Independent Banker - March 2019 - 27

Next: 5 questions for the OCC's Joseph Otting
consumer desires. There is a cautionary tale for community
banks in the Sears story, too. Over time, Sears focused
on itself, rather than on its customers. Its failure to adapt
to changing customer preferences allowed Walmart, Amazon
and others to replace it.
Current success does not guarantee continued relevance.
In a late 2018 survey, Gartner forecast that 80 percent of
financial institutions will be irrelevant or out of business
by 2030. The largest banks are proving their relevance;
the three largest grew from 20 percent of all U.S. banking
deposits in 2007 to 32 percent at the end of 2017. The size
and growth of the large banks should be of concern to all
community bankers, as the days of competing only with
local institutions, or relying on inertia or unaware customers
are long gone. Consider these questions:
Q How much of large banks' deposit growth has come
from community banks?
Q How do I react to negative trends and transform my
bank into one that not only survives but thrives?
Q What value proposition do I offer my customers?
Q Why would a prospective depositor do business with
my bank?
There are several critical factors that must be in place to
stay relevant with your customers. Let's examine a few that
closely parallel the problems that doomed Sears.
Competitive and efficient deposit pricing
We are all aware that core deposits are the " golden
goose " of the banking industry. In the 2018 Bank Director
Bank M&A Survey, sponsored by Crowe, 71 percent
of dealmakers stated the potential target's deposit base is
highly important in making the decision to acquire. To be
competitive in a global, internet-savvy economy, competitive
deposit pricing must consider the changing banking
landscape, the inherent value of core deposits and their
importance to the survival of community banks.
Deposit pricing tends to be less disciplined than loan
pricing but is equally or more important. Traditionally,
bankers scanned the local newspaper or polled local competitors
to determine deposit pricing. Now, however, large
banks have become competitors and are winning the battle
for deposits.
We almost never hear bankers mention the United
States government as a competitor. If you offer CD rates
lower than the rate paid on easily obtained Treasury securities,
community banks must ask if depending on inertia
or the unawareness of your customers is a viable business
strategy. A bank manager would not invest in a security
yielding less than a U.S. Treasury. So why would your customer
purchase a bank CD that returns less than a U.S.
Treasury they can obtain with a mouse click?
Have bankers, like Sears, become too internally focused,
too concerned about controlling deposit betas and net
interest margins at the risk of losing customers? We understand
the desire to control funding costs, but this internal
focus affects your deposit franchise and ability to survive.
Are your valuable depositors serving as a source of large
bank growth?
Efficient financial tools
The largest banks seemingly do an excellent job of providing
products and services that resonate with their
customers. They are generally able to overcome one of the
great banking dilemmas: aligning bank desires with customer
preferences.
Virtually all the large banks use interest rate swaps to
solve this dilemma. Interest rate swaps allow them to provide
products that are relevant to their customers while
also meeting the bank's profit and risk management needs.
Swaps are simple, efficient, accepted by regulators and
easier to understand than many products already on your
balance sheet.
Managing interest rate risk on the backs of your customers
or using less efficient methods will not provide the
products needed to remain relevant. To thrive, community
banks cannot follow Sears' example, focusing on internal
needs. They must listen and offer products customers
want, delivered in the most efficient manner possible.
Your best competitors use the most efficient tools
available to fund their assets, giving them a competitive
advantage that allows them to attract your customers.
Community banks must use these same tools to assure
long-term survival and avoid becoming irrelevant.
It has been said the only constant in the business world
is change. Transformation must be a priority for your
community bank if you expect to thrive in a marketplace
where your customer base is not protected by barriers that
existed in the past. If you follow the Sears model of adjusting
but not transforming, you may buy some time, but it
will not be enough to assure long-term relevance.
Take the next step
ICBA Securities, Vining Sparks and Vining Sparks
Interest Rate Products are available to help you
offer transformational products and services
that meet your customers' needs while helping
you thrive.
independentbanker.org Q 27
http://www.independentbanker.org
Independent Banker - March 2019

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