This Time It's Different

Updated: Nov 17

Three consecutive quarters of falling stock prices doesn’t feel good when you log into your retirement account, but it In some senses it feels like a return to normalcy. It is more realistic than markets always going up and to the right. There is a generation that has known anything other than savings rates hovering around zero and mortgage rates in the single digits. Likewise, there is a generation of entrepreneurs who only know a seemingly boundless venture capital dollars flowing into fintech startups, and that spigot turned off almost overnight.


That might alleviate some of the competitive pressure.


Many bankers have been through this before and are dusting off the playbook: focus on loan quality, ready the workout group, cut costs and aggressively manage expenses. Except this time the tried and true recessionary strategy might not work.


This time it’s different.




The Model is Morphing

The fundamentals of banking have been largely unchanged since the time of the Medicis. Take in deposits at one rate and lend out at a higher rate. Lending rates are based on perceived risk of repayment and preferably have some underlying collateral. Maybe layer on some non-interest sources of income such as payments and fees.


The recent run up in rates is causing a jump in Net Interest Margin as loan rates are rising faster than the cost of funds. As Matt Michaelis, CEO of Emprise Bank pointed out in our last Strategy Center of Excellence, this blip is temporary, and the situation will be worse when the cost of funds catches up. NIM will be under more pressure because rates went up but not spreads.


The pressures on the balance sheet are even more fundamental than the cost of funds vs loan rates. Deposits are landing— and staying— in more places than bank checking and savings accounts. Balances are being kept with e-commerce players like Amazon and wallets ranging from Starbucks to Peer to Peer payment apps like Venmo.


Enhanced value and/or convenience from these apps ups the ante beyond the rate game in the effort to attract deposits. The competition for loans is not getting easier as the convenience of online applications, differentiated underwriting, and the continued growth of embedded lending turns the table on relationship-based origination.


People and relationships are still important but what fuels those interactions and the additional value that gets wrapped around them is where bankers have to focus.


To Fee or not to Fee, That is the Question

Ron Shevlin recently wrote an article about the CFPB’s war on “junk” fees. He argues that these fees aren’t junk but solve a real problem. I agree with his ultimate conclusion that there are systemic issues with real potential solutions that can obsolesce the need for these fees. The reality is the market pressure, first from fintechs, and now the largest banks to eliminate many punitive fees will make this market standard far faster than regulation.


I gave a talk for the Boston Fed a couple weeks ago about payments and made the offhand comment that we should expect to see pressure on interchange fees, not because of a rewrite to Durbin but because of market forces. I was stunned at the response; evidently most of the room hadn’t contemplated that moves by Starbucks to induce customers to use ACH to load their wallets to get double rewards or the prevalence of Amazon checkout could upend this lucrative income stream.


Efficient markets work to eliminate friction, and in many cases fees are friction that innovators will find ways to eliminate. Entrepreneurs have a saying: “Your margin is my opportunity”.


What's A Bank to Do?

Bankers also have a saying: “The best loans are made in the worst of times”. The traditional model may be under pressure, but change creates disproportionate opportunity for those brave enough to embrace it.


The first step is to disavow ourselves of the notion that there is a return to “normal'' and that strategies that worked in the past will necessarily work in the future.


The second step is to rethink how we create value and how that value is shared.


Lending in the future, from origination to underwriting, will look different. Relationships with customers will continue to evolve; use of data and technology will transform even the most human of interactions. Value will be created by the ways we embed banking into other services and embed other services into banking.


The Times, They Are A-Changin'

The future of banking is bright but it requires a rethinking of what it means to be a bank and how we operate, and how we can leverage products beyond the traditional commoditized loan and deposit products.


We’ve been focused on finding opportunities and partners to lean into this. Prizeout is a great example: the customer benefits from the extra value and brand affinity from merchant-funded offers, the brand sees increased revenue, and the bank has a more deeply engaged customer and a new revenue stream. This value creation means pie gets bigger and there is more for everyone to have a bigger slice.


The bank of the future is customer-centric, and much of the growth will be product-led, not necessarily sales-led, or marketing-led. I’ll have more to say on product-led growth in future posts.