Banks under stress from declining fee income can turn the tide by leveraging the capabilities of their often-forgotten treasury management operations.
By SCOTT HODGINS
The first step in boosting fee income could be lurking in the ops department.
Please, just follow me on this … With Durbin poking us in the eye and our overdraft fee crutch getting kicked out from under us, replacing noninterest income is Job Number One at just about every one of my commercial bank clients. Yet, the truth is that many banks are actually thinking too Big Picture when it comes to beefing up fee income. Establishing a new or more actively cross-sold trust, investments or insurance subsidiary sounds good during a planning session, but success stories of banks quickly earning their way out of trouble through better cross-selling of investment or insurance subs are few and far between.
No, for amping up fee income banks should focus on better leveraging their oft-ignored and underutilized Treasury Management (TM) departments, where the ingredients to tastier fee income have already been purchased, but the chef has been out to lunch.
The benchmarking data in the latest Cornerstone Report paints a sad picture when it comes to TM sales at mid-size banks. Internet cash management, the commercial version of retail Internet banking, stands as the cornerstone of banks’ TM programs. However, with commercial lenders screaming for more robust TM products to support the depository needs of their borrowers, it is truly shocking that banks have sold Internet cash management into less than 7% of their commercial checking accounts (a median 6.94% in 2010 compared to 6.53% in 2007).
Electronic bill payment is understandably lightly deployed for larger commercial customers due to security, but can we really get comfortable with the product being sold into less than 1% of commercial checking accounts? ACH should be a no-brainer for commercial customers, but banks have sold this key service to merely 2% of their customer base. Sweeps services are sold to just 1% of the commercial deposit base, and positive pay is used by a paltry 0.2%. (That rounds down to 0!)
These statistics scream of a serious lack of focus on TM sales and products; banks simply are not leveraging their hyper-valuable commercial deposit franchises as they should. (To be fair, of late there certainly have been plenty of other pressing issues to distract the commercial team – credit quality and regulatory issues to name just a couple.)
With such light TM penetration at commercial banks, it is no coincidence that banks report less than $10 million in deposits per commercial lender – roughly 20% to 25% of the size of the average commercial lender’s loan portfolio. Many banks plan to grow their commercial loan portfolios substantially in coming years, and that growth is usually expected to be as close to self-funding as possible. The self-funding part of that equation simply will not work without a new laser focus on TM services.
For banks to use TM to push the noninterest income needle to the right, they must do three things:
Integrate – A bank that is not making its commercial customers’ lives easier cannot expect them to utilize its TM products. Internet cash management is typically the anchor product and ancillary TM systems such as ACH, positive pay and bill pay are often bolted on (poorly) as an afterthought. Too often, a bank’s commercial customer has to endure multiple sign-ons; navigate to different Websites to access the various ancillary features in the TM suite; and administer security and end-user rights across the suite from several different locations.
For banks at which any of these situations are true, it is likely the lack of integration is strangling customer utilization of the TM suite. We cannot expect more usage if we only halfway pay attention to all-important integration.
Package – Creative product packaging and pricing with a combination of business checking, Internet banking and other base products such as ACH – with customer incentives for utilizing electronic channels – is going to be necessary to increase customer TM usage. A simple, easily explained product set is especially necessary for TM sales into small businesses via the branches.
Incent – Lenders (especially) and TM sales reps are often incented for TM product sales, but they are rarely compensated significantly or for the desired end result – commercial deposit growth. Incent them, and they will sell. The opposite is also true. To really get a lender’s attention, throw in a negative incentive for unsatisfactory deposit growth.
With banks easily able to charge their end users double what they pay their vendors on a monthly basis for TM modules and the added benefit of more and relatively cheap business deposits, the financial aspect of additional focus on TM sales is inarguable. Only with focus and the right employee and customer incentives will banks be able to truly leverage the rich potential of TM services; the potential is absolutely there for the taking.
Mr. Hodgins is a senior director with Cornerstone Advisors, a Scottsdale, Ariz., based consulting firm specializing in bank management, strategy and technology advisory services. He can be reached at firstname.lastname@example.org. Cornerstone principal Steve Williams also contributed ideas to this article. He can be reached at email@example.com.
BAI Banking Strategies