A Rising Rate Environment Isn’t All Bad!

Just four months after the Federal Reserve raised the target interest rate to above the rate of inflation, interest rates were hiked again. With three more rate hikes projected next year and more talk of a bear market mid-2019, the strong economic tailwinds that have made bank growth relatively easy seem to be subsiding.  As we’ve seen before, in a rising rate environment, the volume of deals declines as demand declines.

Increased Competition

As if today’s banking and financial services industry isn’t competitive enough, things are going to get more competitive. Some of your competitors will return to offering rates and terms that just don’t make any sense.  For those banks that refuse to “follow the market,” it’s going to get tougher and tougher to put quality earning assets on the books.

But that may be good for the long haul––particularly if your institution is open to thinking outside of the box.

Production pressure

Lenders and RMs will push for more rate concessions in order to “remain competitive.”  It’s been my experience that bankers forget that the entire economic world doesn’t run on “who is the cheapest.”  The reality is that we all buy products and services that aren’t the cheapest for a reason!  The reason we pay more for certain products and services is because we get something of value that we feel is worth paying a premium.

I could easily save $400 to $600 dollars a year on my car insurance, but I don’t.  The reason I don’t is because my insurance company, in the rare instance my kids or I needed to make a claim, the manner in which my insurance company handled things from a speed and ease standpoint was worth paying a premium.  The ease and speed (and the time it saved me) was worth more than the $400 I could save if I opted for the cheaper option.

Aiming for Success

Two steps bankers can take in order to remain successful in a rising rate environment include:

1. Place greater emphasis on value provided over rate. Bankers forget that customers pay for value. Community and regional banks deliver an incredible amount of tangible and intangible value to their customers. That point needs to be brought to the forefront of relationship development efforts.  It’s imperative that customers understand all the forms of value they will receive as a result of doing business with your bank. It takes very little true sales and negotiation skill to close business by lowering rates and fees.  It takes a lot more skill and strategy to close business at premium pricing.  Remember, net interest margin is a measure of value realized. If your customers realize how much value they’re actually receiving from your bank, the majority will pay for it.  If they don’t realize it, they won’t.  It’s no more complicated than that.
2. Cultivate more relationships.   In a rising rate environment, bankers need to be talking to their customers and cultivating more relationships.  In fishing terms, we need to cast a wider net.  For those bankers who are overly reliant on third-party referrals (broker and CPA referrals) for deal flow, it’s imperative that they utilize more contemporary strategies for sourcing business directly with quality commercial prospects.  Direct sourcing of commercial business is a lost art in banking which is why the majority of bankers consider “marketing” to be the solicitation of deals from CPA and brokers.  As deal flow declines, every banker in your market is going to push harder on their CPA and broker contacts.  These opportunities are often “bidding wars” where four to six other banks are competing for the same business.  Talk about being a commodity?

Time for a Change 

If a rising tide floats all boats, a rising interest rate environment will quickly expose the true marketing, business development, and sales effectiveness of your lenders and RMs.  In this type of environment, doing what you’ve always done for the past two to three decades isn’t going to sustain your bank’s success.

It’s time to be innovative in your business development efforts––and that may mean you need to tolerate some level of vulnerability as lenders and RMs learn new strategies and approaches to remain productive. Peter Sheahan, CEO of ChangeLabs™️ says, “If you want a culture of creativity and innovation, where sensible risks are embraced on both a market and individual level, start by developing the ability of managers to cultivate an openness to vulnerability in their teams.” Learning and earning have almost always been closely linked.  Remember, innovation can never be birthed from a closed or satisfied mind!

Watch for the next blog where we dive deeper into the relationship between innovation, success, and vulnerability.

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PS For a complimentary consultation on how I might be able to help your organization become more agile and innovative in 2019, reach out and set up a time to speak to me.

Here’s the link to my calendar or call me at (760) 720-9270 to discuss how we can bring change to your bank.