bg-arrow-down icon-arrow-up icon-back-to-top icon-linkedin icon-menu icon-search icon-twitter logo-white slider-arrow-left-gray slider-arrow-left slider-arrow-right-gray slider-arrow-right

This Month In Commercial Banking | March 2021

As the first quarter draws to a close, the March issue of “This Month in Commercial Banking” begins with an analysis of the ways in which banks are zeroing out deposit rates across the board. Next, we share some preliminary findings from our State of the Treasury Profession survey, which lay out the many challenges Treasurers face in migrating to a post-pandemic world. Then we describe how bank salesforces are adapting to the closing innings of the pandemic, incorporating lessons learned from a year of remote sales. Finally, we examine the growing threat posed by commercial fintechs, which are poised to invade the core operating account space that has historically been the exclusive domain of banks.

BANKS TEST ZERO AS LIQUIDITY FLOODS BALANCE SHEETS

The non-stop flood of liquidity into the banking sector is unprecedented. Commercial deposit growth is nearly 30% higher than year-ago levels, dramatically outpacing flat loan growth. This imbalance of commercial loan and deposit growth also holds true at smaller banks where PPP was a larger contributor to overall asset growth. (See Figure 1.) The new round of stimulus programs will contribute more liquidity even as the outlook for loan demand remains murky. (See Figure 2.)

Figure 1: Commercial Loan and Deposit Growth

Aggregate YoY Commercial Loan and Deposit Growth

Deposit
Loan

Average YoY Commercial Loan and Deposit Growth | 4Q19 to 4Q20

Average Deposit Growth
Average Loan Growth

Source: Novantas Comparative Deposit Analytics, SNL, SBA PPP Lender Information, Call Reports
Note: Loans are composed of C&I Loans, CRE, Multifamily and Total Leases

Figure 2: Deposit Outlook

Additional Stimulus Expected to Drive Incremental Surge Deposit Growth

Commercial Deposit Levels Expected to Begin Declining by Second Half of 2021

Source: Novantas Comparative Deposit Analytics

These conditions may be further exacerbated for regional banks as the temporary SLR relief for GSIBs is removed, potentially forcing them to shed deposits. Additionally, commercial deposit growth may increase further as consumers begin to spend their latest round of stimulus checks.

Against this backdrop, banks are employing a range of strategies to curtail unwanted deposit growth, including the exploration of near-zero rates on interest-bearing products. (See Figure 3.)  These can be achieved through ultra-low nominal rates or by applying a deposit assessment on interest-bearing products. When combining these two factors, Novantas analysis shows that the bottom quartile of rates on both IB DDA and MMDA average less than 5 bp. (See Figure 4.) According to Novantas CDA, the balances in these ultra-low rate portfolios are material, with the bottom quartile of ratepayers holding nearly half of the IB DDA balances and more than a quarter of MMDA balances.

Novantas believes there are four key priorities for commercial businesses this year: managing deposit rates down, getting a handle on the surge via client level multi-scenario forecasting, deepening relationship primacy and building/updating customer scoring models and segmentation. The latest trends outlined here underscore the importance of these first two points.

Figure 3: Deposit Flood Prompts New Strategies

Have You Discouraged Additional Deposit Growth?

Yes
72%

If Yes, Which Means Have You Used to Discourage Additional Growth?

Pricing that will decline (but stay zero or positive) for additional funds (e.g., reverse tiering)

Firm balance limits for a client

Reduction in FTP to decrease profitability

Forced cross-sale (willingness to take additional balances if new products / additional volumes are brought in)

Improved linkage for movement off-bank balance sheet

Suggested placement at different bank

Reduction of / penalty incentive compensation for sales force or executives

Pricing that will decline and be negative for additional funds

Have You Discouraged Additional Deposit Growth?

Yes
72%

If Yes, Which Means Have You Used to Discourage Additional Growth?

Pricing that will decline (but stay zero or positive) for additional funds (e.g., reverse tiering)

Firm balance limits for a client

Reduction in FTP to decrease profitability

Forced cross-sale (willingness to take additional balances if new products / additional volumes are brought in)

Improved linkage for movement off-bank balance sheet

Suggested placement at different bank

Reduction of / penalty incentive compensation for sales force or executives

Pricing that will decline and be negative for additional funds

Source: Novantas Comparative Deposit Analytics

Figure 4: IB DDA and MMDA Portfolio Rates

IB DDA Avg. Portfolio Rate
Middle Market Segment: December 2020

Nominal Rate
Rate Net or DAF

MMDA Avg. Portfolio Rate
Middle Market Segment: December 2020

Nominal Rate
Rate Net or DAF


Source: Novantas Comparative Deposit Analytics
Note: Quartiles represent populations of distinct banks split evenly from lowest to highest rates. Average is calculated as the simple average of the entire population. For banks that do not charge DAF on either IB DDA or MMDA DAF is treated as zero. Does not account for DAF waivers or discounts.

TREASURER TALK: "THE STATE OF THE TREASURY PROFESSION" SURVEY

The automation of payments and elimination of paper receivables top the list of COVID-19-related priorities in this year’s State of the Treasury Profession Survey that was recently conducted by Novantas.

While most treasurers felt that their disaster preparedness plans provided a seamless transition to remote work, the pandemic accelerated the need to automate manual tasks, especially for forecasting and payment processing. That includes the adoption of electronic signatures, enhanced payment request/authorization workflow and improvements to forecasting for both cash availability and cash needs.

Respondents expect remote work to continue in some form, mostly with a hybrid approach. They did, however, express concerns about team development and oversight in a fully-remote work environment. They also worry about the impact that remote work has on staff and corporate culture, saying they must develop strategies to train and mentor new employees.

Other areas of focus for 2021 include banking structure optimization and cost reductions associated with finetuning banking services and treasury operations to realize both cost savings and operational efficiencies.

Fraud and cyber risk remain a significant area of concern. Incidents and attacks have increased and caused treasurers to deploy more robust payment workflow processes coupled with the use of enhanced banking and other third-party fraud mitigation tools. Treasurers also expressed concern that remote work increases the risk of social engineering fraud.

Finally, the acceleration of automation of treasury and finance operations with a focus on both efficiency and control is being incorporated into 2021 projects. This includes the elimination of manual rekeying and spreadsheets with treasury management systems, robotics process automation, payment hubs and business intelligence tools that can provide near real-time global liquidity positions and forecasts.

cybersecure

In terms of economic factors, treasurers said that low interest rates have provided attractive opportunities to lower the cost of debt. Companies that are cash rich, however, are frustrated by the low rates. The availability of cheap credit is prompting nearly all treasurers to consider borrowing now for future needs.

Treasurers had mixed views about the prospect of rising rates, especially when it comes to the potential for inflation to drive rates higher. There was also a mixed response to LIBOR replacement, with some not addressing the issue and others actively renegotiating revolvers and other LIBOR-indexed loans.

We are continuing to compile the survey results and expects to release more details soon.

ACCELERATE THE SALESFORCE TRANSFORMATION

Masked by the focus on the pandemic and its impact on 2020 performance is the reality that commercial banking has had an extended period of slow growth with median revenue growth of just 3% for more than four years. But banks have still been unwilling to change the sales model except for minor upgrades to CRM platforms, tweaks to sales processes and implementation of advice-based selling.

Novantas sees three areas of opportunity that can be tapped to transform sales management and boost sales. (See Figure 5.)

This is the time for radical change. Commercial banking faces severe headwinds despite growing optimism about the economic outlook: declining NIM, muted loan growth, higher switching rates and more competition. Regional banks are also starting to realize they don’t have the scale or capabilities to compete through product differentiation, leaving sales management as a primary competitive strategy. Finally, customers are demanding channel options (physical, virtual and digital) when engaging with their bank.

Figure 5: Sales Management Transformation

Physical

RMs and product specialists will shift their focus towards higher value customers to maximize their sales capabilities

Virtual

The inside sales team will be responsible for servicing and deepening with the highest value customers that no longer qualify for a relationship manager

Digital

The digitization of the sales model will include building out the channel as well as enabling activities within all channels

PROGRAM ACTIONS

BUILD SALES OPERATIONS

  • Sales Force Enablement
  • Analytics
  • Sales Administration
  • Performance Management

DESIGN MULTICHANNEL MODEL

  • Physical (BBRMs, RMs, TMSOs, Product Specialists)
  • Virtual (inside sales teams)
  • Digital

LAUNCH SALES PROCESS TRANSFORMATION

  • Process redesign
  • Technology enablement (RPI, AI, ML)
  • Client portals
  • Role clarity

Source: Novantas Analysis

  • Build centralized sales operations to drive the following activities: sales force enablement (sales process, CRM/loan UW platforms); analytics (product and customer); sales administration (client planning, proposal support); performance management (goaling, compensation and incentives). These efforts typically are dispersed across the LOB, aren’t well integrated, lack scale and often are led by individuals who have limited sales experience.
  • Design a multi-channel go-to-market model that includes physical, virtual and digital channels. Culturally, this can be very challenging for banks to move from an almost exclusive face-to-face selling model to a model that leverages inside sales and digital selling capabilities. The last year has proven that virtual selling is possible, but that model now needs a more holistic approach. And the associated productivity gains can be significant. For example, Novantas has designed effective SME models that move RM gearing from 75 to 200+ clients. The new model leverages a virtual sales team that is enabled with analytics and technology, as well as digital marketing. Gains in middle-market gearing won’t be as dramatic, but can be substantial, especially when adopting marketing automation to increase client communication and engagement, while also significantly increasing lead generation and conversion through digital marketing strategies.
  • Launch a comprehensive sales process transformation program to significantly improve sales productivity, reduce high levels of performance variability, and take advantage of technology (e.g., RPA, AI, ML) and analytics. Overall, banks need to reduce manual activities, make the sales process more intelligent and get the sales force engaging with clients to a greater degree.

To be clear, these channels work in concert across all client segments and are self-reinforcing (making the other channel more effective). In no way do we want to minimize the need for face-to-face selling, but banks must transform their approach to sales. Otherwise, they will feel the full brunt of the current economic headwinds and changing client behaviors.

Mike Rice (mrice@novantas.com)

COMMERCIAL FINTECHS RAISE STAKES FOR TRADITIONAL PLAYERS

Commercial fintechs are joining their consumer counterparts to expand into the traditional banking business, raising the stake for regional banks that are now facing new competition.

This trend can be seen in recent moves by Square and Brex, two commercially-focused fintechs that want to offer FDIC-insured deposit accounts and traditional lending products to small and medium-sized business (SMBs). Essentially, both are seeking to be a one-stop financial-services shop for SMBs.

Square, the point-of-sale provider run by Twitter’s Jack Dorsey, acquired a conditional banking charter in 2020 and just opened its bank earlier this month. Brex, which offers SMB credit cards, payment processing and financial management software, has applied for a banking charter and points out that many SMBs need to access up to 15 different interfaces to manage their finances.

What makes Square and Brex material threats to traditional banks is that both are already centered around operational services. Given the proximity of their offerings to the operational account, there will likely be less friction when these companies attempt to capture the operating account itself. This can present an existential threat to banks, especially those that don’t have a fintech strategy.

The strategies being pursued by Square and Brex differ from what we have seen over the past decade. In the 2010s. many regional banks didn’t view fintechs as a direct threat that required a strategic response because many of the new players were content to partner with banks to provide core commercial banking services.

GettyImages-898210210

Additionally, the distress of some high-profile, asset-based commercial fintechs, such as Kabbage and OnDeck in late 2020 and, more recently, Greensil Capital, might have created a false sense of security for traditional banks. As we observed in August 2020, these fintechs weren’t focused on capturing the core commercial relationship: the operating account.

More recently, it has become apparent that fintechs are an emerging threat as they are no longer content to partner with banks to deliver traditional commercial banking services. Instead, a growing number of them are seeking to acquire banking charters in order to capture operating accounts. Two of the most prominent consumer lending fintechs, LendingClub and SoFi have acquired banks and their charters. Since the beginning of 2020, 27 fintechs have applied for banking charters and six have been approved.

Regional banks, therefore, must establish a specific commercial fintech strategy. Novantas sees three partnership models for fintech engagement. (See Figure 6.)

While partnering with a fintech may take many forms, these three basic options can be the foundation upon which commercial LOBs can determine their strategy – and compete effectively for operating relationships.

Figure 6: Fintech Partnership Models

Referral

Explicit agreement to pro-actively recommend a specific fintech to select clients

White Label

Offer fintech solution directly through bank’s platform via licensing or other agreement

 

Acquisition

Purchase fintech and integrate functionality directly into product set

 

Pros:

  • Only frictional cost to implement
  • Quickest to market
  • Meet client demand while maintaining operating relationship
  • Ability to offer expanded scope or improved experience within current solutions set
  • Moderate revenue opportunity and time to market
  • Ability to offer expanded scope or improved experience within current solutions set
  • Highest revenue opportunity
  • Complete control of functionality/ development

Cons:

  • Minimal to no revenue opportunity
  • Active fracturing of relationships
  • Lack of control of functionality/development
  • Cost to implement and integrate
  • Not full integration (e.g. separate sign-off, slightly different branding or experience)
  • Limited control of functionality/development
  • High costs and complexity to implement and integrate
  • Longest time to market

Referral

Explicit agreement to pro-actively recommend a specific fintech to select clients

Pros:

  • Only frictional cost to implement
  • Quickest to market
  • Meet client demand while maintaining operating relationship

Cons:

  • Minimal to no revenue opportunity
  • Active fracturing of relationships
  • Lack of control of functionality/development

White Label

Offer fintech solution directly through bank’s platform via licensing or other agreement

 

Pros:

  • Ability to offer expanded scope or improved experience within current solutions set
  • Moderate revenue opportunity and time to market

Cons:

  • Cost to implement and integrate
  • Not full integration (e.g. separate sign-off, slightly different branding or experience)
  • Limited control of functionality/development

Acquisition

Purchase fintech and integrate functionality directly into product set

 

Pros:

  • Ability to offer expanded scope or improved experience within current solutions set
  • Highest revenue opportunity
  • Complete control of functionality/ development

Cons:

  • High costs and complexity to implement and integrate
  • Longest time to market

Source: Novantas Analysis

Subscribe

Stay up to date on the latest banking news