The coronavirus pandemic has altered our daily lives, forced change across many industries and caused community banks and credit unions to respond, on-the-fly, to unprecedented and persistent changes in their landscape. And, with the brightest highlighter in the box, it has demanded the need for these institutions to re-focus on their long-term strategic plans.
In this final part of our series on the impact of COVID-19 on community banks and credit unions, let’s dive into what community banking leadership should consider as they focus on a future with and beyond COVID-19.
Paving a Path Forward in a (Post) Covid World
For community banks and credit unions, the path forward must be the one that allows them to focus on what they do best – connecting with their communities, building relationships and using technology to strengthen them. Smaller institutions should ask themselves the following:
- Growth. Where will my future growth come from?
- Deepening relationships. How can I leverage my most valuable asset, customer relationships, to drive revenue? What can I do to encourage my customers to consolidate their wallets with me?
- Regulatory compliance. Can I meet current and future regulatory obligations within my current framework?
- Agility. How can I respond quickly to what my customers and communitites are looking for?
- Differentiation. How do I stand out from the crowd?
Pricing Innovation as a Strategic Lever
Relationship pricing, or making a direct linkage between the price a customer pays and the value of his or relationship to the bank, is an especially viable area for community banks to consider. According to McKinsey:
We are a long way from understanding the full financial impact of the coronavirus pandemic – and some banks will fare better than others. But overall, we anticipate that consumer-banking economics will likely be depressed as a result of net-interest-margin compression and decreased fee income. In the event of a flight to quality deposits, traditional banks can deploy relationship rewards and relationship pricing to encourage customers who have shifted to non-FDIC vehicles to come back. They can emphasize their broader suites of products and the value of relationships to underscore their value proposition to these customers.
Leveraging existing data sources, including customer data, account data, product information and transaction activity, community banks and credit unions can calculate preferred pricing based on predefined criteria and rules.
Relationship pricing is a powerful tool in a community banker’s toolbox, enabling bankers to:
- Drive deposits to satisfy regulatory requirements;
- Grow revenue by turning those deposits into loans; and
- Enhance profitability and reduce dependence on interest income with new fee-based revenue sources, including checking accounts that deliver added value to customers in exchange for a fee.
Relationship pricing strategies are already in place at many smaller institutions across the United States. With the right relationship pricing toolbox, bankers can::
- Reward balances in excess of minimums. Offer bonus interest or a rate boost if a customer maintains balances or combined balances in excess of a set minimum.
- Incentivize beneficial behaviors. Offer cash back or bonus interest if a customer exhibits a desired behaviour, including meeting spending and savings thresholds, achieving tenure goals, or making online bill payments or direct deposits.
- Promote products. Offer discounted or free add-on services when a customer signs up for multiple products.
It’s vital to the health and success of smaller institutions who may not have relationship pricing programs in place to get started. In a world of powerful big bank brands and emerging digital competitors, it’s time for smaller institutions to deliver on their relationship promises. But how?
The relationship pricing concept starts with a checking account. Within the core checking account, the bank can craft conditions and qualifications that reward desired outcomes.
Combined balances. This is usually the best place to start because it is easy for customers to understand pricing in relation to a single value. For example, if a customer maintains a combined balance across checking and savings accounts of $2,000, the bank’s $5 monthly service charge might be waived. If the same customer maintains a combined balance across checking and savings of $5,000 or more, not only is the fee waived, but the customer earns extra interest on savings balances. You can extend the combined balance model to include other accounts and attributes such as a period-end investment balances and/or a period-end card spend.
Transaction activity. Building on the combined balance model, bankers can build in other banking behaviors, including:
- Number or dollar value of debit card transactions
- Number of self-service transactions, such as online bill payments
- Usage of direct deposit—either frequency or dollar value
- Usage of lower-cost channels, such as e-statements or remote deposit capture
With each of these transaction types, banks can establish policies that link a preferred price with a minimum required number of transactions (three to four is considered a good starting point) or a minimum dollar value across all transactions. For customers using higher-cost channels, such as in-branch and phone, these policies are a way to encourage the use of lower-cost digital channels such as ATMs, online and mobile banking.
Tiered pricing. Customers are generally comfortable with the notion of depositing a higher amount with the bank for a longer period of time to receive a better rate. As such, the concept of tiered pricing is best suited for savings accounts and term deposits (CDs). At the end of a period (usually monthly), a customer receives a bonus interest payment based on his or her deposit position within the bank’s pricing tiers.
Want to learn more about how Zafin can help your community bank focus on a future with and beyond COVID-19? Check out Zafin’s Community Advantage for how we help your community bank with products, packages and offers your customers and members will love.