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PCBB Banc Investment Daily September 03, 2015
Banc Investment Daily
September 03, 2015

Dialing Up Opportunities

Salesforce.com is the industry leader in the customer relationship management (CRM) business and it was the first tech powerhouse to run its entire business just using online access. Most of the other tech giants began either as hardware producers (IBM, Apple, Oracle) or in consumer driven businesses (Google, Amazon, Yahoo). One major difference between business application and consumer product companies is that business application companies tend to have long term relationships with their clients and to generate an increasing income stream through upgrades and long term contracts. Salesforce has operated a little differently and has tended to have smaller piecemeal contracts that have required a lot of follow up to generate a growing income stream. Salesforce's CEO (who came from Oracle) seems to be working on the development of larger, longer duration relationships using a hardware company model.
Community banks too can end up with a strategy similar to what Salesforce historically has done - pursuing each potential customer regardless of whether it fits the focus and abilities of the bank or not (and regardless of size). Every bank is looking for efficiencies and better ways of generating revenue, therefore most bank teams try to focus on overall relationships rather than on just landing the next big commercial loan. There are many instances when this does not happen though and when piecemeal strategies take over through familiarity or in looking for a quick fix.
One area that has been neglected as it has been static for such a long time in most banks, is the deposit portfolio. Most bank customers are sitting in core deposits because there is not enough interest paid on any deposit product to merit losing flexibility. This worked fine as long as banks had high levels of liquidity, but there is a bit more loan demand out there and many banks are beginning to look for deposits once again.
Because almost everyone is out of practice at building deposits, it is really important for banks right now to build a strategy around growing deposits intelligently and with the long term future in mind. It requires a different mindset than just running a rate special. Mostly, having a deposit rate special is a lousy idea, so we should probably just stop there.
The idea of a deposit special is deeply embedded in banker culture though. Sometimes a bank feels it needs to run one as loan demand is accelerating and the bank doesn't want to dip into wholesale. The key is to understand that the only purpose of a deposit special should be to have a net increase in the quantity of deposits at the bank. This has to be established up front in the bank at every level from senior management to sales staff. The objective of the special is to bring new funds into the bank and to do so primarily by bringing in new customers. The objective is not to pay higher deposit rates to existing customers unless they bring net new deposits into the bank. With any other focus, the bank will primarily end up paying more for its existing customers and not really see any net increase in deposits.
A better approach for growing deposits is to look at relationships within the bank and work to develop new deposit business from those established customers. The bank already has a track record of service and it serves to deepen the relationship with those customers. It's important to remember that the marginal cost of funds associated with a rate special is likely to be much higher than just the increase in cost of funds on those particular deposits.
Salesforce wants to remain the nimble industry leader but also to take advantage of the long term relationship building strategy of the tech behemoths. Community banks would be well served to seek to do the same, building quality customer relationships by offering flexibility and personalized service.