The current financial crisis has the potential to produce a shift in American finance.
An emerging trend is the rise in importance of banks as intermediaries. Individuals and businesses are voting with their feet and looking to banks, to a greater degree than in several years, to be the repository of their funds and the solution to their funding needs.
Banks can and should take advantage of this. For the first time in decades they have the opportunity to outshine the capital markets. Here's how:
The first thing banks should do is aggressively reach out to individuals and entities to take in their savings. For the past decade-plus, many institutions have become more focused on the easy money that comes from wholesale funding than the harder-to-get core deposits that come from an institution's geographic footprint.
Of course, establishing a meaningful deposit relationship has not been easy. Customers have increasingly been rate-sensitive and inclined to turn to the capital markets and Internet to earn a few basis points more on their deposits.
However, I have seen across the nation (even in the last several years), how some banks that have serious outreach programs have been able to obtain dramatically more stable deposit funding than their peers.
And I have seen how these programs have paid big dividends in terms not only of funding but also of establishing customer relationships with true cross-selling, operation-building opportunities.
Given the rightful concern about risks in the capital markets, there is an important opportunity to be even more successful with such strategies.
Their success entails designating someone — or if the institution is large enough, a team — whose entire job is bringing in deposits. Success-based bonuses should be used heavily to motivate these folks, who guide an organization's sales program and act as its "spark plugs." When these people perform well, their organizations invariably have superior performance.
Outreach strategies should also entail employing sales representatives who are paid on commission to work in both the branch and the field, interacting with customers who can place large deposits with the bank.
Some of these programs may be broader than deposit only. We have seen enormously successful "concierge" programs that focus on serving certain customers. However, programs should emphasize gathering core deposits.
Corporate borrowers that have relied on the capital markets are being shut out of needed funding. Some of them will not meet your credit standards and, of course, are not candidates for your loans.
However, every day we see examples all over the country of corporate borrowers that are now prepared to give banks the kind of collateral and covenants that make for secure loans. These are potential borrowers that were not prepared to meet such criteria in recent years.
This is not an area for which commissions are appropriate. Indeed, they could be highly problematic. However, getting sales representatives into the market right now can uncover customers that can be safely served and that, if accommodated in this turbulent environment, will be good customers for a very long time.
Finally, banks can do a great deal more to make themselves the centers of choice for customers who want to save and invest prudently. Not every investor is right for a bank's trust and investment program, but there are vastly more potential customers available than the industry is signing up. And this is a fine environment in which to seek them out.
Of course, trust and investment programs have their own operational and regulatory complexities that do not make them right for every bank.
However, for banks that have these programs or wish to establish them, we are entering an extremely fertile time. And when these opportunities are exploited correctly, they can lead to great benefits for the bank and its customers.
The next several months will be challenging for financial institutions, but they present distinct opportunities banks should seize. Happy hunting.
