The backlash against the largest financial institutions creates an outstanding opportunity for community banks to attract commercial deposits, increase fee income and lower cost of funds with commercial cash management products. In fact, 54% of surveyed CEOs have experienced an increase in fee income from commercial depository services in the last six months and 87% believe they can increase commercial fee income.
Many community banks are unaware that they already offer the cash management products to launch or expand their commercial cash management business because their current products are offered as a knee-jerk reaction to customer demand. For example, a bank that has half a dozen customers on sweep accounts, a few dozen customers using remote deposit capture, and a hundred or more customers using online cash management may say that it doesn't have commercial products even though effective bundling of the products would result in a fairly robust commercial cash management line-up.
Far too often in community banks, commercial cash management products are handled as one-offs. To be successful, a disciplined product management approach is needed. By extending retail product management disciplines already in place to commercial cash management products, community financial institutions can leverage their existing investment in cash management products; improve the pricing, delivery, infrastructure and sales/marketing of these products; and increase deposits and fee income by luring small and mid-sized businesses to the bank.
About the Survey
In April, 2009, Abound Resources surveyed CEOs at community banks throughout the U.S. about the cash management products they currently offer and whether they believe there is untapped potential in commercial cash management. Fifty-five CEOs from banks ranging in size from $100 million to $3 billion in assets responded to the survey.
Respondents reflected the varied deposit base that is typical in community banks with almost half (47%) reporting that between 21% and 40% of their deposit base consists of commercial deposits. The majority of respondents' commercial deposit base comes from businesses with less than $5 million in annual revenues.
Cash Management Disconnect
In our Business Banking and Cash Management consulting practice, we see four factors driving the growing interest in cash management programs.
Flight to safety - many commercial customers are giving community banks a new look, but expect products comparable to what they had at their previous big bank Cost of funds - in a tight margin environment, cost of funds becomes more important and commercial deposits and public funds tend to be cheaper than consumer deposits.
Portfolio diversification - many community banks are seeking to lessen their dependence on commercial real estate by increasing commercial and industrial lending. Cash management products are central to C & I lending.
Fee income diversification - many community banks have seen sharp declines in overdraft fees and are looking for fee income opportunities from commercial customers.
Our survey confirms that Community banks place a high priority on fee income earned from their current commercial cash management offerings, with 61% of respondents saying fee income is important or very important. Respondents are also bullish on the future importance of cash management: 80% say it will be important or very important within 2 years. However, only slightly more than half (53%) of community bank have succeeded in increasing fee income from commercial cash management products within the last six months. When asked if they believe that they could increase commercial fee income by offering additional cash management services and/or more aggressively promoting existing offerings, 86% of respondents replied "yes." Clearly there is a disconnect between respondents' belief that they can earn more fee income and their ability to actually do so. Why are community banks having a difficult time generating revenue from cash management?
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