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This Month In Commercial Banking – August 2020

Novantas is pleased to introduce the inaugural issue of a new monthly report that is devoted to banks’ commercial lines of business. This is the latest piece of Novantas thought leadership that is aimed at providing senior bankers and executives with timely insights during this unusual time.

This issue explores deposit and fee pricing trends and the fast-growing need to use geolocation data as a way to better understand business activity at a time when there are growing concerns about credit quality. We also provide an analysis of how commercial-oriented fintechs can work with bank partners to deepen customer relationships by providing capabilities that clients want and need.

Banks Use ECR to Manage Deposit Surge

Banks are facing a commercial profitability crisis as deposits have surged at least 30% year-over-year, but loan growth has flattened (excluding those loans made through the federal Paycheck Protection Program). In a return to behavior seen after the financial crisis, banks are now offering ECRs that exceed deposit interest rates and money fund yields. (See Figure 1.) Furthermore, the average ECR rate at nearly two-thirds of banks exceeds the higher of the average IB DDA and MMDA rates. (See Figure 2.)

Figure 1: ECR rates are, on average, the highest-yielding cash investment.

Median Middle Market Portfolio Avg. Rate – June 2020

Source: Novantas Commercial Deposit Study, Crane Data MMF Index
Note: ECR DDA, MMDA and IB DDA = Bank deposit products; Prime MMF and Govt / Treas MMF = Off balance sheet investments

Figure 2: Portfolio ECRs exceed the portfolio interest rates at most banks.


(Portfolio average rates for middle market – June 2020)

ECR rate is higher
Interest rate is higher

Source: Novantas Commercial Deposit Study
Note: Charts have been further filtered to reflect banks that have product-level balances >5%

These trends are consistent with the relative price positioning that Novantas  recommends when rates are unusually low, which we now expect to be the case for the next five years. Higher ECRs protect against adverse changes in bank fees when companies face cashflow challenges. Bringing balances back into analyzed accounts also provides banks with more levers to earn fair value from clients through the cycle by dynamically managing ECRs and PxV pricing.

On the interest-bearing side, median rates have come down quickly, but there is significant variance at the bank level, with a 40 bp spread between average MMDA rates in the top quartile versus the bottom quartile of banks. (See Figure 3.) While generous acquisition rates are exceptionally rare, banks have had varying degrees of success in rapidly reducing back-book rates. This reinforces the need to invest in business intelligence analytical tools and adopt strong sales management capabilities to nimbly and efficiently manage in these volatile times.

Peter Serene (

Figure 3: Interest rates vary widely.


Middle Market Segment: June 30, 2020


Middle Market Segment: June 30, 2020

Source: Novantas Commercial Deposit Study
Note: Quartiles represent populations of distinct banks split evenly from lowest to highest rates – rates calculated for each quartile are dollar weighted across the banks in the quartile

Survey Finds Banks Tweak PxV Plans

The pandemic-related low-rate environment has compressed NIMs for banks. And with the Fed planning to keep rates low for the foreseeable future, banks will need to find other sources of revenue, namely fees. Many commercial groups are looking to fill the gap with treasury management fees, but are faced with tough questions.

For example, is the extra fee income worth the potential reputational risk of raising pricing on already struggling businesses? Are some banks inherently better situated than others? Will it be too difficult to raise prices if we already dropped ECRs? How do we minimize negative client reaction if we do have a pricing event?

We recently asked banks how the pandemic has impacted their plans for TM pricing. (See Figure 4.) The results are clear: the number of banks with planned price increases dropped from 80% coming into 2020 to only 48% by the end of the second quarter. And those that are still planning increases have scaled back the magnitude: 35% were planning on significant price increases this year (more than 10%), but that number has now dropped to 17%. Many of these banks commented that they scaled back from a full repricing to just adjusting a few service codes. They also said they didn’t want to “double dip” customers after dropping ECRs earlier in the year.

Figure 4: Prior to the start of 2020, most respondents anticipated a slight increase to PxV. Now, half are planning no change.

Planned PxV Pricing Event

(Inclusive of Standard and Exception Prices)

Start of 2020
Current Plans

Source: Novantas Commercial Deposit Study survey responses
Note: N=25

For banks that decide to pursue a pricing event this year, detailed customer-level analysis will be crucial. Existing price sensitivity models need to be updated quantitatively and qualitatively with COVID-19 impact analysis. These should allow banks to understand what pricing changes will hit their clients the hardest and be prepared to make exceptions where needed. Finally, for banks looking to simplify TM pricing structures, price increases can be an effective time to offer more fixed fee or bundled services to customer that can benefit from more stable expenses in an uncertain environment.

Ryan Schulz (

No Time for Rest as Drawdowns Ease

The initial wave of credit line drawdowns that dominated the first months of the COVID-19 pandemic has eased, providing bankers with the opportunity to assess client behavior and business activity. Geolocation data can be a valuable tool to help determine trends in business activity that may affect future drawdowns.

Banks saw an unprecedented spike in committed facility utilization rates in March – one of the many sudden changes in client behavior that impacted bank balance sheets during the initial months of the pandemic. Core commercial loan growth increased $302 billion in two weeks at the height of the drawdown frenzy in March compared with an average increase of $138 billion per year during 2017-2019.

Fast forward to today: banks have seen significant revolver paydowns – along with higher levels of debt and equity issuance in the second quarter – as corporates take advantage of more stable market conditions. The dust has settled for now, and commercial banking teams in conjunction with Treasury should use the opportunity to analyze trends from March and April to supplement intelligence around stressed liquidity of deposits. A focused analysis is particularly important given the uncertainty around long-term government stimulus and the potential for business uncertainty if the virus continues to linger or intensify in the fall and winter months.

It will be critical to better understand behavioral patterns by deepening segmentation around customer relationships. This should be table stakes, particularly around industry, region and relationship primacy. Banks on the vanguard are using mobile geolocation data to understand traffic patterns and derive real-time insights into changes in business activity. This can help banks anticipate the needs of clients that may be forced to tap credit lines if market funding conditions deteriorate. (See Figure 5.)

Figure 5: Geolocation data and analytics can provide fresh insight about commercial clients.

Each dot represents the same device at a different point in time


Targeted prospecting

Deepen client relationships

Underwriting & risk management

Target prospecting efforts at growing businesses based on customer patterns

Provide clients with insights into their customer demographics and behaviors based on data that the bank can acquire at scale

Additional data on customer profiles and traffic patterns to provide near real-time insights into changes in business activity that serve as early-warning indicators for future drawdowns


Targeted prospecting

Target prospecting efforts at growing businesses based on customer patterns

Deepen client relationships

Provide clients with insights into their customer demographics and behaviors based on data that the bank can acquire at scale

Underwriting & risk management

Additional data on customer profiles and traffic patterns to provide near real-time insights into changes in business activity that serve as early-warning indicators for future drawdowns

An empirical view of liquidity buffer requirements will be critical. Effective management of the balance sheet in a period of ultra-low or negative interest rates requires the prudent deployment of excess liquidity into earning assets to offset margin pressure and generate shareholder returns.

Greg Muenzen (

A Rude Awakening for Commercial Fintechs

Fintech competitors have played an important role in the banking landscape during the COVID-19 outbreak by being the face of “digital first.” (See Figure 6.) Even so, asset-driven players that rely on non-core funding are under tremendous pressure. This is particularly true of commercial lending strategies.

Figure 6: The number of new fintechs has been declining since 2014, but fundraising has steadily grown.



Deposits and Lending
Capital Raising
Financial Management
Banking Operations

Source: “Fintech by the numbers: Incumbents, startups, investors adapt to maturing ecosystem”
Note: Investment types: debt, private equity and venture capital

In just the past month, two distressed commercial fintechs – OnDeck and Kabbage – have been acquired by two very different consumer finance companies, Enova and American Express, respectively. The troubles of OnDeck and Kabbage were widely known: they were unable to access capital markets to finance new loans and both saw their receivables shrink in the second quarter as a result. This occurred even before the potential negative impact of credit problems, which haven’t hit yet due to widespread payment deferral programs. For banks and finance companies with access to capital markets, the question is one of “why build certain capabilities when I may soon be able to buy them at distressed prices?”

To add insult to injury, neither acquisition ascribed much value to either company’s loan portfolio. Specifically, American Express is buying Kabbage’s team, products, data platform and intellectual property, but not its loan portfolio. Novantas has no insight into Kabbage’s loan performance and the size of the current loan portfolio hasn’t been disclosed, but given the current depressed nature of SMEs, it’s fair to assume that AmEx didn’t want to sort through it. OnDeck’s credit performance is public, however. The company reported that roughly 40% of its loan portfolio was at least 15 days past due, up from about 10% just three months earlier. Additionally, Enova’s legacy SME brands, The Business Backer and Headway Capital, were already on pause from extending new loans to commercial borrowers. The company cited OnDeck’s data analytics platform, brand and IP as the desirable assets.

This all indicates that, like banks before them, commercial fintechs are failing to capture the true source of value in commercial relationships: the operating deposit account. Unlike their retail competitors, which have focused on deepening primacy, commercial fintechs have been focused on granting credit more efficiently. History clearly shows that there is no moat with this playbook: asset yields always get competed away and force a trade-off with credit.

Commercial fintechs and commercial bank partnerships need to take a page from their retail peers and refocus on developing capabilities that support operating account acquisition. This largely untapped market is ripe for disruption as COVID-19 continues to ripple through the ecosystem.

Bob Warnock (

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