Seven Big Takeaways From the Second Annual Raddon Conference
What a Conference!
Another Raddon conference is in the books, and what an event it was! So many factors came together to make it exceptional – insightful keynote speakers, engaging breakout sessions, Raddon Rocket cocktails, reasonably good Chicago weather – that everyone involved had a blast.
If you didn’t make it this year, be sure to plan for next year’s event. In the meantime, here are seven key takeaways from the 2018 conference about the industry and the economy.
1. Evolve effectively to maintain relevance amid constant change
Opening keynote speaker Bill Handel, chief economist at Raddon, set the stage by documenting where the industry stands and what challenges lie ahead. Even though one in four banks and credit unions have disappeared since 2010, earnings have returned to pre-crisis levels. Branch counts are declining but not as fast as the number of institutions. Acquiring new customers is a much higher priority now, given the high shares of wallet of existing customers. Deposit growth and retention are increasingly top of mind. The great threats on the horizon are the disrupting competitors and technology firms that look to take advantage of looser loyalty among Gen Z and millennial consumers to traditional financial institutions.
2. Use CECL data to refine your offerings and pricing
Current Expected Credit Loss (CECL) actually can be a benefit to your organization; if implemented well, it allows you to accumulate data and analytics that you can use not only to optimize your provision amount but also to assist in refining your product line growth and earnings strategies. The information necessary for CECL is potentially daunting and requires an organization-wide commitment to the process. However, you can use the data you gather to fine-tune product pricing and better evaluate the success of your loan product lines as currently configured. The four key points are:
- Make sure your approach is multidisciplinary, involving many parts of the organization
- Fully understand the data you will need to be successful; IT will be critical in data gathering, standardization and storage
- Consider the many diverse models you might apply and understand that your final solution is likely to be a mix of several models
- Make sure you have access to the expertise you need
3. Be sure you understand the risks of irrelevancy in the payments space
Today, cards (credit, debit and prepaid) account for three-fourths of the number of non-cash payments in the U.S. but less than 8 percent of the dollar volume of payments transacted. The fastest-growth transaction channel since 2000 is debit cards, both traditional and prepaid, whereas check volume is declining by over 5 percent per year. In this session, we examined the three emerging payments channels: the mobile wallet (e.g., Apple Pay® or Samsung Pay), person to person (P2P) (e.g., PayPal®, Venmo, Zelle®) and payments apps (e.g., Starbucks, Lyft, Uber). Of these, P2P has had the fastest growth, but many payments apps, particularly Starbucks, have had great consumer acceptance as well. The mobile wallets have had limited success to date. It is important to recognize that traditional cards are likely to maintain their position of dominance in the short term, so continue to optimize the performance of cards. Although we expect use of mobile wallets will continue to grow, the ease of doing business with a card makes it imperative that financial institutions create a reason for consumers to adopt the mobile wallet. Ease of use, increasing acceptance at merchants and, perhaps most important, incentives such as rewards programs will be critical to growth. To take advantage:
- Aim for the “top of the mobile wallet”
- Fully integrate P2P into your mobile app
- Optimize your bill pay within the mobile platform
- Be creative with the use of incentives in the payments space
4. Develop an executable deposit strategy
Deposits are clearly a rapidly emerging need for financial institutions. Both of our breakout sessions on The Emerging Deposit Wars: Building a Winning Strategy were attended at full capacity – a laughable scenario just two years ago. Because so many institutions need deposits, much of our discussion focused on realigning resources to this side of the portfolio after a decade of a largely exclusive loan focus. In these sessions, we highlighted that just 18 percent of consumer households contribute 80 percent of all retail deposits. Additionally, an analysis of over 4,000 banks found that nearly 9 in 10 will face a funding gap in the next five years – that is, loans are poised to grow faster than deposits in their markets, primarily because of demographic shifts. This concentration of existing deposits and the forecasted funding gap emphasized how intense the battle for deposits is primed to become. Accordingly, we discussed the need to develop a comprehensive deposit strategy and the framework for such a strategy. It must include marketing, staff development, online/mobile efforts and investment services in addition to product and pricing maneuvers. Ultimately, a strategy that relies heavily on price will attract too many shallow relationships while compromising earnings. And as competition intensifies, an insufficiently prepared and executed deposit strategy will quickly become a losing strategy.
5. Measure your brand
In this increasingly competitive financial industry, brand plays a critical role in strategic growth and sustainability. A financial institution’s brand is composed of three areas: customer sentiment, employee sentiment and market sentiment. Understanding your brand strength and seeing how it is benchmarked to other institutions of similar market size and with similar assets, you are able to implement strategies to enhance performance at each level of the brand purchase funnel. When financial institutions couple the brand strength information with the sentiment of the local market, they are able to make these insights actionable by crafting a cohesive brand message and strategy that resonates with the market.
6. Combine process improvements with relationship development for a competitive advantage with small businesses
Community-based financial institutions can step in and fill a considerable credit gap that has emerged from a retrenchment in small business lending by many of the larger banks. At a time when small businesses are expressing renewed optimism, greater loan demand and intentions to grow their firms, filling this credit gap represents a significant opportunity. Fintech providers have started to capitalize on this opportunity by promising a faster and more efficient loan process. They address a pain point highlighted by the 47 percent of respondents from small businesses in the recent Raddon small business survey who agreed, “Getting a loan is a long and difficult process.” Streamlining and improving the loan process, particularly for smaller-dollar business loans, will emerge as a critical differentiator for financial institutions wishing to compete with the fintechs and major banks. By marrying process improvements with relationship development, community financial institutions should hold an advantage over these competitors given their local market presence and capacity to develop highly engaged relationships.
7. Design branches with 2020 and beyond in mind
The conference attendees participating in this session needed no convincing that branches are still an essential part of a financial institution’s delivery ecosystem, especially considering 83 percent of consumers have visited a branch in the last year. Perhaps even more telling, 21 percent of tech-savvy millennials prefer to conduct most of their banking business face-to-face with a bank employee, and another 34 percent prefer a mix of some digital and some face-to-face transactions (the remaining 45 percent prefer to conduct most of their banking business via electronic channels such as online, mobile or ATMs). This research suggests that the effective integration of all channels is critical to the customer experience as consumer channel use and preferences continue to broaden. The strategic questions posed about the design of branches centered on five key areas:
- Size – How much square footage is needed?
- Layout – Should it be functional or open?
- Personnel – How do the staffing roles and job responsibilities need to evolve?
- Technology – What is the proper blend of people and technology, such as with interactive teller machines?
- Mixed-use branches – What are the benefits of joining another entity to help drive traffic into the branch?
Although the answers to these questions will be different for each financial institution, the common objective is to develop deeper customer relationships and a consistent experience across all channels.