Career in Banking Advice from The Pro's

I recently moderated a Risk Management Association (RMA) panel focused on managing risk in today's environment. Since the panel were seasoned bankers, the audience also wanted to hear some nuggets of wisdom about managing their careers in banking.

The question I asked: If you could give career advice to your 25 year-old self, what would it be?

The panelists were: 

Mike Allen, President of Harford Bank. A career banker with multiple financial institutions, including the long-admired Mercantile from Maryland, Mike elevated up the credit and lending vertical to his current position.

Kevin Benson, President of Rosedale Federal S&L Association. Kevin was a regulator before becoming senior lender at Rosedale, and ultimately to his current position.

Mark Semanie, Maryland Market President, Wesbanco. I first met Mark when he was CFO of a community bank, rising to COO of a different bank that was acquired by Wesbanco, giving way to his current position. Mark did not come into banking until his mid 30's.

Three great leaders, all from different backgrounds. Here is my take on how they responded to my career advice question.

Sins of Our SIFI

Another day, another big bank faux paus. On July 10, the Consumer Financial Protection Bureau (CFPB) issued a consent order (CO) against Bank of America, N.A. (BofA), claiming, among other things, that BofA opened credit card accounts for new customers without their consent. The next day, the Office of the Comptroller of the Currency (OCC), exacted a $60 million fine for prior sins that were based on a 2022 exam and subsequent consent order regarding double fees charged to customers as a result of ACH representments.

Not a red-letter day for BofA.

But can it be for the community banks that would covet the customers that make up the $1.9 trillion in BofA deposits?

If past is prologue, we shouldn't get too excited. Wells Fargo was slapped with a similar CO back in 2016, while they were third in the nation in deposit market share. They're still third. Even though a subsequent CO limited their growth to under five percent. The good news is they only grew deposits 2.1% annually, while others in the top 10 deposit market share averaged 7.1% annual growth. But still, Wells grew deposits $169 billion since receiving their 2016 fake account order, which has been subsequently lifted.

So, as I told a banking friend, however community financial institutions react to BofA's wrongdoing, or don't react, it should be different than what we did in reaction to Wells' 2016 CO.

It's not like the BofA news isn't bad. Let me give you some of the CFPB language in the CO in Article IV, subsections 24-31:

Respondent's (BofA) Violations of Law Regarding Account-Opening Practices

24. During the Account-Opening Findings Period, Respondent offered an array of Consumer Financial Products or Services, including savings and checking accounts (deposit accounts) and credit cards.

25. During the Account-Opening Findings Period, one factor that Respondent considered when evaluating financial center employees’ overall performance and incentive compensation was the number of new Consumer Financial Products or Services that were opened and used by the consumer.

26. During the Account-Opening Findings Period, in response to sales pressure or to obtain incentive rewards, Respondent’s employees sometimes submitted applications for and issued credit cards without consumers’ consent. These acts or practices were contrary to Respondent’s policies and procedures and involved a small percentage of Respondent’s new accounts.

27. It was Respondent’s practice to obtain consumer reports in the course of considering consumers for new credit cards.

28. Respondent used or obtained consumer reports to consider consumers for new credit cards even when the consumers had not applied for or did not want the products and where Respondent did not otherwise have a permissible purpose for the consumer reports.

29. During the Account-Opening Findings Period, Respondent sometimes generated associated fees from credit card accounts opened without consumers’ consent. 

30. Respondent’s acts or practices described herein may have negatively impacted consumers including through fees charged; impacts to consumer credit profiles; the loss of control over personal identifying information; the expenditure of consumer time and effort investigating the facts and seeking closure of unwanted accounts; and the need to monitor and mitigate harm going forward.

31. Respondent has addressed a root cause of Relevant Account-Opening Practices—individual sales goals and sales-based compensation—by eliminating sales goals both for compensation incentives and for performance management for financial center employees primarily responsible for the sale of consumer credit card accounts as of January 1, 2023.

So What?

In a separate CO, the OCC cited violations of law against BofA for charging customers a $35 overdraft fee, and if re-presented by merchants the next day and there were still insufficient funds, charged an additional $35 fee for the same item. This practice was said to have ended in 2021.

Representment issues and the disclosures were recently a regulatory hot-button issue in bank exams. And, truth be told, others may have done it without even knowing it was being done. These double-fees were not very big to a traditional community financial institution and it is possible when the deposit accounts were set up, they were not set up to identify representments when automatically assessing fees. 

But still, the timing of the CO coinciding with the fake accounts opened as a result of the sales culture within BofA is certainly a bad look.

The question; will this bad look result in community financial institutions finally making a successful case to younger depositors and small businesses that their deposit dollars belong with them and not the SIFI banks?

I hope so. But hope is not a strategy.

~ Jeff

Does Your Bank Matter?

My firm is debating the direction of the banking industry so we can present, discuss, and debate with our clients, particularly how they can succeed in the current and emerging environment. In the past, I have advocated for "stakeholder primacy"; if you mattered to your employees, customers, shareholders and communities you would surely have an enduring future. If an enduring future is what you aspire to.

If you mattered to your employees, your retention rate for those you want to retain will be greater than your competitors. Higher retention usually means greater employee satisfaction through employee development, engagement and empowerment, career opportunities, competitive compensation and benefits, work-life balance, and overall satisfaction with how your bank is making a difference. These higher performing employees reduce process friction and customer pain points, delivering a superior customer experience.

If you matter to customers, you would understand their individual needs and deliver banking services to them without them having to think about it or worry about it. If they have an issue, they know who to call and that person is empowered to solve it for them without being bounced around. They are comfortable that their bank and banker will balance the needs of the customer with the needs of the bank and its other constituencies. They feel good banking with you because you serve some higher purpose in your community. They won't dump you for small rate variation or loan terms. They are your greatest promoters, reducing new customer acquisition time and resources.

If you matter to your community(s), you would be missed if your bank was not there. If you are dedicated to elevating the financial wellbeing of your customers, for example, then their net worth and overall financial happiness will improve over the long term. You help elevate those in need to a sustainable level. You lift low-to-mod income households to middle class households, and so on. You are committed to the financial literacy of all that bank with you. Yes, without your bank, there would be a hole in your community. 

Better employees that stay with you to serve your higher purpose in your community are delivering a superior customer experience to customers that are comfortable paying you for the service you deliver and the value you bring to them and the community. This delivers superior financial performance to shareholders. I've discussed how to calculate earning your right to remain independent in a prior post, and banks should do this regularly to ensure they are holding themselves accountable to deliver to shareholders.

But the brass ring is to matter not just to shareholders. But to matter to all of your stakeholders.

Below is a list of the largest of the 223 bank merger deals that happened in 2013. Ten years ago. Do stakeholders miss these banks? When you build your strategy, build one where you will be missed if you were gone. It's a great legacy.

~ Jeff

Predicting the Next Banking Crisis Is a Fool’s Game. Not Learning From the Last One: Equally Foolish

 //Jeff Marsico remarks to the 2023 New Jersey Bankers' Association Annual Convention: May 19, 2023//

Four decades ago, the prolonged savings-and-loan crisis devastated the industry. Between 1980 and 1995, more than 2,900 banks and thrifts with collective assets of more than $2.2 trillion failed. More recently and by comparison, the mortgage meltdown and subsequent global financial crisis took down more than 500 banks between 2007 and 2014, with total assets of nearly $959 billion.

Outside of those two crisis periods, American banking failures have generally been uncommon, at least since the end of the Great Depression. Between 1941 and 1979, an average of 5.3 banks failed a year. There was an average of 4.3 bank failures per year between 1996 and 2006, and 3.6 between 2015 and 2022. Before SVB, Signature, and First Republic, in fact, it had been over two years since the last bank failure.

Because our industry has been fairly stable except for a few extraordinary periods, doesn’t mean we can’t learn from tough times as both crises had long germination times and were predicated on factors that were both known and observable. 

The recession of 1990 was caused, in part, to the decade-long S&L crisis. The crisis stemmed from a variety of factors, but none contributed to the meltdown more than inflation and the attendant interest rate increase. The early 1980s was a difficult time for the United States, as consumers faced rising prices, high unemployment, and the effects of a supply shock—an oil embargo—which caused energy prices to skyrocket. The result was stagflation, a toxic environment of rising prices and declining growth, sinking the economy into recession.

To fight inflation, the Fed raised rates aggressively (familiar?). And S&L’s had long-term, lower yielding mortgages funded by shorter term deposits. The old borrow short, lend long strategy. Struggling to raise asset yields, S&L’s turned to commercial real estate, junk bonds, even art to combat rising deposit costs. 

I want to read to you the FDIC’s conclusion from their An Examination of the Banking Crisis of the 1980’s and Early 1990’s. This will be fun.

“The regulatory lessons of the S&L disaster are many. First and foremost is the need for strong and effective supervision of insured depository institutions, particularly if they are given new or expanded powers or are experiencing rapid growth. Second, this can be accomplished only if the industry does not have too much influence over its regulators and if the regulators have the ability to hire, train, and retain qualified staff. In this regard, the bank regulatory agencies need to remain politically independent. Third, the regulators need adequate financial resources. Although the Federal Home Loan Bank System was too close to the industry it regulated during the early years of the crisis and its policies greatly contributed to the problem, the Bank Board had been given far too few resources to supervise effectively an industry that was allowed vast new powers. Fourth, the S&L crisis highlights the importance of promptly closing insolvent, insured financial institutions in order to minimize potential losses to the deposit insurance fund and to ensure a more efficient financial marketplace. Finally, resolution of failing financial institutions requires that the deposit insurance fund be strongly capitalized with real reserves, not just federal guarantee.”

My lesson learned to the regulators, read your past lessons learned. To you, manage your interest rate risk. Before becoming desperate and trading interest rate risk for credit risk. This crisis hatched the more sophisticated ALCO tools we have today. Currently, not many (if any) financial institutions have experienced negative spread as they did in the early 80’s. Yet.

The dot-com bubble recession began in March 2001 and lasted only 8 months. High-tech employment fell from 12.1 percent of all jobs in 2001 to 11.3 percent in 2004, a decline of 1.1 million jobs, as the high-tech sector was harder hit by the bursting of the bubble and its aftermath than other sectors of the economy. By comparison, non-high-tech industries lost 689,000 jobs between 2001 and 2002 but recovered the lost jobs by 2004.

What caused a dot-com bubble? In the late 90s, low interest rates made speculative equity investments more attractive than bonds, and at the same time, innovative internet companies grew in popularity among retail investors, professional traders, venture capitalists, and the like (familiar?). When the Taxpayer Relief Act of 1997 passed, the top capital gains tax rate was lowered, providing yet another incentive for equity speculators to pour money into the fledgling internet industry. The Y2K scare also had companies pouring money into tech firms.

Between 1995 and its peak in March 2000, the Nasdaq Composite stock market index rose 800%, only to fall 740% from its peak by October 2002, giving up all its gains during the bubble. Lesson learned, meteoric rises are often accompanied by gravitational falls. And it is so difficult to be the odd-one out at the cocktail party full of those that participated in the ascent… during the ascent. Taking your own punch bowl away when the party is getting good takes fortitude.

The Great Recession, in contrast to the relatively short dot-com bubble recession, officially lasted from December 2007 to June 2009, the longest recession since the Great Depression. What caused it? Economists cite as the main culprit the collapse of the subprime mortgage market — defaults on high-risk housing loans — which led to a credit crunch in the global banking system and a precipitous drop in bank lending. Who would’ve thought lending $1 million to a San Francisco cab driver to buy a house at 100% loan to value would go bad?

And quite frankly, I did not know there were so many tranches to mortgage-backed securities. Although community banks did not lend to sub-prime borrowers in any meaningful way, did we participate? In many respects, community banks were caught in the cross-fire through the purchase of those mbs instruments – and subsequent trial through public sentiment. We took a serious reputational hit. 

According to the FDIC, the causes of the 2008-09 financial crisis lay partly in the housing boom and bust of the mid-2000s; partly in the degree to which the U.S. and global financial systems had become highly concentrated, interconnected, and opaque; and partly in the innovative products and mechanisms that combined to link homebuyers in the United States with financial firms and investors across the world. Capiche? (credit default swaps anyone?).

In 1991 FDICIA was passed into law. It had a provision that prohibited assistance to failing banks if FDIC funds would be used to protect uninsured depositors and other creditors (hmm, think about that in light of recent events)—but the act also contained a provision allowing an exception to the prohibition when the failure of an institution would pose a systemic risk.

In 2008, by relying on the provision that allowed a systemic risk exception, the FDIC took two actions that maintained financial institutions’ access to funding: the FDIC guaranteed bank debt and, for certain types of transaction accounts, provided an unlimited deposit insurance guarantee. In addition, the FDIC and the other federal regulators used the systemic risk exception to extend extraordinary support to some of the largest financial institutions in the country in order to prevent their disorderly failure, setting precedent for what we now know as Too Big to Fail (TBTF), or Systemically Important Financial Institutions (SIFI).

Although community banks did not play a significant role in subprime lending, the runup and subsequent decline in real estate values had a profound impact on their safety and soundness. Most of the more than 500 financial institutions that failed were community banks. When your construction loan is greater than what a builder can reasonably recover, when your home or commercial mortgage is larger than its value, you’re going to have bad loans. We knew there was tremendous hubris in the subprime market. We thought since we were only tangential players, we were insulated. What we found out is the interconnectedness of real estate values and the contagion that it can cause. 

Remember K Bank in Maryland? In 2006, the then $686 million in asset bank made $8.8 million, or 1.38% on assets and 16.38% on equity. They were killing it in construction and development loans. At industry events they had that wry grin saying, “yeah, we perform better than you.” After losses of $24 and $23 million, respectively in 2008 and 09, the regulators in 2010 said enough is enough. M&T assumed their $411 million of loans and securities with a $289 million FDIC loss-share agreement. Let those numbers sink in a bit. It didn’t take long for the profit GOAT to become, well, an actual pig. Lesson learned, beware of how a runup in asset prices might impact your assets and diversify accordingly. 

After the Great Recession, we had over 10 years of economic expansion, albeit anemic economic expansion. Economists were rubbing their crystal balls trying to accurately predict when the next recession would begin so that they could seal their celebrity on CNBC. But it never came. Instead, Covid came.

So many extraordinary things happened during Covid that I’m not certain if they will ever repeat themselves in our lifetimes. Most lessons were for bureaucrats. I think we have enough experience to know bureaucrats don’t learn well. They learn short, forget long. 

A substantial yet brief recession ensued. Followed by extraordinary government support that came in multiple trillion dollar plus fiscal stimulus packages so competing administrations could outdo one another on government assistance funded by ridiculous sums of debt, largely purchased by the Fed. Money supply expanded wildly. This amount of stimulus shielded our loan books from experiencing any material losses.  

And what happens when the government prints money? Inflation. I think I learned that in economics 101 or reading anything written by Milton Friedman. Perhaps bureaucrats would benefit from a brief stroll through an econ book. Not written by Paul Krugman.

Recall that the S&L crisis was caused, in part, by inflation and the subsequent rapid rise in interest rates orchestrated by the Fed. Well, this time, the Fed raised rates faster because they misdiagnosed inflation as transient. Or, the cynic might read it as, our Chairman is up for renomination and we won’t raise rates until he owns the gavel.  

The Fed Funds rate was zero in December 2021. It didn’t take a rocket scientist to predict rates would go up. And we positioned our balance sheets accordingly. And in December 2021 our liquidity positions were so strong we didn’t know what to do with the money. Good times.

Some of us took our liquidity and bought longer-term bonds – at historically high prices - to try and increase yield. Most banks consider their securities portfolio as first and foremost for liquidity. When you elevate yield over liquidity, bad things can happen. Don’t get me wrong, giving up yield for liquidity could also be bad. But there are different degrees of bad. But, no worries, right, AOCI was excluded in regulatory capital ratio calculations, and we could hide some of that interest rate risk in HTM securities. 

Then we realized we needed a special exemption from our FHLB’s regulator to borrow money from our FHLB if our GAAP equity or tangible equity was below zero. I remember being at a Bank CEO Network event in Denver when CEO’s learned of this knowledge nugget. Some seemed panicked. 

But we still had plenty of liquidity, right? Rates were rising fast, but we weren’t raising our deposit rates accordingly. Our deposit betas were phenomenally low. We thought our customers would stay with our bank, no matter what.  We bragged about it in our earnings releases.

Then depositors woke up. First municipalities and larger commercial customers, and more sophisticated retail depositors. Even I started to wake up. I don’t get angry at my bank that often, but when I found out I was earning .01 percent on my money market account when the Fed Funds rate rose to five, I was angry. My bank was taking advantage of me because I didn’t babysit my money. They will not be my bank for long.  I – like many – will use technology to move my money but keep my account open – costing the bank money.  

But what of SVB, Signature, and First Republic? Three different banks and business models. All were enviable in some sort of way. All suffered extraordinary runs on their bank due to large unrealized losses on both HTM and AFS securities, peculiarities in the p/e world, uninsured deposits, crypto, and old school panic via new school technologies and social media. 

For community banks, it’s not as much about the uninsured deposits or even the AOCI. We were concerned about the panic. The extraordinary measures taken by our government and us in employee and depositor communications, makes panic less likely.

Our pressure on deposits was because we let the difference between what we paid depositors and what they could earn in alternatives become too large. And we should’ve been able to predict this – but we did not want to be honest and thought our customers were all ours. At the end of tightening cycles, deposit betas have risen like hockey sticks. And given the transparency of deposit pricing and the ease of moving money from our bank to alternatives, why did we think it would be different?

Our lesson learned in this most recent crisis, in my opinion: don’t let market rates get too far ahead of what you pay depositors, unless you think it’s worth those two or three quarters of superior cost of funds to aggravate your depositors and force them to seek alternatives and lose trust in you. Be extremely cautious elevating yield over liquidity in your securities portfolio… I would’ve liked to have been a fly on the wall at SVB when they decided to deploy their extraordinary liquidity position in long-term (and relatively low yielding) bonds without hedge. Revise our contingency funding plans to ensure that the liquidity will be available if 400 of our banking friends are waiting in line at the same time and at the same window. And ensure our business continuity plans or crisis management plans includes a communication plan to employees and customers to restore confidence in our bank even when confidence in banking has been shaken.

So, to summarize my lessons learned from every crisis in the last 35 years:

- Manage your interest rate risk;

- Meteoric rises are often accompanied by gravitational falls. Recognize the rise;

- Beware of how a runup in asset prices might impact your assets and diversify accordingly;

- Don’t let market rates get too far ahead of what you pay depositors;

- Be extremely cautious elevating yield over liquidity in your securities portfolio;

- Revise our contingency funding plans to ensure that the liquidity will be available if there is a run on your liquidity resources; 

- Ensure our business continuity plans or crisis management plans includes a communication plan to employees and customers to restore confidence in our bank.

So what of the next crisis? Will it be non-residential real estate? We’ve had pretty frothy real estate runups – in terms of rental rates and insurance expenses despite increasing vacancy rates. Will it be commercial office space as the pandemic chased workers out of office buildings only to have them slowly return, if they return at all? Will it be retail commercial real estate, as the pandemic accelerated our preference for online shopping making zombie mall owners desperately looking for alternatives? Spread of the Ukraine war? 

So many questions that we at The Kafafian Group toyed with the idea of having a fun conference to debate emerging risks to banking called “Predictapalooza” where we would have industry pro’s stand up and make some “what if’s” to help us shape our risk management practices. Outside the box what if’s, such as what are the chances and how should we prepare for, I don’t know, a worldwide pandemic?

I don’t know what the next crisis will be. And I’m skeptical about those that say they know.

What I do know is that almost everyone in this room has been through every crisis I discussed. They were all different. They all forced us to learn from them and make adjustments on how we managed our balance sheet and our banks. And they’ve all made us better bankers and more capable to handle what “crisis” comes next.

We learn and we move on. It’s all we can do.

Memorial Day: Remember Sergeant (USMC) Rafael Peralta

Rafael Peralta was born April 7, 1979 in Mexico City. He graduated from San Diego's Morse High School in 1997. But he had to wait to receive his green card before he could enlist. In 2000, he received it, and on that very day he enlisted in the U.S. Marine Corps as a rifleman. He would later become a U.S. citizen while serving. 

In 2001, Peralta was deployed overseas when his father died in a workplace accident. He returned home to San Diego where he was stationed at Camp Pendleton while he took care of family affairs. In 2003, he transferred to Marine Corp Base Hawaii at Kaneohe Bay, and reenlisted. He was assigned to 1st Battalion, 3rd Marine Regiment, 3rd Marine Division. In 2004, he along with his other battalion mates, were deployed to Iraq in support of Operation Iraqi Freedom. He was a scout leader.

On November 15, 2004, Peralta and his squad were heavily engaged in Operation al Fajr, commonly known as the second Battle of Fallujah. They successfully cleared six houses that morning. At the seventh house, the point man in the squad opened the door to a back room and immediately came under close-range automatic weapons fire from multiple insurgents. It was an ambush.

While attempting to get out of the line of fire, Peralta was severely wounded. As the insurgents fled the building, one threw a grenade that came to rest near Peralta's head. Without hesitation, he pulled the grenade to his body to absorb the brunt of the blast saving the lives of the Marines that were only a few feet away. Peralta succumbed to his wounds.

He pulled the live grenade to his body to absorb the blast which he knew would kill him and save his fellow Marines. 

Let's pause for a moment.

For his actions, Sgt Peralta was posthumously awarded the Navy Cross and Purple Heart. He is buried at Fort Rosecrans National Cemetary in San Diego. In 2007, the command post for the 31st Marine Expeditionary Unit at Camp Hansen in Okinawa named "Peralta Hall" in his honor. 

To further honor the heroism of Sgt Peralta, the U.S. Navy, in 2017, commissioned an Arleigh Burke destroyer the U.S.S. Rafael Peralta (DDG-115). On the ship's website, in welcoming new sailors to the Peralta, the ship's captain states: "Our ship emblazons proudly the name of an American hero, a Marine who sacrificed his own life so others might live. Our motto, 'Fortis Ad Finem', which translates to 'Courageous to the End', is a testament of his dedication to his country and his fellow Marines. Every Sailor in Rafael Peralta must strive to earn the right to represent such fortitude and devotion."

As you enjoy the long Memorial Day weekend, I ask that you remember Sgt Peralta, and all of the more than 4,300 Americans that gave their last full measure of devotion during the Second Iraqi Conflict.

~ Jeff

Sources: Sergeant Rafael Peralta (navy.mil)

Welcome (navy.mil)

Iraq War - The surge and the end of the war | Britannica

Bankers: Please End This Practice. Or It Will End You.

I recently spoke at a banking conference where I challenged bankers to end the practice of relying on sleepy depositors that don't demand top rate. You know, the practice of allowing bankers to raise deposit rates only if the customer calls and complains.

When I challenged bankers that they can't claim to be trusted advisors to their customers if they engage in this practice, I got push back. Push back because most bankers in the room likely practiced it. I heard, "what would you like us to do?" or "where were you with this advice in 2017 or 2018?"

To the second question, my response was "it's in my book." And it is. Chapter 10: The Hot Rate Stalemate, where I wrote "paying 1/3 the market rate on a customer's savings, and then bragging about it in your investor presentations, can't be a way to strengthen relationships and increase the amount of business you do with them." 

But that book, Squared Away: How Can Bankers Succeed as Economic First Responders was written in 2021. And it was hardly a best seller. Actually, it did rise to #1 in Banks and Banking on Amazon for one week. Aside from that, not many people have it on their bookshelf. Aside from my family. Well, at least they say they'll read it... someday.

However, the reference in the book was to a blog post written in 2018, titled Hot Rates, Swipe Left. Also in 2018, in a blog post titled A Time of Reckoning for Your Bank's Core Deposits, I wrote "a business model based on the sleepiness of your depositors is unsustainable." I encourage you to read both posts if wondering question number two, what would you like us to do?

What this tells me is not that I haven't been in front of this issue, but that nobody reads what I write or hears me when I speak. Or that the practice is so ingrained in bankers that we need to pass the generational torch to put a silver stake in it.

If you continue to read this article, you must be interested in breaking from the time-honored tradition of screwing your customers that don't pay attention to the rate you are paying them. Maybe "screwing your customers" is harsh. But what would you call paying depositors significantly below the market because they are not paying attention to what you are doing? Sometimes, the truth hurts. But doesn't make it an untruth.

What To Do

But there are practical considerations. Say you have $500 million in a money market product. Let's call it product 360, as representative for a product code on your core system. If you abandon the practice of making rate adjustments only for those that realize you are paying them materially under market rates and call you to complain, you would reprice $500 million in deposits! Disaster, right?

Let's take my bank, who I would normally leave anonymous but since I'm only attributing fact, I'll talk frankly. Truist was paying me .01% on my money market. When I finally woke up and realized it, Fed Funds was five percent. When I called, they said they would raise it to 3.5%. When I told the branch banker that I didn't appreciate being taken advantage of because I wasn't babysitting my money she said, "sorry." Good thing they inserted the "i" in their name as a hedge.

But if a bank increased product 360 by 349 basis points to $500 million in balances, this would add $17.5 million of annual interest expense. Even if this hypothetical bank could increase their new production loan yields by 349 basis points, it would not keep up with the $17.5 million because yield on loans would increase slowly. 

That money market account was only one of many deposit accounts I have at the bank. The others, including my checking account, I was not too price sensitive. One was for storing money for future home renovations, another saving for a future automobile, a third was a wash account for business traveling expenses. 

If when opening accounts, the bank learned the purpose of the account, and classified accordingly, they would be able to hold steady on pricing, at least not increase rates to market for those accounts I considered "store of value" accounts. These accounts are meant for accessibility, safety, and frictionless transaction processing. Maybe their product codes would be 320 and 330. So as rates rise, pricing committees know they don't have to keep pace with the market. Maybe their names would be Fort Knox Savings, where your deposits are insured up to the FDIC limit and beyond because of reciprocal deposit features, and is easily accessible via mobile, online, and your local branch.

But for those I want to keep pace with the market, you would reprice without having me check the rate you are paying me, recognizing it is below market, and having me call to complain. I'm not saying you have to keep pace with the market. I do get FDIC insurance, and the benefit of the branch and possibly a person to call on the phone. That's worth something.

Your brand should also be worth something. So often in strategy sessions I hear that a bank's brand is a strength. And sometimes this assertion is because of third party customer and non-customer surveys. But most times it's a feeling. It should be more than that. I wrote about this in 2019 in a post titled, Bank Brand Value: Calculated!

For this tightening cycle, it is probably too late to change your deposit pricing strategy. The fault in the strategy can be easily diagnosed by the hockey stick increase in your cost of funds. In recent remarks to a group of bankers, I said "our lesson learned in this most recent crisis, in my opinion: don't let market rates get too far ahead of what you pay depositors, unless you think it's worth those two or three quarters of superior cost of funds to aggravate your depositors and force them to seek alternatives and lose trust in you."

But the solution requires you to segregate depositors interested in "store of value" or "accumulation" accounts. Something we have some work to do in order to successfully execute on.

What is your deposit strategy?

~ Jeff

Bankers: What Problem Are You Trying to Solve?

Finovate Spring 2023 is coming up in late May and the social medial buildup is palpable. Industry pundits in the know about everything financial technology and financial technology firms will soon be clinking martini glasses saluting each other and telling stories about their profitability and number of bank installs they have under their belt. 

I was actually joking about the last two things.

I will occasionally look at past Finovate "Best of Show" winners. It is a veritable "who" of financial technology firms. Not a typo. I never heard of most of them and know of no bank that implemented most of the winning solutions.

Truth be told, though, Finovate is a good forum to learn about what is out there, and what firms rise to the top as Best of Show because of the niftiness of their solution. There are enough financial technology solutions that fall under the "nifty" category to make a banker's head spin. So who do you follow up with once you decamp from Finovate Spring?

"What Problem Are You Trying to Solve?"

Forget about solutions or the universe of what is out there. Prior to fintech becoming a buzzword, bankers have been solving problems. Problems regarding regulation, risk, operations, and customer needs. Fintech is not something new, as I frequently cite when telling people I produced microfiche in the basement of my first bank. In 1985.

One of the speakers at Finovate Spring is Charles Potts, Chief Innovation Officer at ICBA. I recently teamed up with Charles at a New York bank's strategic planning retreat. During his presentation, he was asked a question about the sheer number of solutions out there. His answer: "what problem are you trying to solve?"

Sometimes when I hear financial technology promoters, it seems like this question escapes them. As if having a cool solution out there is enough for a banker to give it a look. Do fintechers stock the checkout aisle of the supermarket? Skip the Skittles. Bankers have better things to do. 

I am obviously cautioning bankers against this vendor centric approach. Just because it's cool, out there, and a fintecher is telling you that you are a dinosaur if you don't get innovating doesn't make it a good strategy for your bank.

How would a customer centric, or, gasp, a strategy centric approach work?

Strategy. Yes, let's start with strategy. We often hear lofty aspirational goals in vision statements that sit atop a bank's strategy. One such goal goes something like this: "We improve the financial well-being of our customers."

When asking the banker how, the lofty vision starts to crumble and you get some anecdote about when they sent a banker to the local high school to teach kids to balance check books. 

The Problem: How to improve the financial well being of our customers? Now we have a problem in search of a solution. And perhaps this banker might recall Array, a Finovate Fall 2021 Best of Show winner that helps people improve their credit scores, protect their identity, and inform the financial institution about making the right offers to customers to improve their financial well-being.  In this regard, the financial institution can measure how they are doing in improving the financial well-being of their customers by how much they improved their customers' credit scores.

Many bankers have a similar vision for their bank. When I ask if they have a personal financial management solution with their online banking tool, many say yes. Ok, is it standard to set up customers when they open accounts, or are your branch people calling existing customers and making appointments for them to set it up, either virtually or in-branch?

Well, no. And by the way, our branch people don't even know we offer it and if they did they certainly wouldn't know how to set customers up on it. They don't use it themselves.

Wouldn't it be nice if you made it standard practice to do so, and measure the trend in average net worth of all customers that use it? So you can say, ya know, "We improve the financial well-being of our customers."

That is how you take a problem (tracking the financial well-being of our customers) and search for a solution. Instead of finding a cool solution at Finovate and looking for a problem for it to solve.

~ Jeff

By the way the highlight of that bank strategy retreat in which Charles and I spoke was Brooklyn Brewery afterwards!