In recent newsletters we have discussed the combination of factors that will make 2007 a very difficult year for either asset or liability growth:

As the end of 2006 rapidly approaches, banks must develop a cogent strategy and the related tactics to address these growth challenges. Jumping to tactics without market differentiation based upon a rigorous strategic assessment will limit the effectiveness of any growth initiatives. That said, senior managers want specific tactics and approaches that they can implement to grow small business deposits and loans and to exploit the related cross-sell opportunities.

Growing the Deposit Base

Banks cannot control external events such as the flat yield curve, but they can address the internal factors that create roadblocks to deposit growth. Banks need to rethink and reverse some of the practices that limit deposit growth:

 

Simplify and link the product set. The availability of third-party product providers means that even the smallest banks are able to offer a wide range of deposit and cash management products. Ironically, however, banks often sell too many products; oftentimes, a bank’s ability to create products far exceeds the customer’s needs or the internal sales force’s “bandwidth.”  This leads to confusion among bankers as to which product is right for their customer and also results in lost opportunities because of the banker’s insufficient product knowledge. In addition, many banks fail to integrate individual products into packages that offer comprehensive solutions to a customer’s financial services needs and, as a result, miss an opportunity to both streamline the sales process and create customer “stickiness.”

 

To determine product opportunities and requirements, management needs to objectively assess its offer versus competitors’, determining the gaps that exist and the opportunity to improve and simplify the product set in order to enhance sales effectiveness. In addition, banks need to more aggressively develop product bundles to increase natural cross-sell linkages and streamline their sales processes as well as to address the specific needs of the bank’s target customer segments.

 

Direct a targeted sales focus on deposits. Virtually all senior bank managers now finally understand the importance of deposits as the driver of small business profitability. Despite this economic fact, many bankers continue to lead with loans. Culture (“Real men lend”), incentives (discussed below), and a lack of strategic focus on deposit-centric customers all create a loan focus. As a result, bankers choose the established path to internal success. Loans also involve a more likely near-term sale, since for various reasons, it is usually easier and quicker to sell a loan than pursue a significant deposit/cash management sale. As one banker commented, “Deposits are hard to sell unless the prospect’s current bank really screwed up.”

 

Our evaluation of a client’s sales process typically uncovers opportunities to significantly increase the bank’s focus on deposits. Recognizing that culture is difficult to change and that the loan culture often extends into the top management, our analysis and recommendations often center on uncovering deposit-rich target segments and differentiated approaches for product positioning, sales, and marketing in order to exploit those segments. Implementation may involve creating a segment-focused sales team (potentially led by cash management sales) or developing an affinity relationship with the segment’s centers of influence, such as industry associations. Management telling bankers to “just go sell deposits” is ineffective. Instead, bankers need to be provided with a targeted focus aimed at customer groups that have greater deposit-related requirements.

 

Ensure incentives that emphasize deposit retention and generation. I recently spoke with the national sales manager of a Top Five bank about the steps her bank was taking to increase its deposit base. She stated that management had told the sales staff that deposits were a “top priority” for the bank and had, in some cases, increased bankers’ deposit-related goals. However, despite it being a “top priority”, the bank had not changed its incentive plan to emphasize deposits; frankly, that is a mistake.

 

Banks frequently, and sometimes inadvertently, create incentive plans that reward bankers for selling loans versus deposits. In developing incentive-related recommendations, we are sensitive to the fact that many banks cannot determine profitability on either the product or the relationship level. Therefore, it may be necessary to increase the weight given to deposit revenue and cash management-related fees in determining incentives. In addition, for banks with revenue-based plans, we recommend basing the loan component on the averagerevenue generated over the life of the loan versus the actual revenue generated in the current year. This reduces the front-loaded benefit to the banker of selling a loan.

 

Next week: Loan Growth

Banks need to build an approach for growth today, if they are to avoid being sunk by the perfect storm of conditions that may challenge growth over the coming year. While obviously self-serving, FIC and other strategy consultants, if they are implementation oriented, possess the focus and experience to quickly create an effective plan and, importantly, lack the “baggage” that often inhibits management from making the tough decisions required to break away from the past to develop a growth path that will succeed in a changed market environment.

 

In our next newsletter, we discuss tactics for growing the asset side of small business banking.