There is a current trend afoot of refinancing certificate of deposit (CD) customer in order to take deposit customers away from sleeping banks and credit unions. While one bank’s “theft” is another bank’s competitive gain, both sides should be cognizant of the ramifications of this move. Some banks may let these customers freely go while others will combat the assault with higher rates, greater marketing or an improved structure. In this post, we explore both the math, the profitability, how best to play defense and how to use this tactic offensively.
In banking, we tend to think of risk as transactional in form. We contemplate what would happen if a loan defaulted if a cyber-attack occurred, if a new product caused a liability or if interest rates spiked. This is to say that we think of risk in the context of a particular event – if X happens, then Y risk will occur. The problem is that this event-driven mentality limits our thinking on risk. Risk is present no matter if it is monetized or not. Rising interest rates does not create risk; it just monetizes it.
Most banks completely ignore odd digit pricing. Instead of offering that competitive commercial loan for 5.00%, you offer the loan for 4.99%. Conversely, in a non-competitive situation, instead of offering a 5.20% rate, you offer a 5.23% rate and pick up three basis points per year. However, those banks that do are religious about it and as a result, it ends up increases their product acceptance rate and increasing margin.
In a recent blog, we discussed transparency in banking, which in a corporate setting is the degree to which a company shares its leaders, employees, values, culture, strategy, business processes and the results of those processes with the public and customers. We further asserted that banks should strive to increase transparency in their business because in the long-term this strategy will lead to better customer satisfaction, more efficient customer selection and result in greater bank earnings.
We recently worked with a bank that was closing a multi-million dollar commercial loan. Exactly one day before the scheduled loan closing we met with the borrower to discuss the final steps to closing and funding. We were astonished to learn that the borrower did not know how the loan would be priced or what index would be used to set the rate. Except for the short commitment letter, the borrower had not reviewed any marketing materials from the bank. The borrower did not know the conditions or covenants for the loan and knew only the amort
Three social scientists, Suk, Lee, and Lichtenstein, walk into a bar… No joke, they do, and they observe patrons for eight weeks and watch how they order off specially designed beer menus. One beer menu has a variety of beers ordered with prices from high to low. The other beer menu has a menu of beers ordered with prices from low to high. Are the results the same? How does it compare to a randomly ordered menu? Does it really matter? And, most importantly, what happens if you did the same test for banking?
Banks fall into two categories – those that display pricing on their website and marketing materials and those that don’t. Most banks don’t put pricing on their website and use a variety of reasons – pricing is complicated and is best discussed in person, all our pricing is customized, we don’t want our competition to see it, and, our favorite, we have never done it that way. If your bank falls into this category, then read on because the chances are that tactic is hurting you in more ways than you know.
One of the best predictors of bank performance is the level of fee income. The more fee income a bank has, the more likely they have above average performance. Fee income creates a more stable and less interest rate sensitive revenue stream. It amazes us how few banks offer a loan sweep (sometimes called an “ALS” or Automated Loan Sweep) where a customer can set their operating account to sweep balances to reduce their borrowings on their line of credit. CenterState Bank offers the product, and this lays out a case of why you may want to consider the product.
We are at the ICBA 2017 Live convention in San Antonio, and there is nothing like a heated banking discussion over dinner with good bankers. We were comparing battle stories and the ever-important concept of loan pricing came up. Our banker friend lamented on the tight pricing in his territory and that his competition was pricing commercial loans 25 to 50bps below Prime.
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