In Part I of this post (HERE), we discussed the Gambler’s Fallacy and how the loan process itself can inject bias into a bank’s decisioning. In particular, we looked at how the order of how loans are reviewed for credit makes a difference. This sequence bias comes from an inherent cognitive belief in humans that want to assume the world is less random than it is. Flip a coin enough times, and every time the result is heads in a row it is natural to assume that tails are due.
For the first time since 2013, the Federal Reserve’s monetary policymaker expectations and the market’s expectations are similar. The swap’s market now show an approximate 1.07% implied rate at the end of 2017 (purple rate below). This means two rate hikes next year which are what the Fed’s “dot plot,” or survey of policymakers shows (green line below).
Historically community banks have been hesitant to use derivatives, mostly interest rate swaps, to manage credit, interest rate, and sales risk. Derivatives have been historically stigmatized and even more so after the last recession. Interest rate hedges have predominantly been used by larger and more sophisticated banks. However, approximately 15% of all commercial banks now report some form of a derivative on their balance sheet, and 9% report interest rate swap exposure.
The goal of credit underwriting is to make prescient decisions. All credit has an outcome – either it pays as agreed or it does not. The role of the underwriter is to best predict that outcome which is why it is critical to limit the amount of bias inherent in any decision. While we have looked at overt bias in credit underwriting in the past (HERE for example), in this article we look at a particular bias inherent in all bank’s processes and why it matters.
The reality is that the last two months of the year are among the worst to market a bank brand or product. People don’t seem to care and with all the retailers running ads for the holiday season, advertising is crowded and expensive. This is why we dramatically reduce marketing for the last two months of the year.
Donald Trump’s surprising win last week will spawn important changes in the banking industry. While some of the potential regulatory relief has been well covered in banking publications, community banks should now consider how the immediate changes in interest rates and inflation expectations will influence borrower demand for credit, and how banks should respond to this change. Over the last two weeks, interest rates are up approximately 55 basis points as the market is interpreting a Trump presidential win to be more inflationary.
For those banks, which are trying to target particular demographic cohorts, you will find the below data helpful to laying out your marketing plan for 2017. We point out that it is likely your bank thinks of social media channels as a way to amplify your marketing and increase customer engagement. While all true, social media is also becoming indispensable to build a brand, socialize products, synthesize ideas and to service customers .
Data this week from the electronic payment association, NACHA, shows that the new same-day payment functionality totaled $3.8mm transactions worth almost $5B for the first full month of availability. That is a good start, and while some community banks are not taking advantage of the functionality, an estimated 95% will be in the next couple of months. In this post, we take a quick look at the progress that banks are making and point out one area to focus on to get a jump on the large national banks.
In Part I, we covered how bank marketing is changing from the reliance on in-branch brochures, print ads and a couple of events per year. Now that banks have embraced social media, 2017 will be the year that banks build on that understanding and not only wage proactive social media campaigns and interactions but get involved with advertising and expanded content. The Trump Administration will provide banks with endless uncertainty and volatility.
In 2016, bank marketing changed. Out was the reliance on in-branch brochures, print ads and a couple of events per year. In 2016, as an industry, banks started to embrace the power of social media which has now morphed into a trend of focusing on mobile. For 2017, a Trump Administration will bring more change, more volatility, and more uncertainty. Tax reform, trade, less regulation, higher interest rates and new programs will have households and businesses yearning for more financial analysis.
- 1 of 2
- next ›