From new technologies to interest rate hikes, the financial industry as a whole is changing at a rapid pace.
In this episode, Maria Abbe sits down with Neil Stanley, CEO & Co-Founder of The CorePoint, to chat about the changes coming to the financial industry regarding deposits and interest rate hikes. Neil shares ways banks can brace themselves for the changes, while remaining competitive. They also discuss the implications for customers and how it'll affect current CD holders.
Neil Stanley's LinkedIn
Spotlight on Specials - Independent Banker
Fed Raises Key Rate For Fourth Time Since 2008 Crisis - Omaha World-Herald
JPMorgan Tells Banks to Partner Up as U.S. Deposit Drain Looms - Bloomberg
The Savings Account That Saves Accounts - Zafin
Maria Abbe: Hi, and welcome to The Purposeful Banker, the podcast brought to you by PrecisionLender, where we discuss the big topics on the minds of today's best bankers. I'm your host today, Maria Abbe, content manager here at PrecisionLender, and I'm joined today by Neil Stanley. Neil is the CEO and co-founder of The CorePoint and president of community banking at TS Banking Group, which has banking operations in Iowa, North Dakota, and Illinois. Neil has over 25 years of banking experience and formerly served as the CEO of Northwest Bank in Spencer, Iowa. Prior to Northwest Bank, he spent 22 years as an executive at First National of Nebraska, and then, at the end of 2009, he founded The CorePoint, which helps banks attract properly priced longer term core retail deposits.
We work quite closely here at PrecisionLender with Neil, and we are very excited to have him as a guest. Today we'll be chatting about the changes coming to the financial industry regarding deposits and interest rate hikes. Neil will share some ways that banks can brace themselves for those changes while remaining competitive. We'll also discuss the implications for customers and how it'll effect current CV holders.
So, with all of that being said, welcome to the show, Neil.
Neil Stanley: Well thanks, Maria. I appreciate the opportunity to talk with you today.
Maria Abbe: Absolutely. We're happy to have you on. So, we will dive right in here, and for our listeners, do you mind giving us a little background on who you are and what you do?
Neil Stanley: Oh sure, I'd be glad to do that. So, as you pointed out, I've been in banking all of my professional career. In the early part of my career, I worked with the Lauritzen family at Lauritzen Corporation, which is the holding company for First National Bank of Omaha. They were very progressive bankers, Maria. They would create and leverage many durable competitive advantages, and I saw banking from a very dynamic place. They were early adopters of credit card lending, for example. And, by the way, another example of their sound decision making, they're also PrecisionLender client -- really happy about that.
So, I started my career in the ad crisis of the 80s, and that propelled a lot of dynamics in our organization and for me and my career. I found myself promoted to an officer of the holding company that I worked at at a very young age, and that gave me lots of opportunities. I was able to run banks, and that included the adoption of technology and coordinating the leaders of the community banks I worked with. And managing those bank balance sheets, John and Bruce would tell us that we had an unusual opportunity, and we had an unusual amount of resources to envision a future, and more importantly shape the future because of the platform that we had there as what grew to be the largest privately held banking company in the US.
So, I consider myself to be a student of community banking, and as I progressed through the years I had a front row seat to experts in many segments of bank management. I tried to be very intentional about learning from the expertise I encountered. However, Maria, it seemed that there was a distinct void in one segment of banking -- time deposits. You know, CDs are just CDs. So, I decided to probe the opportunities that seemed to be in this very static environments of this non-changing environment. I gained a lot greater insight for this when I started managing the investment portfolio of First National.
I used tools like Bloomberg to calculate lots of detailed analysis and forward implied yields, for example. I was able to manage the investment portfolio there by using those tools, and it occurred to me that our industry was woefully short, woefully inadequate in helping the depositors as they managed their life savings, and they didn't have the tools I had. So it caused me to wonder, could we build the kinds of tools that we use to manage the investment portfolio of our bank and put that in the hands of retail bankers? Today, Maria, most bankers are unaware that their competitors have upgraded their processes for selling CDs.
I had the good fortune of being able to test and learn lots of things as I worked for that holding company over the years because we have multiple charters, and we could go out and do different things with different small banks and see how they worked and then apply them to the larger banks. So, today, I'm really happy to be on this call today where we can share with you how we've learned to create a 10 to 40 base impact on 10 to 40% of the balance sheets of most community banks. It's an exciting position to be in today.
Maria Abbe: That's great, and we're excited to have you on and have you share all of that knowledge. So, jumping in here, can you explain to us how the Federal Reserve has propped up the economy after the financial crisis and why it's now an impending issue?
Neil Stanley: Well, in amidst of the crisis, the Fed transitioned from their historical tools of regulating the economic activity. I studied for a PhD in economics, I'm not a practicing economist, but basically what we studied years ago was that monetary policy ranged from restrictive to accommodative. We could slow the economy down with high interest rates or we could be accommodative with rates that were not restrictive. But since the Great Recession, the Fed immersed themselves in this pursuit of stimulative economic policy by forcing interest rates to the lowest levels in modern financial history for an extended period of time. We moved beyond the boundaries of historic reference points. Any evidence from the past in our economy is no longer relevant, so we're in uncharted territories going into the Great Recession and coming out of it. So, I'm not going to weigh in on whether or not that was a good decision, but what we do know is that it really dried up a lot of the opportunities that people living on fixed income had as interest rates were so low for so long.
Recently, what I did for banks, is that they provided this flood of deposits. It just flooded the banking industry with cheap funds. That is the policy that people are now looking at. As we come out of that, some, like the folks at JPMorgan Chase, have realized that this flood of cheap funds is going to dry up, and bankers will once again have to compete for deposits after a decade in which deposit surpluses became the norm for our industry.
Maria Abbe: Wow. So, do you see that happening anytime soon, or when do you see that happening in the foreseeable future?
Neil Stanley: That's a great question. You know, people will look at me and say, "Well, you're biased if you've got a CD system. You Kind of like interest to be higher." I understand the logic of that, Maria, but essentially I'm looking at the industry, the banking industry, and saying, "Really it doesn't matter what rates do because we are intermediaries. We're buying funds, and we're selling funds." Certainly interest rates are poised to move from this very low rate, this historical lows in modern financial history, and move towards normality. You can see the Fed moving towards normality. So, it feels like rising rates, but we can't say interest rates are high when we're at this level.
Maria Abbe: Right.
Neil Stanley: They could up a lot before people would actually start to think interests rates are high, we need to change our behavior.
Maria Abbe: Gotcha. So, I read in a recent article by the Omaha World-Herald that you said, "A rise in interest rates is an opportunity for both depositors and bankers." How is that so?
Neil Stanley: That's a great opportunity to engage here because bankers are going to look at interest rates and they're gonna see it from the bank's perspective. And what we really do in our industry, Maria, is we help people better manage their money, and in the process we make money. So, the opportunity for depositors, at this point, is that as interest rates rise, they get new opportunities to improve their financial condition because now they have some energy that they can work with with a higher interest rate. Some bankers will try to slow that down and say, " Oh depositors, we have nothing more for you than we had years ago," but the reality is some financial institutions are seizing the opportunity to show value that they wouldn't otherwise have been exposed to without rising rates.
Maria Abbe: Interesting. Before, you briefly mentioned that bankers, they'll have to soon compete for deposits. Now, why will it be more difficult for mid-sized banks to compete for those deposits, and how can they compete against the larger banks?
Neil Stanley: Well, when we think about the banking industry, we now have about 5,600 banks in the country, and the dominance of the large banks is certainly evident. Our clients at the CorePoint have proven that they can compete if they take that challenge seriously and equip and inform and empower their frontline. Certainly, big banks have an advantage. That advantage comes from the fact that most people assume big banks are going to have more functions and features, and if price is the same, why wouldn't I bank at a big bank? That's the mentality that a lot of people will have.
So, the community banks have to be thinking where do we gain our advantage? And that advantage is really gained in the ability to have a dialogue, to have a relationship. If you're just a number, and you never know any of the people you work with at the big bank, then you're gonna be looking at it as a commodity. And so, the people who I see being successful today and into the future are the ones who can legitimately claim, "We have flexible choices here. We have competitive prices, and we have the best tools so that I can help you." Now, notice that last part. We want the frontline of the bank to really be personal in saying, "I'm here to help you," because if a client, a depositor, or a borrower thinks that the bank is adversarial or indifferent, they're not going to be banking with small banks. They can get that from the big bank.
Maria Abbe: Right.
Neil Stanley: What they want to do with community banks is that they need to know that there's an advocate for them -- somebody helping them manage their money, Maria.
Maria Abbe: Yeah, we talk about that a lot here. At PrecisionLender, it really begins with the customer borrower interaction and then works backward from there. So, what are some traditional strategies that bankers have used to grow deposits?
Neil Stanley: Of course, running rate promotion is the thing that every banker thinks they have in their hip pocket, right? I can just pull that out when I need it, and if I need to grow funding, I'll just have a rate focused promotion. Of course, the problem is that rate induced growth often poisons the net interest margin of the bank using that as a promotion. So, we like strategies which allow bankers to gain advantage without over emphasizing interest rate. You can't compensate, very often, for an inferior rate offering, but a modest interest rate can be used alongside other good strategies for pricing and sales.
I wrote a white paper for the Financial Managers Society published a few years ago, and in that white paper we talked about product design, pricing, selling practices, and management practices. When you put that package together, you're gonna get better results. Give you some examples, Maria.
Most banks are familiar with trade up CDs. Those should be an important part of the opportunities that are offered. There should be a slate of offerings, including trade up CDs. We don't want to structure our CDs so that they automatically renew as standard terms, even if they were promotional at the beginning. We want to emphasize liquidity because every CD customer thinks, "Oh, I'm committed. I'm locked in. I can't get to my money." Well, the reality is a partial withdrawal opportunity makes all the sense in the world, but most CD clients don't understand that their bank is willing to allow partial withdrawals. It's so simple, so easy, but most banks never ... Maybe they offer it, but no one knows about it, so it's neglected. CD loans are another way that you can do that.
And then there are promotional opportunities like restricted promotions. So, instead of promoting to broadcast, we can promote to a segment of our clients. Or we can do a time focused promotion like Election Day -- it's a wonderful day to run a promotion. It doesn't come around very often, of course, but when it does, which you know is senior citizens have rides, they're going to vote. It's a great day to have an open house and a CD promotion. It's simply stuff, right Maria?
Maria Abbe: Yeah.
Neil Stanley: So, there are things like this, you know, things like using the FDIC electronic deposit insurance estimator, being proficient with that, and timing and defining promotions based upon maturing schedules. Every banker should be looking at the schedule of CDs that they have in the maturities. I find that most bankers want to level off the maturity schedule. Let's just have a little bit mature all the time. Well, that's a dollar a cost averaging, and I get that, but it loses the opportunity to promote aggressively because what you really want to do is you want to find the natural valleys in your maturing schedule, and that's when you run the promotion. When you don't have much maturing, you don't have the risk of repricing your own money. That's when you're gonna want to bring in new money from the outside. These are not complex ideas, and you'll find that there are many bankers throughout the country who will know about a few of these. We bring them all together as a package.
Maria Abbe: That's great, thank you so much for sharing that. And we will include that white paper on the show notes page, so that everyone can take a look at that. Which brings me to my next point, you wrote a piece for Independent Banker, back in 2016, in which you talked through ways to price and sell CD rates. So, what are some of those ways and how can using these methods help make a bank more profitable?
Neil Stanley: Well, Maria, we notice that banks were starting to run promotional specials -- high yield offerings. Our survey data that we were gathering was showing us that these financial institutions were saying, "Rate focused promotion. Come open up accounts with us," and so we spotlighted five things that they could do that weren't rate focused. The first was: let's have a sales process. You know, there are so many things that we'd buy in the economy today as consumers. If you go to buy a new car, you don't look at the rate sheets or the price schedule on the dealer's website and say, "Yeah, I'll have one of those," and that's it. You just click the order and you buy it. You're gonna have a conversation with the salesperson, and they're gonna point out sticker price, right? Manufactured suggested retail price. They don't think you're gonna buy it at that, and you don't plan to buy at that, but it's a price reference. It starts the conversation.
Unfortunately, most bankers end the conversation with their sticker price. Here's our standard rate, take it or leave it. Sometimes they give the frontline discretion - frontline bankers given discretion about 25 to 50 basis points. The problem is, they don't know when and how to use that. They don't know what to do with it. So, you gotta develop a process. Just like I guarantee the car salesman, they have a process about working through the value proposition for the buyer and the car dealership. We've developed a process of working through the value proposition with depositor and bank that bring them together because some people are more than happy to buy at sticker price. Those are usually your renewal rates, but some people need love and attention that goes along with having a more focused offering for them.
So, that's the first thing. You've gotta have a structured guided sales conversation. Secondly, you need to display your offer in dollars. This idea that you can have a rate sheet out there just commoditizes what you're offering at the bank. So, if I see six months, here's the APY at 12 months, here's the APY 60 months, here's the APY ... Then I'm, as a consumer, thinking, "Well, I think this is a rate game, so I want to higher rate. Whatever you offer me -- I want more."
What we found over doing this for decades is when we dollarize it, when we show them if they invest so many dollars in a deposit here at our bank, they will end up at maturity. At the end of that contract, they'll end up with so many dollars. That helps us when we win, but it also actually helps us when we have the lower yield. When we have a winning yield, a higher yield, we dollarize that difference, and when we have a lower yield, it's certainly going to be more dollars than the competition, but when we identify the monthly difference, the amazing thing is that client is talking to us and we're showing them how many dollars it is.
We can then go to the third point of this, and we can show them clearly how they stack up against the competition. Just like Progressive Insurance does, you know, if we start showing our competitor offers alongside ours, they trust us. They know that we're interested in what they're interested in. How do we stack up? Where's the value? And once that trust builds, then you're in a relationship where they'll give up a few dollars to bank with you because they trust you, and they want to keep their life simple.
So, that's so much fun, Maria, to help bankers at the frontline, who often times don't get any training, to understand that they can show the client that they're an expert. Their bank gives them the tools and empowers them to be an expert with their client.
The next thing we do -- item number four -- is that we can customize maturities. I find this remarkable in today's technological age that we present a schedule of CD offers 6 months, 12 months, 18 months, all the way out to 16 months, typically, and we don't just ask the client, "So, when do you think you might spend some of this money you're looking to deposit with us?" Because I guarantee you our core systems are capable of having a maturity date of any date in the future. That contract can mature anytime you want it to as a depositor of highly proficient financial institution. So, the idea that they have to fit the box of the bank is obsolete. So, we customize those maturities, and with that customization comes along an efficient, very advantageous price. It makes a world of difference when you're working with that client that you have some given price, you have some extra value, but it comes alongside flexibility.
The fifth thing we do is when we're negotiating with somebody working through that guided sales conversation regarding a maturing CD, sometimes we end up with a match it or lose it proposition from the depositor, and either of those choices is bad. When they're saying, "Match our competition or lose this funds -- get me a cashier's check." You need a better win-win option, and that option is limited edition savings. It sounds like a proprietary product, but it's not. We wrote the recipe, and we published it in Zafin a couple years ago. Zafin is a organization that publishes a journal, and you can include that in this podcast recording and put it out there. But, basically we put the recipe for using this limited edition savings product, and, of course, when people work with our organization, we engage them and help them and train them so that their people are ready, willing, and able to deliver that product.
So, those are the five things that we put in that Independent Banker article.
Maria Abbe: That's wonderful. Thank you so much. So, Neil, here's the big question for you: What is new today?
Neil Stanley: Well, that is the big question, and we're always wanting to be timely with new and powerful things in this industry that tends to stay in what we've done in the past. So, today it is exciting. We have more tools for attracting deposit rates in a rising rate environment than we've ever had before.
You mentioned the article that was published in the Omaha World-Herald, that was about refinancing CDs. When bankers hear refinancing CDs, they typically hear, "Whoa. That could be dangerous because we've depended on these CDs as low rate funding into the future," but it's quite simple and intuitive to the public. They know there are early withdrawal penalties, but they're often quite pleasantly surprised to find that most banks allow their early withdrawal penalties to become relatively immaterial as interest rates fell lower and lower.
So, so many month so of interest used to be quite punitive in higher interest rates, but the interest rates dropped, and therefore if you're charging so many months of interest, the penalty dropped. So, today, financial institutions who adopt this strategy of promoting: Refinance your CD. Give us a call, and we'll help you analyze your current contract with your current financial institution. And if you move that over to us today, we'll show you what the advantage might be on the exact same day as your current maturing CD. Because that's really what the question is. You;'re already committed to a contract, you're gonna get so much money -- it's a fixed rate contract, you know how much money you'll get. Would you like to know how much you could get if you moved your money over to us today?
The problem with being in the CD business is that you typically only get an at-bat when there are maturing accounts. What we're doing right now, to mix my metaphors, is we're going from one at-bat to a jump ball for all the CDs right now because every CD could be considered for moving if you look at that penalty as not necessarily a barrier to early withdrawal, but an opportunity that run the numbers. If we run the numbers, we'll know are we better off or not to make that switch. So, in a rising rate environment, our clients are enjoying the conversations of helping people understand if there's a windfall opportunity for them. So, that's powerful and it's a lot fun, Maria.
Maria Abbe: Great. Neil, thank you so much. Before we wrap up here, are there any final thoughts or anything that we missed that you would like to still cover?
Neil Stanley: Well, I talked about the process of refinancing CDs in a rising rate environment, let me also cover one new product that I think the audience might be interested in. Now, it's a little more aggressive and not everybody does it, but we have built a better savings system. I'll kind of interact with you here, Maria.
If you're a saver, what are you thinking about, and this isn't a trick question, it's very simple, so don't try to think too hard here because think about a senior citizen, right? They're thinking, "I've got some money. I don't need it today. I need it in the future," so what are they thinking about when they come to the financial institution and look at a savings program?
Maria Abbe: A high interest rate?
Neil Stanley: Yep. That's perfect. And if they're thinking, if they hear, "well, if you want our highest interest rate, you need to put it in a 60 month CD." Now what are they thinking?
Maria Abbe: That's too long.
Neil Stanley: Too long -- I'm over committed. I don't want to tie up my money that long -- that's really the trade off that most people think they must have. So, years ago, we started thinking about this, and do we really need to have two very unattractive choices, either high yield or short commitment, and you have to compromise one or the other? Why can't we give them both? You know, with technology being what it is today, we should be able to figure how we could give long term yields without a long term commitment. Now, it sounds ridiculous, I know, but hang on. Bear with me. We designed the second generation of CDs. It incorporates the benefits of CD yields and the liquidity of savings. The problem with CDs is the penalties are typically deigned to be punitive and they're arbitrary. In other words, Oh, I don't know -- 6 months, penalty. 12 months, penalty -- nothing to do with the impact on the bank. Like, the bank's not damaged 12 months of interest because you withdraw early, so why did we charge them this 12 month early withdrawal penalty or whatever it is?
Why don't we actually look at the damage or the benefit to the bank? So, Maria, let's think about the benefit to the bank. Most bankers are like, "What do you mean? How could it be a beneficial if they withdraw from the money?" Let's think trough this. Let's say that a couple years ago you opened up a 60 month CD, probably wouldn't even have been two years ago. Let's just say sometime you opened a 60 month CD. It's a 4% CD, and interest rates drop to 2%. What does the banker want to have happen? I'm paying you as depositor 4%, and now I could replace that money with 2% money. What does the banker really want to have happen there?
We don't want to pay the 4%. We could replace it with 2% money, so we've told the public, "Hey, you've got a 4% CD. We're gonna charge you a year's worth of penalty if you withdraw it early." The opposite of what we should be saying. We should be saying, "You know, we really could fund that more cheaply. We're happy honoring our contract with you, but if you would like to redeem that, we'll pay you principal, plus interest, plus a bonus because we are benefited if you withdraw it early." How about that for a client sensitive approach?
Maria Abbe: Yeah.
Neil Stanley: What does that do to the bank? Do we give up anything by offering to redeem it at market value? We're not losing anything. We're gaining new clients because we're offering a better product, and we're not losing anything. Most bankers think this a zero sum game. The only thing we can gain is what we get our clients to give up. The only thing the clients can gain is what the bank gives up. Here, what we've done is we restructured the product so it's a win-win. It's a high yield because there's a commitment, and the early withdrawal is based only on the penalty of the damages that are created to the bank.
That's a new product. It's not offered very widely. You can see it if you go out to tsbank.com and look at the offering there at our bank. But, it's something that you're gonna see over your lifetime. You're gonna see a better designed savings product be initiated by financial institutions. It's a fun process, Maria, we enjoy being part of it.
Maria Abbe: That's great. Thank you so much. Now, where can our listeners find you?
Neil Stanley: Yes. Our website is thecorepoint.com and you can reach me at email@example.com and my phone number's 402-699-9509.
Maria Abbe: Great, and we will also include all of that information in the show notes as well. Neil, thank you so much for joining us today. This was impactful, insightful, and I'm sure all of our listeners will truly enjoy it. Thank you very much.
Neil Stanley: Thank you, Maria. I love my relationship with you and everybody at PrecisionLender.
Maria Abbe: Great. Thank you.
And that will do it for us today. Thank you everybody for listening. You can always find more information about today's episode on our resource page at precisionlender.com and if you like what you've been hearing, please make sure to subscribe to the feed in iTunes, SoundCloud, Google Play, or Stitcher. And we would love to get ratings and feedback on any of those platforms.
Thanks for listening. Until next time, this has been Maria Abbe with guest Neil Stanley, and you've been listening to The Purposeful Banker.
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