Some Notable Takeaways From Cyber Banks

2Q - 2018
Ally’s retail deposits grew 15% year-over-year. They have an average balance of approximately $54,000. Millennials continue to comprise the largest generation segment of new customers at 56%. In addition, customer retention remains strong at 96% in 2018.

CIT’s strategy to reduce deposit costs relative to the index shifts origination to lower cost non-maturity deposits and lower balance amounts. As a result, savings balances grew by over 23% from $6.4 Billion to $7.9 Billion driving total on-line deposit growth from $12.4 Billion to $13.9 Billion from Q1 to Q2.

1Q - 2018
PurePoint Bank which launched in early 2017 by MUFG Union Bank has generated about $3 Billion in deposits.

Marcus has almost doubled their balances since Goldman bought the GE Capital Bank platform in April 2016.

4Q - 2017
Synchrony had an 87% retention rate on certificates of deposit balances up for renewal for the year ended December 31, 2017.

Sources: Company Annual and Quarterly Reports and Press Releases

Deposit Decline at Community Banks

Recent trends of higher rates and a decline in deposits overall have negatively impacted smaller banks.

Deposits at banks with less than $10 Billion in assets fell 3% from June 2017 to June 2018 while banks $10 Billion and higher increased deposits by 6%. According to industry analysts, smaller banks will have to raise rates more aggressively to reverse course. This decline started in Q3 2017. Note that over the last 5 years, the loan to deposit ratio of community banks has steadily risen to about 85%.

The Deposit Squeeze Has Begun

After nearly a decade in which deposit funding has largely been taken for granted, many industry analysts predict a deposit squeeze for the banking industry, and for mid-sized and community banks in particular. Core deposit growth has stagnated at banks under $10B in assets.

Many of our clients tell us they are beginning to experience low to negative growth in core deposit balances and turning to CD specials to help fund loan growth. And JP Morgan recently predicted that deposit shortages at smaller and mid-sized banks could become acute (assuming the Fed proceeds later this year with moves to limit quantitative easing), leading to constraints on lending and forcing many community banks to seek partners through M&A.

Many bankers today are too young to remember what a rising rate environment feels like. But astute senior FI executives can feel the warm breeze of a funding squeeze blowing in from the horizon.

Many banks are out of practice when it comes to deposit generation. Rates have been so low for so long that Pricing Committees have largely been abandoned. Customers continued to park more and more cash at their banks after the crisis, initially to keep it safe but more recently because of limited opportunities to redeploy it for any type of return. And banks, for the most part, haven’t done much of significant interest on the competitive front in terms of innovative strategies to attract core deposits.

But now core deposits are once again taking center stage as a critical strategic challenge for many financial institutions, and growing core deposits is not going to be easy. Most institutions will feel the need for core funding at exactly the same time, resulting in a rather rapid increase in rates and ramp up of marketing and sales activities. Even for seasoned bankers, it’s been so long since the deposit growth “muscle” has been exercised that it likely needs to be rehabilitated. Finally, consumers and media have changed considerably since the last cycle, so strategies that worked in the past are not necessarily going to be as effective this time around.

Now is the time to get a lot more focused on core deposits.

A Deposit Growth Sprint

Despite being in a low rate environment for years, there are FIs that have grown core deposits and households at a more rapid rate than the industry. While every institution is different in terms of its customer segments, geography, and strategy, many core deposit best practices will be applicable.

We are seeing an approach emerge in the past year that has proven beneficial for many banks. It consists of clarifying your internal situation and agreeing on your objectives, looking outward for best practices and benchmarks, screening the ideas for strategic fit and highest payoff, then project managing for rapid deployment. This approach is both fast and cost-effective.

A Deposit Growth Sprint consists of three sequential steps.

1. Scope the Opportunity – Before gathering a team, it’s critical to understand your situation both externally and internally. How have your local competitors performed? What have the top performers done that the others have not? Nationally, who are the core deposit standouts and what strategies and tactics did they rely on? What kind of deposit volumes should we expect from Consumer, Small Business, and Commercial segments? How have analytics and digital marketing played a role in these organizations’ success?

Internally, how have you performed compared to these local and national leaders? What has your funding strategy been, and how does it need to change over the next few years? What, if anything, have you done that has worked and what can you learn from that?

2. Set the Deposit Funding Strategy – Now it’s time to gather your team for an all-day Deposit Summit. Create and distribute briefing materials from Step One above in advance. Begin with a discussion of your current funding strategy and performance. Create a “burning platform” by outlining the funding gap that has appeared or is likely to appear in the near future. Lay out the negative repercussions for each line of business if this situation is not rectified. Then begin to discuss growth opportunities and review the best practices to stimulate discussion.

Finally, evaluate the ideas for strategic fit and payoff. Discuss at a high level whether the organization has the capacity and expertise to develop and implement them, and how quickly.

Don’t leave the room until the prioritized initiatives each have an owner, and you have an agreed upon timeline to get back together with action plans.

Who should this brainstorming group include? Most banks limit it to a small group of senior executives and managers representing all lines of business and sales forces.  However, we have seen a very successful case where the CEO brought together every single manager who would be involved in implementing the plans to allow them to prioritize the projects and gain buy-in. This reduced the need for communication after the meeting, increased the feeling of ownership, and permitted more rapid deployment.

3. Take Action – Immediately following the group session, each initiative owner creates a team to define the initiative, more fully size the opportunity and cost, and create detailed action plans and timelines. A project management structure is put in place, with regular progress reports provided to executive management during development and following execution of each of the initiatives.

Establishing First Mover Advantage

While competition has already begun heating up in some markets, it’s early days in the battle for deposits. Now is the perfect time, with warm summer breezes beginning, to get your team together to map out and implement a core deposit growth plan, before those breezes turn into a squall and you are playing catch-up with your local and national competitors.

Mary Beth Sullivan is Managing Partner of Capital Performance Group, a strategic consulting firm dedicated to the financial industry. She and her colleagues are currently assisting community and regional banks develop and implement deposit growth strategies.

Tech-Marketing: What to Do When the Toasters, Coffee and Lollipops Run Out

Remember when growing your bank was as simple as opening more branches than the local competition and serving up a tasty assortment of lollipops? Folks, I am sorry to report, those days are over.

During a recent panel discussion at the “Crossroads: Banking and FinTech” conference, Chris Nichols, the Chief Strategy Officer of CenterState Banks, reported that the average cost to build a bank branch rings in at $750,000 and costs an average of $949,000 to maintain annually. In stark contrast, it costs an average of $650,000 to build a bank website and mobile app, and only $324,000 to maintain them annually. That’s a difference of $725,000. Moreover, while a typical bank branch serves only 2,500 customers who visit 24 times a year, virtual banking sites serve an average of 23,000 or more customers who visit 122 times a year.

You don’t have to be Alan Greenspan to crunch those numbers: Virtual banking offers a better return on investment.

So why are community banks so hesitant to kick their bank tubes to the curb and adopt financial technologies? According to a recent article by Robert Barba on American Banker, many community bankers are reluctant to use FinTech to grow their businesses for reasons ranging from increased regulatory scrutiny, to a consumer base that’s slow to adopt newer technologies. However, many of these fears may be misconceptions holding community banks back. For instance, Barba writes, “smaller banks have an easier time persuading regulators to approve partnerships with FinTech companies because those under $10 billion in assets are not directly supervised by the Consumer Financial Protection Bureau.” He also notes that community banks often think only big banks can innovate, when in fact, large banks “are often huge animals with wasted resources and legacy systems. Small banks, in contrast, can move on a dime.”

At the end of the day, Tech-Marketing companies such as XpertSavers are leveling the playing field for community banks by providing a more affordable, effective option to opening new branches.

Gallup: Two-Thirds of Americans Prefer Saving to Spending

A recent Gallup poll shows that 65 percent of Americans polled prefer saving to spending, marking an all-time high. In contrast, the share of spenders and savers was equally matched in the early 2000s prior to the recession. For the first time since 2006, half of respondents rated their personal financial situation as excellent or good.

Among the 18- to 29-year-old demographic, the share of those who enjoy saving more than spending rose from 54 percent in the early 2000s to 66 percent.

"Americans are considerably more likely than they were in the easy-credit years preceding 2008 to perceive saving money as more enjoyable than spending it," Gallup said. "And their actions have, at least to some extent, mirrored their attitudes. Saving rates that had dropped from the double-digit levels of the 1960s and 1970s down to an abysmal 1.9 percent rate in July 2005 are now consistently close to or above 5 percent."

"Two-Thirds of Americans Prefer Saving to Spending"
ABA Banking Journal (04/25/16)

Four Ways to Save the Dying Branch

According to Richard Fleming and Mark Schofield, partners in Bain & Co.'s financial services practice, the physical branch is not dead but the branch network has to be transformed more quickly than Bankers seem to indicate. Branches will need to be downsized and have activities redeployed to more cost effective solutions including digital channels.

Despite the growing dominance of digital banking, the physical bank branch is not extinct. But to ensure the viability of branches, the size and nature of the branch network must change more substantially and more quickly than most banks acknowledge.

A cost-benefit analysis reveals that many branches are underperforming. As currently configured, the typical U.S. branch requires at least 5,000 teller transactions per month to justify the cost of operation. We estimate that for a typical U.S. regional bank, one-third of its branches fall below this level. If the 20 banks with the most U.S. branches reduced both their branch footprint and costs per branch by 30%, their total cost savings could well exceed $10 billion.

In response, banks should eliminate some branches while streamlining others, first by redirecting branch activity that is more clearly suited to digital channels. The institutions that undertake such a project more quickly will stand a better chance of reaping the benefits of having convenient digital channels combined with smarter branch networks.

After downsizing the branch network, what should banks do with the branches that remain? Whichever route retail banks take, here are four principles behind a successful transition.

Retail Branch Banking is Doomed and Banks Don't Know It

Meanwhile, Eric Rosenbaum, CNBC Financial Writer and Editor writes that the incremental technology improvements and branch futuristic redesign will not be enough to save the branch system within the next decade. This is driven by the belief that finance will be the most disrupted industry over the next 10 years.

Big banks are rolling out futuristic branches to keep up with the technology cutting-edge, but according to financial technology experts, it's a major waste of time and money. Within a decade the retail bank branch model will be dead.

"Finance will be the most disrupted industry in the next 10 years," said Peter Diamandis, executive chairman and co-founder of Singularity University, at the Exponential Finance conference in New York City on Tuesday.

The most obvious loser, according to experts, is at the level of the retail branches. "Bank branches will most be gone ... this decade," Diamandis said.

"Bank tellers will be the telegraph operators of 21st century when we look back in 100 years, the most-impacted job," King said. "This will hurt."

Last year saw the highest level of bank branch closures in the U.S. in history, according to FDIC data.

The number of people expected to come online in the near future across the globe is a primary reason for the pessimism about the branch model's future.

Brexit and the Fate of Bank Branches

With the potential for an extended lower interest rate environment due to Brexit being a distinct possibility, Mary Beth Sullivan, Managing Partner of Capital Performance Group, LLC believes that a reexamination of the pace of branch transformation including digital channel development needs to occur.