The Covid-19 pandemic has decimated the US economy, and the recovery may take longer than initially suspected. However, currently, community banks have an opportunity to identify and win or retain longer-term, credit-worthy relationships at better credit spreads. There are also substantial challenges facing the entire banking industry.
When was the last time you changed your fees? Most banks, when setting fees on bank products and services start and end by taking a look at what selected competitors are doing. This method, while not a bad start, will almost always result in a suboptimal setting of fees. The reason for this is not only is your bank very difficult to compare to your competition, but your competition is likely doing the same thing. In this article, we look at practical considerations for banks looking to set or revise their current fee structure.
While many banks say they are all about developing a relationship, few have an account structure to support that claim. Since deposit values are heating up, we thought we would take a look at what a commercial relationship banking package looks like and how you can use the package to drive fees, balances and profitability performance. Structured the right way, a commercial banking package does your heavy lifting for you. It speeds up the sales process, promotes cross-sell, retention and performance.
Many banks work hard to have a low-cost deposit base only to undermine their efforts. One of the biggest mistakes banks make is to advertise an above market rate thereby not only shortening deposit duration and increasing negative convexity for that one account, but for the whole product offering.
Mispricing of small balance loans is the major problem facing our industry and is a drag on many banks. It is difficult to make a $50,000 loan profitable. Let’s consider a typical small business commercial loan example: a five-year loan for equipment with a 1% origination fee. To make a 15% risk-adjusted return on equity, a banker must price this loan at a minimum of a 7.75% spread using direct costs and assuming average credit. That is a thick spread and not only could make your bank less competitive but also potentially increases the risk.
If you are in retail, you spend a lot of time thinking about the most effective way to display your product and where to put the price. If you’re Tiffany’s, you put your products out there first, make consumers click into the display, or if you are in person, make them ask about the price. In this manner, the website or salesperson have a chance to explain the quality attributes of the product. However, if you are Amazon or most other retailers, you put your price first. The question is, what works best in banking?
In a prior article where we tested “odd digit” account pricing, we showed that conversion rates were almost twice as high when we used a $1.99 price point for a product compared to $2.00 (HERE). We previously also showed the importance for banks to show their pricing easily on their website. We received many comments on these blogs about our use of $12.95 per month pricing versus $12.99 or $13.00.
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
Pick up almost any survey, from Pew to JD Power and you will find that deposit account fees are a significant driver of customer satisfaction. Often it is a major factor in choosing or leaving a bank. Unfortunately, many banks set their fees according to where their competitors are. If your bank does this understand that it is based on the fact that your competitors know what they are doing. The logic also presupposes that you are exactly like your competitor in terms of customer, geography, goals and strategy.
There is an opening scene in Sharknado where an Eastern European fisherman and an Asian businessman are on a boat negotiating the classic cliché-filled shady business transaction. Negotiations are over in about 10 seconds, which is good because it is right before a shark washes up on the deck and starts eating people. Other than how fast these negotiations concluded, the rest of the movie was pretty realistic.