CEO Strategies Group Recap: What Are the Key Issues Facing Financial Institutions Today?
This past December, Raddon held its quarterly seminars for participants in its CEO Strategies Group program. The program provides institutions with comprehensive analytics that measure performance across all areas of the organization and help guide their strategic initiatives. The workshops facilitate a review of the latest research findings and offer a platform for discussion about how financial institutions can respond to the challenges they face today.
There were 14 meetings held in locations across the U.S., attended by 110 institutions and 403 total attendees, including C-level participants from nearly half of the participating organizations. Other levels of the organizations, from branch operations to marketing, IT and finance, were also well represented.
What were some of the key topics and issues discussed at this latest round of workshops?
1. Deposits are clearly making a comeback
With industry loan-to-deposit ratios returning closer to pre-recession levels, many institutions expressed a need to acquire deposits. In turn, even ignoring the Federal Reserve’s Dec. 16 announcement of a quarter-point rate increase, deposit rates have begun to see upward pressure as these institutions price more aggressively in an effort to lure new money.
One great unknown with deposits is how consumers will behave and react to rate offers – and rising rates in general – after such a protracted low-rate environment. How likely are they to switch institutions to achieve a higher rate? How can institutions limit “cannibalization” where customers simply move existing deposits into higher-rate products, raising the cost of funds without contributing any new money? At the workshops, a significant portion of the discussion focused on strategies and tactics to help mitigate these issues and generate new deposit growth in a cost-effective manner.
Another key issue on the deposit front centered on staff capabilities to discuss and sell deposits. With loan growth a primary focus for financial institutions since the recession, many frontline personnel lack experience in engaging customers in a deposit conversation. Only a small percentage of frontline staff has ever worked in a rising-rate environment, last seen 10 years ago. As a result, deposit training for client-facing staff is becoming a critical focus for many organizations. Even institutions not actively seeking deposits are looking to develop strategies and training aimed at retaining deposits and key relationships.
2. Technology and security are top of mind
Technology and mobile banking were also hot topics, and the term “cybersecurity” was seemingly mentioned at every workshop. With the mobile channel playing a rapidly evolving role in banking, institutions are looking to leverage this service and measure the value it brings to their organizations. We also discussed household performance by branch accessibility. Do households that access a branch have stronger relationships than those that don’t? How well is mobile banking serving customers who don’t have convenient access to a branch?
On the payments front, many of the attendees indicated they had signed on with Apple Pay® or were in the stages of doing so. As services like Apple Pay and Samsung Pay gain increased consumer awareness and the shift to EMV™ extends merchant acceptance, it will be interesting to monitor how quickly consumer households embrace these services and whether or not there’s an effect on usage and top-of-wallet status.
3. Earnings growth will be a challenge
Overdraft income is down more than 25 percent on a per account basis since 2010 and refinance activity has slowed dramatically over the last two years. As a result, growth of noninterest income has flattened for the industry.
At the same time, margins have steadily declined and the prospect of rising rates complicates pricing decisions. At the workshops, the need for income diversification, especially new sources of noninterest income, was a particularly hot topic. Using relationship pricing as a tool for effective cost-of-funds management and relationship retention was also discussed.
Given the pressures on revenue, expense management – more specifically, expense optimization as it relates to process improvements – is also a concern. Participants discussed the importance of continually evaluating processes to identify bottlenecks and redundancies. Process improvements that enhance the consumer experience should be leveraged as a differentiator so organizations are less reliant on attractive pricing and low fees to win and retain business.
Ultimately, the December CEO Strategies Group workshops highlighted the increasing complexity of competing in the financial services space and signaled a turning point in the operating landscape as we slowly emerge from a post-recession environment. However, with a solid understanding of the issues facing consumers, the industry and the economy, organizations can position themselves for success. Stay tuned for updates from our next round of CEO Strategies Group seminars in March.