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What Does Success Look Like?

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Mar 30, 2021

Deposit institutions work hard to attract customers and encourage existing ones to consolidate business with them. What happens when they have too many deposits and few opportunities to lend? Ensure products and operations are performing optimally.

What Does Success Look Like?

Not long ago, one of our consultants helped their high school-age son open a checking account at a local bank. The account came with all the standard features and functionality consumers have come to expect, including online banking, a debit card, a mobile app to allow him to make deposits, withdrawals, and transfers from his phone, and so forth. As they were leaving the bank, the youngster asked how much his account would cost? He was told it would be “free”, which led to further conversations about how banks and credit unions make money and what ‘free’ meant.

All deposit institutions work hard to attract new customers and encourage existing ones to consolidate their business with them, offering various bonuses to create perceived value for the account holder. We know banks cannot make money unless they have low or no-cost deposits to lend. But, what happens when there are too many deposits and not enough opportunities to lend, like what we are seeing today?

One of our recent newsletters, highlighted the imbalance banks have with their deposits compared to their loan books. The demand for loans has shrunk to the lowest level in years. In the U.S, loan-to-deposit ratios dropped to 56% in 2020 from 94% in 2008, forcing banks to actually try to discourage customers from making deposits!

Low-Interest Rates Not Helping

Many banks and credit unions now have the issue of being unable to generate enough loan volume to utilize the deposits they have, and the added issue of historically low-interest rates is not helping. Per Bankrate, the average saving rate paid today by U.S. financial institutions is 0.07% versus 0.16% in the fourth quarter of 2019, a reduction of 9 BPs – which certainly won’t impress our new young depositor. But here’s the rub; while banks and credit unions are paying less, the result of the huge growth in deposits and weak loan origination is hammering performance. Over the past year, those consumers who have been able to save, have been saving A LOT. Total deposits in the U.S. banking system have grown by $3.3 trillion since late 2019, which has overwhelmed the benefit of the decrease in funding costs.

Last summer’s fears of loan losses were top of mind. Up went loan loss reserves with corresponding asset write-downs, which thankfully turned out to be too pessimistic. Most borrowers could maintain loan payments thanks to continued employment and making good use of stimulus funds. Advancing into the fourth quarter, many banks made the move to significantly reduce reserves, which boosted profits. Now, with another wave of stimulus payments arriving in deposit accounts, the issue remains- banks still have high deposit rates and low loan volumes. And what is needed now are ways to identify opportunities to improve long-term profitability as we strive to return to pre-pandemic life.

Unfortunately, there is no magic pixie dust which will instantly improve loan demand. However, there are ways we help our bank and credit union clients re-balance this conundrum. Loans come in all different variations; commercial, auto, mortgage, personal and credit card just to name a few. And with these variations comes the need to ensure the offerings, pricing, operations and connected services our high-schooler - who just opened his first bank account - expects to function as intended and generate optimal financial performance for him and the Banking institution.

Client Example

This conundrum led one of our clients, a large, full-service banking franchise, to engage Profit Insight to quickly ‘find the hard-to-find revenue and help ensure costs are not outpacing performance’. And, ‘we need this done quickly and independently’ {sic} given the team workload. That was the request from the Retail Banking executive. From kickoff to strategy presentation, ideas were identified, vetted, valued, and shared with the cycle repeated.

Focus and Results

Profit Insight reviewed all consumer and small business banking products and their supporting operations focusing on retail deposits, exception processing, online banking and credit lines.

The outcome was pretty substantial: 70 strategies identified in a variety of areas, products and processes, worth $75 million annually. The client ultimately implemented 12 of the recommendations, which generated over $18 million annually. The remaining were slated for review as part of continuing roadmap initiatives in coming years.

Our ability to move swiftly, understand the details and communicate the potential financial impact was mission critical and resonated immensely with our executive sponsor. The client was deeply impressed by the level of detail and specifically cited our accurate forecasting of increased benefit as well as our flexibility in structuring the engagement to meet their needs. All in all, a very successful outcome that far exceeded their initial expectations for the work.

Banks and credit unions clearly are longing for the day when their business and consumer clients are comfortable enough with the economic recovery to begin spending and borrowing again. We all are. While that will undoubtedly look like success in and of itself – we believe that success can be accelerated and enhanced and look forward to proving it.

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