Deposit Funding Challenge the Widening LIBOR-OIS Spread Faster
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SUMMER 2018 THE FUTURE OF BANKING Deposit Funding Challenge The Widening LIBOR-OIS Spread Faster Payments for Commercial SUMMERCustomers 2018 | 1 THE FUTURE OF BANKING IS ALREADY HERE This is the third in a series of thought pieces related to Novantas’ views on sustainable transformation efforts, particularly with a focus on evolving the revenue 4 generation side of the equation. 7 | SITTING DOWN WITH NOVANTAS 9 | BANKS CAN EASE DEPOSIT WOES BY TAKING CUE FROM CARD ISSUERS 11 | DEEP DIVE: WIDENING LIBOR-OIS SPREAD BEARS WATCHING, BUT NO CAUSE FOR ALARM 13 | WHEN FUNCTIONALITY ISN’T ENOUGH: TAPPING YOUR CUSTOMERS’ EMOTIONAL NEEDS 16 | BANKS SHOULD PURSUE EFFICIENT AND SCALABLE “MODEL FACTORY” MANAGEMENT 19 | SNAP AND TAP: MILLENNIAL BANKING TRENDS 20 | FASTER PAYMENTS SPEED TOWARD COMMERCIAL BANKING 22 | BANKS NEED WORKFORCE OVERHAUL AS BIG STAFFING CHURN LOOMS 26 | AT THE PODIUM WITH NOVANTAS 30 | NEWS YOU MAY HAVE MISSED 2 | EDITORIAL Director, Novantas Center for the Future of Banking A Note from the CEOs Robin Sidel +1 212.901.2742 [email protected] CONTRIBUTORS Kaushik Deka elcome to the Summer 2018 issue of the Novantas Review. Darryl Demos Marc Harrison We are all looking forward to some pool time and burgers on the grill, but we are Dale Johnson also looking to the future. And there’s a lot that bank executives must do to prepare Don Kumka for it. As uncertain as the future always is, there are a few things we can count on. Sherief Meleis Deposit betas are rising, competition is ferocious, and technology is changing the Leo Rinaldi world faster than we ever expected. Matthew Sharp Robin Sidel Steve Turner In this issue, we tackle some key topics that you will face as you look to the future of Bob Warnock banking. We guide you through some strategic choices that you will likely have to Jonathan 'Wes' West make, such as developing a thin-branch network or launching a direct bank. We also examine the significant amount of churn that will hit your workforce and provide guidance about figuring out which deposit customers are most valuable to you. DESIGN Art Direction and Production We are also introducing another new feature as part of the Review’s overhaul. “Deep Adrienne Cohen Dive” will analyze timely financial topics for the banking industry. In this issue, we explore the widening LIBOR-OIS spread — from why it is happening to what it means for your business. NOVANTAS, INC. Co-CEOs and Managing Directors Dave Kaytes As always, we welcome your feedback on the Novantas Review. Feel free to reach out Rick Spitler to Robin Sidel at [email protected] with suggestions and comments. Corporate Headquarters So put on some sunscreen and start reading! 485 Lexington Avenue New York, NY 10017 Phone: +1 212.953.4444 Fax: +1 212.972.4602 [email protected] Dave Kaytes Rick Spitler www.novantas.com Co-CEO Co-CEO Offices Charlotte Chicago New York San Francisco Sydney Toronto SUMMER 2018 | 3 COVER STORY THE FUTURE OF BANKING IS ALREADY HERE BY SHERIEF MELEIS he U.S. banking industry has always ings reports shows this clearly — banks followed a very simple formula: are experiencing challenged deposit Intermediation 101 calls for banks growth and there are warning signs to gather deposits from local that deposit betas are rising. Novantas Tdepositors (primarily retail) and lend to believes this phenomenon and the asso- local borrowers (primarily businesses). ciated funding challenge are secular, not But over the past few years, Novantas cyclical, trends. has been warning that this formula is fundamentally at risk. Deposit-gathering SOLVE THE RETAIL DEPOSIT FUNDING has become a national business that is CHALLENGE…OR FIND A BUYER dominated by a few national banks and This issue isn’t only a retail-banking direct banks. The most recent set of earn- matter, but a concern for the very top 4 | THE FUTURE OF BANKING IS ALREADY HERE of the house — from the executive floor hundred years (see Figure 1). But Indeed, a slew of banks have recently to the boardroom. Retail deposits will the evolution of deposit-gathering, announced merger plans. be the primary limiter of growth, while occurring against a backdrop of rising One possible outcome is the cre- commercial DDA and sleepy wealth rates, means banks must consider a ation of several more ‘mega-banks’ (if deposits, will dry up. wide range of choices. That means regulators allow it) that can compete better with marketing and technology scale. Banks that don’t solve their deposit funding challenges will have no choice but to sell out. RETAIL DEPOSIT STRATEGIC PLAYS Banks need to sort out which one (or combination) of retail strategic plays will address their funding needs. The first option to be considered is to double down on the local franchise and take share from competitors. To do this, banks need a distinctive value proposition (“Why bank with us?”); very few banks have one today. The days of getting ‘fair share’ based on convenient local branches are in the past as more consumers pursue dig- ital formats. That means banks must move from distribution-led strategies to customer-level ones by developing a value proposition, distinctive prod- ucts, and additional marketing spend. But for many regional banks, there FUTURE simply isn’t enough opportunity in OF BANKING IS ALREADY HERE Banks are starting to address the thinking about a thin-branch network, the current footprint. Banks that find issue by considering the right side of launching a direct bank or pursuing themselves in this position should the balance sheet, looking at how fast partnerships to extend geographic consider one of several types of out- they can grow stable, low-cost deposits and/or product reach. In May, Citizens of-footprint plays. and assessing lending capacity. This Financial became one of the latest National banks like Bank of Amer- marks a change from the traditional banks to pursue a new strategy when it ica and Chase have pursued well-doc- way that banks tackled strategic plan- announced plans to launch a national umented approaches to “attach” new ning by considering the left side of the direct-to-consumer digital platform markets (Minneapolis for Bank of balance sheet to determine how fast that will offer deposit accounts. America and Jacksonville, Fla. for a bank can profitably and prudently The stakes are high. Novantas Chase) to their existing footprint grow lending, and how those loans believes that funding pressures will with thin-market plays that involve should be funded. increasingly drive M&A activity as limited physical footprint, ‘feet on As of now, too many institutions the scale advantages on the deposit the street’ marketing, and new digital still haven’t laid out a comprehensive side will drive many community and products. plan to adjust to the demise of the regional banks to combine because Another option is to take a local local retail-banking model that has their required betas to drive deposit segment play national. Because dominated this country for the last growth have become untenable. banking is becoming an extremely SUMMER 2018 | 5 COVER STORY FIGURE 1: RETAIL DEPOSIT-GATHERING SHIFTS TO NATIONAL PLAYERS National Purchase Rate Retail Deposit Growth Share of Deposit Growth ‘Power’ (% New Customer Acquisition) ($ bil, 2012 -2017) (Share of Branches) Ratio National 46% 41% $541 40% (18%) 2.26 Super 21% $272 20% (26%) 0.64 Regional 26% Regional $136 10% (18%) 0.43 26% 32% Community $232 17% (37%) 0.48 Direct 7% $184 14% (n/a) ∞ 0% 2016 2017 Power Ratio = % Share Acquisition / % Branch Share Source: FDIC, Novantas BranchScape. Novantas Shopper Survey (>45k respondents nationwide) To support the development of the strategy, new tools are needed. Banks that don’t solve their Banks need scenario-based planning of different potential macro-economic deposit funding challenges will and funding environments to stress test their strategies. Will the proposed have no choice but to sell out. strategies work if betas are higher than expected, or five more direct national business, winning players Needless to say, the right play (or banks enter the fray? They also need may take a segment proposition that combination of plays) will vary for analysis to evaluate funding across the is distinctive in footprint, and take each bank based on footprint, value enterprise under different scenarios. it to other markets. These can be proposition and capabilities, and And they need ongoing enterprise-wide true in retail or commercial seg- funding needs. and retail deposit funding and price ments, as banks like USAA, First optimization tools that incorporate Republic and Silicon Valley Bank DEVELOPING A SUSTAINABLE sophisticated ‘marginal cost of deposits’ have demonstrated. FUNDING STRATEGY (mCOF) measurement to understand And of course there is the national While in the heat of the deposit the true marginal cost of different plays, direct bank option that has been pressure, banks may be tempted including the costs of ‘polluting’ the pursued by MUFG Union Bank with to be reactive and only use tactical back book. These tools will allow banks its PurePoint brand, among others. levers such as price and marketing to course-correct to determine where to While the up-front investment mar- campaigns to drive short-term growth. get the next $5B of deposits. keting costs and interest rate may But these levers may well run out Banks that figure this out will be be high, it still may be cheaper than of steam or become inordinately able to continue to grow and survive the high ‘marginal cost of funds’ of expensive as rates rise. Given this, in the new environment. Banks that pricing up in footprint balances and it is critical for banks to develop a don’t will need to combine with others ‘polluting’ the back book.