41] Speaker A: Yeah. Well said.
All right, well, Tim, thanks again for coming on the show and sharing your insights. It's been great discussion as always.
[00:33:51] Speaker B: Yeah, always fun. Enjoy it.
[00:33:52] Speaker A: All right, till next time.
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.
