Saturday, March 31, 2018

A Time of Reckoning for Your Bank's Core Deposits?

Bye-bye municipal deposits. 

So worries New Jersey Banker's Association CEO John McWeeney since state-owned bank advocate Phil Murphy was elected governor. The state's municipal deposits approximate $20 billion, $13 billion of which are in community banks. A significant source of liquidity.

I got news for you John. We might lose municipal deposits regardless.

And we might lose a lot more than municipal deposits.

According to the Investment Company Institute, money market funds stood at $2.8 trillion this week. And as the chart below shows, these funds are typically paying more than double the community bank money market account rate. 

These rates were at March 29, 2018. I used Wells Fargo because it is a money market fund that I use. By default. When they bought Strong Asset Management. Marcus is Goldman Sachs online bank. FDIC insured. And Mid Penn Bank is a $1.2 billion in assets financial institution based near Harrisburg, Pennsylvania. I had to call Mid Penn for their rate. It is a tiered money market, and the 0.55% is their top tier for accounts greater than $50,000. The next lower tier is 0.35%. 

Mid Penn boasted about their cost of deposits and funds in their 2016 annual meeting investor presentation (pages 21-22). They currently have a 0.58% cost of funds. Can they maintain it? Will their ALCO model betas prove true? Or will customers demand they bridge the rate gap, so vividly portrayed above?

My colleague recently sent me a link for, a soon to be released banking app that boasts a 2%-4% rate for your cash, FDIC insured (they are partnering with a bank). They haven't launched. But they have over 76,000 customers that signed up already. Could some be your customers?

In strategy sessions the past couple of months, I'm hearing more bankers talk about pressure from large depositors on rate. The old arguments are starting to play out. Not bringing large deposits with their loan deal because rates are too low. Municipalities hemming and hawing. Will the traditional retail and small business depositor be next?

There is an inflection point where our Rip Van Winkle bread-and-butter depositor will wake up to think "hey, I'm getting screwed by my bank!" What sized rate gap will trigger it? I don't know. I'm no futurist. The above rates are still below the inflation rate. So keeping money in any of those accounts will result in a real decline in value. Do you know where your customer inflection point is?

Because a business model based on the sleepiness of your depositors is unsustainable. 

Are you feeling the pressure yet?

~ Jeff

Saturday, March 03, 2018

Bankers and Strategic Bets. A Slow Embrace.

There are a lot of crazy ideas out there in banking causing us to think... "remember when such and such ridiculous idea was the new craze?" And we would laugh, continue to drink our cocktail, and lament that another financial institution threw in the towel to merge with a bigger brother.

That's what I thought about while reading a recent Financial Brand post about Innovation in Banking: Killer Ideas? or Idea Killers? More talk about fintech, dinosaur bankers, and flavors of the month.

But their animation caught my attention. And it stirred images of a few strategic planning sessions I have moderated. Much to my chagrin.

How do we balance strategic direction, customer demand, and the futurist or wildly over-caffeinated millennial that tells us we have to implement every shiny new object or we'll die?

Six years ago I asked in a blog post Will Plain Vanilla Kill Community Banking? Did I get caught up in the change-or-die crowd? Was I, gulp, a futurist? When I wrote that post in January 2011 there were 7,700 FDIC insured financial institutions. Today there are less than 5,700. A 26% decline. Was I a futurist?

This brings me to the subject of Strategic Bets. They can be a strategic shift of your franchise, a new product line, or a new operating environment. Something you are not doing, will require some investment to do, and risks failing miserably. Bankers are slow to embrace strategic bets, opting for tweaks to business as usual. Which runs the risk of making the cartoon above become a reality.

Let me highlight some strategic bets for you. In the above blog post, I discussed Apple and Bank of New York Mellon.

Sticking with the Apple theme, in 2007, they launched the iPhone. Here was a personal computer company that decided... "mobile phones, yeah, mobile phones". Much like they did "digital music, yeah, digital music. Thanks Napster!" in the early 2000's. 

How about Amazon? When they started in 1995, they sold books. Maybe those millennial futurists don't remember this. Online book stores. Competing with Barnes and Noble and Borders? In 1998, they decided "why don't we sell everything online?" And boom! Now my friend orders toilet paper through Amazon Prime.

The iPhone represents 62% of Apple sales. Didn't even exist in 2006. Physical stores grew from nothing to 3.3% of Amazon sales and is likely to grow. Because Amazon, with their culture of online sales and fulfillment, had that strategic bet meeting where they agreed "new-fangled brick and mortar store, yeah, let's do that." 

Some other strategic bets that have the chance to transform or have transformed a company:

Pepsi - I listened to a podcast where Indra Nooyi, their CEO said they are focusing on their "healthy for you" line. Pepsi? Also, they are developing female friendly snacks. Apparently females like snacks that don't crunch loudly or leave a residue on your fingers, and fit into a purse. 

Overstock - Announced this year they are getting into Robo Advising. They have a heavily female customer base, and see opportunity to build an offering attractive to those that visit their stores and online space.

Leader Bank - A $1.2 billion in assets Massachusetts bank developed Zrent so it's landlord customers could more efficiently collect rent from tenants. The bank now licenses the product to other financial institutions.

SunTrust - Developed Lightstream, a national online lending platform to provide consumer loans for practically any purpose. It's proprietary technology gives consumers a virtually paperless experience. 

I think there are enough examples of strategic bets transforming businesses. Combined with the alarming rate of those that don't take strategic bets deciding to sell, shouldn't you be thinking about calculated strategic bets that could become a significant part of your future success?

~ Jeff