Winning The War For Deposits

Transcription:

Brad Mayer (00:09):

Hi everyone, I'm Brad Mayer. This is Christina Flood and we're consultants with Boston Consulting Group. If you're not familiar with BCG, we're a Global Management Consulting firm. We have more than 30,000 employees spread across a hundred offices globally. In North America, our financial institutions practice works with leading players across traditional banking, FinTech, and market infrastructure providers. A little bit about myself. I started my career in commercial banking and various credit and relationship management roles. I'm not a career consultant. I've been with BCG now for about eight years, and during that time, have had the opportunity to go really deep with our clients in the small business sector, analyzing the performance of top players in the region, and also really understanding what small business customers want from their primary bank through the ethnographic research and surveys that we've run. And I'm just really excited about the opportunity that all of you have to serve this unique client segment.

Christina Flood (01:11):

And I'm Christina Flood, a colleague of Brad's. I'm a Partner in our Financial Institutions Practice. I'm based out of Atlanta. I focus on commercial banking and B2B payments. I've been in and around financial services my entire career and even before that when I used to ride the train into the city with my dad on Take your Daughter to Workday, I'm sure it's not called that anymore, and spend the day on the sales and trading floor with him where I told him, it's so great that you get to spend the day talking on the phone to your friends. I've since deepened my appreciation and understanding of the financial services industry, and I'm particularly passionate and excited about the small business segment and the critical role that it plays in the economy and the opportunity that we have to support them. So I'm excited to be here today and talk to you about some ideas that we have on how we can better serve the small business segment.

Brad Mayer (02:03):

So with the 30 minutes or 25 minutes that we have with you today, we'll share our perspectives on the current market environment and our BCG framework that's aimed at answering the question, how do you compete in a sustainable way to win the war for small business deposits? We'll try to leave a few minutes at the end for a Q&A session.

(02:25):

Before we get into small business, I thought we would step back and take a look at how the deposit market has performed more broadly this year. And I don't think it's a surprise to any of you, but in the wake of the regional banking crisis in March, we saw a steep outflow of deposit balances fleeing the system and an inflow into money market funds as there were customers across all segments looking to diversify their deposit wallet in a flight to safety, and also a lot of customers just seeking a higher yield in a rapidly increasing rate. If you look on the right side of the page, we can see that banks of all sizes followed a similar trajectory in terms of their deposit growth from January until March where there was this really steep inflection point and larger banks fared much better than smaller banks at that time as customers saw largest banks as being the safest option given the market conditions. If we move forward from March through the end of September, those smaller banks really made up for lost ground, and now we're back to more of an even playing field in terms of low digit deposit growth and back on even playing field in terms of market opportunity and competition more broadly.

(03:45):

Now, if we take a look at how small businesses thought about their deposits this year, our friends at Barlow Research were kind enough to share their latest insights with us on how small business customers treated their deposits throughout 2023 and post regional banking crisis in April. Nearly 50% of small businesses were actively shopping around their deposit accounts. If we look forward four months to August, what did they actually do, what their deposit balance is? And nearly a third made a change. They either opened up another account or they moved money out of their primary account. And the context for these numbers is this is more than two times higher than what Barlow sees in a typical low rate environment. So a lot more movement in 2023 than we've seen in prior years.

(04:39):

And you might be thinking, okay, almost a third of businesses made a big change this year. What does that mean for primary bank market share? Are they switching who their primary banking provider is? And surprisingly, the answer is no or not yet, at least in the past 12 months as of August, only 5% of small businesses actually changed their primary bank. And what we found interesting about the study is while they're not making this big change yet of the almost third of businesses who did make a change, they're increasingly open to deepening that relationship with that new bank. If you see on the right hand side, 40% are likely to make that new bank their primary financial institution. At some point, another 40% are likely to use cash management services with that bank and a smaller percentage expect to request a loan or line of credit. So again, while we're not seeing huge shifts in market share today, businesses are increasingly opening open to making that change and really opening the door up for more competition.

Christina Flood (05:45):

So as we move out of what has been a pretty tumultuous period with the Fed holding rates steady earlier this month and signaling that they'll likely continue to do so even if rates don't keep climbing, it's likely that customer expectations will be recalibrated from the period that we've just gone through, and they're going to look to get more value out of their banking relationships. But we know that competing and trying to win on rates alone in business banking is not a sustainable long-term strategy. So banks are going to have to make a concerted effort to actually define and deliver value beyond rates in order to compete and win in the segment. So let's talk a little bit about what we think that looks like.

(06:31):

Our view and what we believe in terms of a building and delivering on a sustainable strategy is really predicated on the idea that you have to drive deep lasting sticky day-to-day primary relationships with your small business customers. And what does that look like? It looks like getting them doing more and more of their jobs to be done. If you think of it in terms of the Intuit framework that's getting capital or getting paid managing workers through you as their primary banking partner, but they will only do that if you make it easy for them. You've got to simplify things for that time. Constrained SMB who is facing off against a host of complexities and wearing multiple hats in the day-to-day operations of running their business. So how do you lay the groundwork for these deep lasting relationships with intention and a clear holistic strategy?

(07:30):

Now, there's a lot to digest here, so I'll step through this, but as you can see by the slide, the answer is there's not a silver bullet to driving primacy. But there is a proven path to getting there through a long-term committed strategy and a clear north star vision that you demonstrate a deep understanding of your customer's industries and needs as both their advisor and partner. Through our experiences working with leading banks, we've seen both short and long-term strategies emerge that span the customer life cycle and take a truly customer-centric approach to driving deep engagement early on in relationships and continued growth throughout the right strategy for you will certainly depend on your context and your starting point. But some of the ones that we've seen emerge as being very successful are developing a tailored go-to-market strategy for some of the deposit rich verticals that we'll talk about more a little bit later, or building out a value added services ecosystem that's either focused on addressing sector agnostic, sort of broadly applicable use cases and for small businesses or going really deep in solving very sector specific needs for strategically significant industries or leveraging data and analytics to build predictive leads in real time so that you can arm your sales force.

(09:03):

As powerful as these strategies are though, they'll only be successful if you have the right enabling capabilities underpinning them. And what that can look like is having a culture that both promotes and rewards the right behaviors, having an operating model that drives accountability, role clarity, and critically rapid decision making. Having a cloud-based modern infrastructure and leveraging data and analytics to target and segment your customers appropriately to deliver timely personalized recommendations and advice and to proactively identify attrition risk and empower your sales force to address it proactively and to retain that valuable SMB customer. And finally, with all of this, you've got to make sure that you're ensuring a alignment to your treasury optimization strategy and they're using your internal mechanisms correctly to promote and reward the right behaviors like increasing FTP rates alongside interest rates. Now that we've laid this framework out and talked about some of the strategies we think that are important, we're going to dig into a few to make this more tangible for you and your banks, starting with some of the short-term strategies we think you should consider.

Brad Mayer (10:22):

So there's a number of short-term levers to consider that don't necessarily require sophisticated planning or long-term investment. I think I've heard a consistent theme throughout the conference that budgets are constrained this year. So what can you do quickly with the resources that you have? And we've just laid out a few options on this slide. And starting with Salesforce, a really powerful lever that we see is reworking the incentive scorecard to encourage your bankers to exhibit the right behaviors. So oftentimes when we work with our clients, we see incentive scorecards that are balanced that take both deposit and loan volume into account, but it doesn't account for the quality of those loan and deposit volumes and the revenue that they bring to the bank. Similarly, we see cash management treated as a single product on the scorecard versus encouraging bankers to sell the real breadth of the cash management offering, which we know attract those sticky operating deposits on go-to-market strategy.

(11:27):

This one might sound a bit obvious, but we see a lot of potential when management teams and leadership craft those deposit and cash management strategies and campaigns that really incent the sales force to work together and tie those campaigns to the incentive structure, tie it to the operating model to encourage bankers to go out and call on customers with their cash management specialists, just a lot more value versus leaving it up to individual market managers to come up with a grassroots initiative to drive deposit growth and revenue on the service model. When we examine the way that small business segments make money and where that money comes from, we typically see a really interesting pattern emerge and that the revenue is shaped like a barbell and that you have a group of really highly skilled bankers who will look for clients and prospects at the top end of your segmentation, and that brings in a lot of revenue. And then you have a really large pool of smaller businesses or micros that are probably served by the branch network and there's just a low density of revenue in the middle. And that's where we see opportunity to leverage virtual RM models like we've heard about the past two days, where that team has the ability to take on higher client gearing ratios, they have more time to do that outbound calling campaign and to call out for proactive retention efforts.

(12:58):

Moving on to some of the more medium and long-term strategies. Our team runs a financial benchmarking program every year of the top 25 small business segments. And a pretty consistent theme that we see across all banks is that the small business segment is really burdened by a high base of allocated costs. I'm sure you can all relate to that, and that allocated cost base really squeezes profitability in the segment. And so creating a tailored customer segmentation strategy that allows you to serve customers that generate a positive overall experience at the appropriate cost to serve those customers is critically important. This is just an example of one of our clients and how they've designed their segmentation strategy where the first lens that they used is organizing customers by the value or the potential value that they bring to the bank. And the second lens is what are those behaviors or characteristics that may allow them to be served in an alternative model like the virtual RM or a digital platform supported by a dedicated call center?

(14:04):

I think I've heard all of the regional banks talk about their virtual RM strategies this week, and it's such an interesting topic because everyone's doing it a little bit differently and they're testing and learning and banks that are doing it right are seeing a lot of success. Like we heard Mark from Capital One talk about this morning that they're trying to push that model as much as they can because they've had so much success with it. And we see that as a real opportunity as customers just have increasing openness as they are digesting more B2B platforms to run their business. And remote service is just becoming more of the norm in the industry.

(14:46):

Beyond traditional segmentation, there are certain industries in the market that tend to just have more deposits versus others. And when we work with our clients to prioritize, what are those industries that you may want to go after? One of the ways that we do it is shown on this chart on the page where on the X axis we've plotted industries based on the total pool of deposits available in the US market. And on the Y axis we're looking at those industries deposits relative to their lending needs. And if you look at the cluster of companies in the top right hand corner, you'll see that there are industries that have higher deposits relative to their lending needs and just a larger pool of deposits available. So if you can craft a differentiated value proposition to serve those industries in a compelling way, it can be a really powerful way to drive step change growth in your operating deposit strategy.

Christina Flood (15:55):

Now that we've talked about some of the short-term strategies, let's pivot the conversation to some of the longer term strategies, and these are going to be ones that require significant funding and runway to successfully implement. So you'll recall a few minutes ago, Brad talked about the insightful Barlow research that we used as part of this presentation, and the key to that was that about a third of small businesses moved money from their primary bank relationship this year or opened a new account. And so even if only 5% actually moved their primary banking relationship, that statistics still should put banks on notice to a potential higher risk of attrition. As those SMB customers start to do more and more in their new banking relationships. This potential risk of attrition is further exacerbated by the fact that banks just traditionally unfortunately, have not been great at identifying attrition early, losing as much as 20% annually to attrition.

(16:59):

And on top of that, it's not just failing to identify full attrition, but there's what we call invisible attrition, which is where a customer stays on your books, but they gradually reduce their usage of products and services over time. And with that, their spend, this is all despite the fact that banks have such rich data, even just the core DDA data that every bank has, but are failing to really harness the power of that data and use it to their advantage. I think the good news in all of this though is that AI is creating opportunities to do this better and to do it differently to build predictive models that can allow you to identify what we call footprints or markers on the data that can help you identify up to 70% of attrition, as many as six to 12 months early, and use those insights to arm your sales force and empower them with the tools that they need to address attrition and retain your customers. And retention is just one of the use cases that we're excited about. There are many other powerful ones that you can take advantage of when you lay the right foundation in the groundwork for a next generation data and analytics capability.

(18:16):

Value added services is a strategy that I'm sure everyone in this room has heard about and has probably invested into some extent in the past, let's call it three to five years. And this one is really about bringing SMBs. It's pulling them into the bank to get them doing more on your platform. Whether you've invested in this from a sector agnostic approach, like I mentioned earlier, looking at use cases that are broadly applicable across sectors, think things like Bill Pay or whether you've taken a different approach and you've gone really deep in an industry vertical, maybe one of those deposit rich verticals that Brad talked about, maybe based on your strategy. And you've built a very sector specific set of capabilities to address pain points in strategically important industries. Think job costing in construction or real-time payouts and gaming. And you probably see examples of banks entering into strategic partnerships in the market to address exactly those types of needs.

(19:20):

The key to being successful with this strategy is that this is not a set it and forget it play. This is something that you have to continuously invest in, innovate in, think about, and rethink about your partnership strategy because if you don't build an experience that, like I said earlier, makes it easier for the SMB simplifies, the complexity is very well integrated with your products and services has best in class capabilities like single sign-on and a consistent brand experience across the digital landscape, you won't see the adoption and you won't see the return on the investment unfortunately. So this is one that we think can be very powerful, but it requires commitment.

(20:04):

And finally, the last long-term strategy we'll talk a little bit about is embedded finance. And I think probably along with chat GPT, this is one of those things that you've been hearing over and over again as a buzzword that everyone's talking about. But really simply speaking, this is going the other direction of value added services, which is about pulling SMBs into your platform and getting them doing more in your banking environment to going out and meeting SMBs where they already are. Our research shows that there's been a dramatic increase in adoption of software solutions by SMBs with 80% of them saying that they use a software solution to run their business, and 50% of them saying that they actually use an industry specific solution. On top of that, the majority of them say that they'd be willing to consume a financial services product through that software solution that they're using to run their business.

(20:59):

One other trend that I'll just mention here is that we're seeing software vendors start to move up and downstream and consume more and more of the end-to-end flows, and essentially try to be the operating system on which small businesses run their business. Let's look at Toast as an example, right? They started in ar, they moved into ap, then payroll, they're looking to expand further, and right now they're offering working capital loans up to 300 K without an application. So the clear implication of that is that SMBs are going to be spending more and more time on other platforms, and that's time that they're not going to be spending on your bank platforms. The good news from my perspective is that, and some work that we did earlier this year, some voice of the SMB research, we heard from them directly that the solutions that they use, particularly for AP and ar, influence directly the purchasing decisions they make about other solutions that they need, including financial services products. So from my view, what this means is using the opportunity to be the bank that powers the software solutions that SMBs are using that are driving a high degree of satisfaction and traction in the market, and showing up for that segment in those platforms matters. And it's a different way of thinking from where we are today, but it's where things are going, and it's making sure that if you want to deepen the relationship and you want to be the bank that SMBs are seeing in the market, that is a path to doing it.

(22:36):

So as we come to the end of our time together, we've talked about a handful of strategies and we realize they're non exhaustive. Certainly there's many of you with us here today who are executing other strategies in the market successfully, and we'd love to hear from you about what you're doing. But regardless of where you're focused now, it's important to remember that if you really want to drive long-term sustained change, it won't happen overnight. It's going to require a long-term commitment with top-down leadership and the right governance structures in place to sustain the change. I won't drain everything that's on this page, but some of the things that I think are important is it's shifting from exactly as Brad said earlier, from driving lending and deposit volume to quality, changing the mindset from bankers being lenders to bankers, being advisors who are going to market armed with a holistic set of tools, including cash management solutions and incent across all of it.

(23:39):

It's moving from a quarterly cycle to having a long-term North Star vision that's maybe on a five or even a 10 year timeline. And in order to have a truly always on deposit strategy, it's making sure that you have ring-fenced investments so that you can fund the journey over the long term for those strategic enablers I talked about earlier. So in closing, there's no silver bullet to driving primacy, like I said, but we do believe there's a proven path through a multi-pronged approach and a long-term vision that can create the conditions necessary to shift your culture to one that's focused on building those deep lasting sticky day-to-day primary banking relationships that can deliver sustainable low cost deposits for the bank. So thank you so much for being here at the end of day two with us. We really appreciate each of you coming, and in the few minutes we have left, we would love to take any questions. The only ask is that you do use the microphone when you ask.

Audience Member (24:52):

Hey, thanks. This was super interesting. When you talk about PBRs, how have BCG advised their clients on measuring or tracking what a PBR R, you talked about the dimensionality, but I'm an analyst at heart. I want to look at data and track. Are we doing better or worse? What has BCG seen in terms of measuring A PBR?

Brad Mayer (25:16):

Sorry, I'm not sure if I know that acronym.

Audience Member (25:18):

Yeah, PBPR, primary banking relationship. Sorry, also a beer, but primary banking relationship is probably in the, I

Brad Mayer (25:24):

Was like, oh, I think he really caught me off guard. I mean, I'd be interested to hear if anyone else in the room has a perspective, but we don't have a standard definition of what primacy means or what banks should think primacy means. I mean, typically I think if you look at voice of the customer survey and you ask a customer who their primary bank is, I think it's something like the vast majority will say, whoever has my checking account and my operating deposits, that's my primary bank. A number of customers will say, whoever my loan is with, and some even say whichever bank has the closest branch to my office. But most of our clients use a framework of revenue to bank customer lifecycle, lifetime value, and product penetration. But I'm sorry to say I don't have, this is a standard definition of what it should be.

Christina Flood (26:30):

I think one other thing, just to that point that we look at, and you talked about the data and analytics capability and how we think about how you could be using data more effectively is beyond their retention use case. I talked about share of wallet is another one that we think about. And using the transaction data to identify whether or not you are seeing patterns in the data that suggest that the client is using their account as their primary operating account.

Brad Mayer (27:06):

Any others? Okay, call it. Alright, well we'll stick around if any of you want to chat in a smaller setting. Thank you.