Small Business: Big Opportunity

Transcription:

Penny Crosman (00:10):

All right. Welcome everybody to, is this on? Yeah. Welcome everybody to day three. This might be the best day. We have some great panels. We're going to talk with Citizens and Curinos right now. And then we're going to talk with PayPal about open banking, which I call data sharing. And then we're going to talk with TD's regional Florida President about why small businesses apply for credit and get it and then don't use it, which I think is an interesting question. So right now we are here with Manny Tocco, who is, lemme get your title, right? Head of Business Banking Strategy and Credit Ops at Citizens Bank. And we have Adam Stockton, Managing Director at Curinos, which is a consulting data insights company. And Adam also has a few data slides because he's done some research on the small business banking opportunity. So everybody here sees opportunity and small business or you wouldn't be here, but how do you actually quantify that, especially for you, Adam? And then how do you find the resources to invest in it? Somebody showed a slide with three pigs yesterday or Monday and small business was the little pig in the middle squeezed by commercial and consumer banking, but then also market Capital One was talking about the challenges of not only getting investment but figuring out where to invest most in your small business area. But let's start with you Adam. What are some of the ways that you quantify the opportunity in small business.

Adam Stockton (01:56):

Absolutely. Thanks Penny. And I loved, by the way, Brian's other slide from Comerica on Monday with the quantification of small business. In terms of the other parts of the relationship that small businesses bring in, the value of the personal accounts, the value of the wealth relationships, the businesses that use personal accounts, given the focus on deposits, we've taken a deposit angle here. Small business deposits are by far the lowest cost deposits at almost any bank. That's partially due to the high mix of DDA and operating relationships. But it's led as I'm sure many of you have experienced CFOs and treasurers to say, this is great, we want more of it. Go out and get it. Why don't we have twice as many small business deposits on the books as we have today? Unfortunately, it's not that easy. And bringing in particularly with rate, which is the first lever that many go to, it gets a lot more expensive than this.

(03:05):

Now over half of money market deposits are coming in at over 400 basis points. All CDs are, and CDs now make up 10 or 15% of new to bank churn, which is really ahistorical. I mean, we didn't even see that going all the way back to 2008. So how do you get the deposits, the relationships is really going to be what we're focusing on. One of the other things I love to point out is the lending relationships drive more deposits and lower cost deposits. And so it's been one of the real challenges is in an environment where credit is tightening up, credit is one of the ways to get more deposits. And Manny, I'd love your thoughts on how you kind of square that circle.

Manny Tocco (03:55):

If you can execute and do it right. I mean that's the big if getting our small business bankers, not just positioning a single product that being credit, but really pulling that thread horizontally and driving that primacy conversation. And as you go up the market in terms of credit exposure, it starts to become more and more of a prerequisite, right? To unlock that credit opportunity you're going to have to bank with us and have that primary operating account relationship. But it's a little bit of a mind shift, I think Adam, right? Getting our bankers more inclined to deepen from a deposit perspective, but additionally doubling down on the fee income conversation. It's interesting in the slide here, 2.3 x times on the deposit side with respect to lending. Additionally, I think you kind of see that correlation as well when there's treasury management services that are tied in with those operating accounts, making them that much more sticky.

(04:51):

So the other thing I would also comment too is Adam chose to lean in here with respect to deposits around the big opportunity for small business. I would also say that banks are increasingly looking at that. We call it a Gemini relationship. That's the relationship where we have consumer deposits in concert with the business deposits. And it's really pulling that thread completely horizontally. How are we unlocking shareholder value and deepening the relationship holistically outside of the confines of just business. So it's home equity, it's wealth, massive wealth play, and just really trying to diversify your revenue streams outside of having to leverage the balance sheet. How else are we driving fee income and making that relationship that much more sticky?

Penny Crosman (05:40):

Just a quick follow up, people were talking about this the last couple of days after the banking crisis. I think a lot of small businesses realized, whoa, I really can't keep all my deposits in one place, especially if it's more than $250,000. So they're diversifying more and putting money in different places. Do you have any sort of strategy around that and maybe trying to keep more of that in-house.

Manny Tocco (06:08):

The insights and the analytics are mission critical to defending the franchise in this environment given your bankers the tools that they need to be proactive in having those conversations so that it's not too late where the deposits have already traded and now you have off US deposits at a larger money center in terms of flight to quality. And I would say that that's indicative of not just deposits, but it's also around transactional analytics to be able to add value in a distinctive way with our bankers so that they're having those conversations and not just pushing product.

Adam Stockton (06:43):

And there were two conversations there too. One was around deposits and looking for yield. The other was around payments treasury management. It's for large corporates, there already was payments redundancy, but in small businesses, that was one of the big trends we saw in April was particularly at the lower end where there isn't a full-time financial professional, there wasn't the payments redundancy. And that was one of the big pushes was to get a secondary payroll secondary, ACH secondary TM services. How did you think about that as an opportunity to both kind of defend and grow?

Manny Tocco (07:22):

Yeah, I mean for us and Mark Valentino, who's our President of business banking, he spoke earlier in the week about this, is that we launched a very comprehensive cashflow tool. And the thing that you have with small businesses that they're not quite online banking where it's more plain vanilla in terms of capabilities, but they might not be ready for all of the robust treasury solutions that they need with various different modules that quite frankly can be expensive. And so the timing of our release with respect to cashflow essentials, which is somewhere in between, was really paramount for those customers as they needed that liquidity, that insights, and to be able to drive payments but in a very cost effective manner.

Penny Crosman (08:09):

Well, that's probably part of your answer to this next question, which is about primacy and engagement. So first of all, what is primacy? Does it mean having all of small businesses accounts or most of them? How do you quantify that?

Manny Tocco (08:24):

Do you want to take that or you want go for it. Yeah, it's that primary relationship. It's that main operating account where all of that liquidity is funneling through the plumbing of your operating account at your institution. But I think moreover, it's if you pull the customer, who are you really thinking about that's really driving consultative value to you outside of just the deposit relationship, how is the institution supporting them with respect to credit delivery and also on the payment side as well. So it's not a surprise that just like citizens or any other regional or money center institution or community player are really all leaning in terms of those capabilities to drive at that primacy. I think the gentleman from Chase had nailed it earlier on in the conference, and we can increasingly see more margin compression and we're going to continue to see that that's not a new phenomenon. It's not going to go away. The only way for us to be able to unlock additional shareholder value is to ensure that those customers, you are fully supporting them from an end-to-end standpoint.

Adam Stockton (09:35):

I really love, one of the things you said is the consultative value to the businesses. I think as bankers and people who focus on data and scorecards, there's kind of, frankly it can be a little bit of a lazy way of thinking about primacy of we have the five metrics that go on the scorecard. We have the TM services, we have the payroll, we have the APAR, but thinking about what does primacy actually mean for your businesses? And there's been a lot of talk around the bank helps me grow, gives me advice, is there to support my business, getting underneath what does that mean and what are you doing to drive that? And then from the bank side, getting into what are the outcomes that we want from primacy and are we measuring those outcomes or are we just measuring the tick boxes? Are we measuring that we have longer duration, stickier deposits? Are we measuring that we're actually capturing the fee income versus giving it all away through waivers or ECR? Are we capturing that we have the full share of both the operating and the reserve deposits? Are we getting the at that on the credit needs? So really going a level deeper, and there's an opportunity with more data now to really do that.

Manny Tocco (11:06):

And we see, even just to supplement that comment, Adam, I mean we see on the business side when we have a consumer relationship that's tied in, and I would also say that's part of primacy, the profitability of that relationship is probably around almost 2X what it is just on the business side alone. So it's just immense value creation when you end up having both.

Penny Crosman (11:29):

So Adam, can you walk us through this data.

Adam Stockton (11:32):

Yeah, absolutely. I mean, the primacy is absolutely critical to actually realizing the value across the relationship. I mean eight times the fee revenue, 10 times the balances. But again, making sure that you're actually getting that value, not just ticking the boxes on, alright, we handed it off to a wealth banker, our job here is done. We made the referral. That's not getting the value. Getting the value is getting that full consumer relationship, getting the full wealth relationship. And where we see a lot of banks falling down is the actual follow through on those handoffs and frankly leaving a good chunk of this value on the table.

Penny Crosman (12:17):

Can you tell us how did you come up with these figures?

Adam Stockton (12:20):

Yeah, so these are actually derived from the data. We have data across the balance sheet at an account level on deposits, at a loan level, on the lending side for small business. And so we actually track the outcomes and these are kind of the best in class values across.

Penny Crosman (12:43):

So these are among your customers, this is what you're.

Adam Stockton (12:46):

That's right.

Penny Crosman (12:47):

Okay. So let's talk about digital banking for small businesses. Are small businesses ready to go fully digital? There's been a little bit of debate about that the last couple of days that I think someone from BMO said that most of their accounts are opened in the branches. And then I spoke with Daniel Ke at Grasshopper Bank who said, that's really an outdated mode. You can get plenty of people online and you can engage with them and keep them online. It's not a problem. So where do you guys, starting with you, Manny, what do you think are small businesses, generally speaking, ready to go digital? And is that dependent on how big they are or are there other factors that go into that?

Manny Tocco (13:39):

I don't think humans are ever going to go away. I think brick and mortar still going to be important to have the presence. It's about really meeting the customer where they are, where do they want to be met, whether that's around self-service functionality, it's operating in a digital ecosystem that's comprehensive that the institution's delivering to the customer. And then it's that human element as well. I mean, undoubtedly, I think all institutions, especially in a tight expense environment, are going to look at brick and mortar, a ton of overhead related to that. Where do you need to end up carving out, be more strategic with respect to that. But I don't think that we fully just digitalization is just going to completely cannibalize brick and mortar. There's certainly that purpose that's there. I do think the more sophisticated, the larger enterprises that have infrastructure a CFO, a controller or a principle of the business, they can probably survive a bit more in a more digital environment rather than having to go into the branches. But I think it's still going to have this omnichannel experience that's just not going to go away in the near term.

Adam Stockton (14:50):

Totally agree. I mean it has to be. Yes. And one of the things that really stuck with me is I think Neem said a couple times yesterday, businesses don't want to think about banking until they do, and suddenly they want you to be there right away and whatever channel they want to interact with you in. And so it's going to be a messy world of multichannel preferences. We are though seeing significant shifts in servicing, which is held on a lot longer in the small business space than consumer. The number of small businesses who want to go into a branch regularly is way higher than consumer. But really finally starting to shift. Covid obviously accelerated that. And so there's another round of rethink coming to the branch network that, again, the consumer side is probably a few years ahead in thinking through in terms of if branches aren't for service anymore, what are they for? And if they're only for sales and difficult questions, lending applications that doesn't look like our traditional branch, that looks like something totally different. Should it be a branch or should it be bankers who go to businesses? There are big questions here and real opportunity for optimization now that some of these preferences are really starting to shift more.

Manny Tocco (16:18):

Yeah, yeah, I completely agree. I mean, we even have some of our branches that don't have tower lines. I mean the purpose of that location is not to really transact. They can through almost like a digital teller of sorts. So it's pretty progressive. We don't have a ton of those, but it is really more around having that conversation for advice, for planning. It's a place for business bankers, for wealth managers to be able to meet the customer where they want to meet and have a very meaningful conversation around how they can serve.

Adam Stockton (16:52):

And I think the real opportunity here is to take a step back and rethink more of the model. I think often one of the traps that we've seen banks fall into is, okay, well yep, we don't need the teller line anymore, but we still need the platform bankers, the small business specialists, the wealth specialists, the rms. So we're going to take out the teller line and everything else about the branch is going to look the same and work the same. And that is such a missed opportunity. Can you think about the workflow in a different way? Can you think about the locations in a different way? Can you rethink what a branch is for rather than just saying everything, strip out the transactions, good to go?

Manny Tocco (17:42):

Yeah, I mean, I think Adam said another way, banks really need to think long and hard around who do they want to be for their customer. I know we're going to talk about verticals in a minute, but what's the distinctive value proposition for a micro business to want to end up engaging with the institution or somebody that's more of like a 10 or 15 million operator that has more sophisticated needs? What is going to be that compelling value prop that's going to drive activity into the branches or to your dotcom instance to want to be able to open up digitally and engage? And then how do you end up interfacing with that on the backend and making sure that you've got a banker that's prepared to have a conversation in a more proactive manner.

Penny Crosman (18:24):

So Adam, it looks like among your customers, they want to come to a branch to open a deposit or apply for a loan. They're more increasingly willing to go to the website for their routine customers.

Adam Stockton (18:36):

Complex new transactions still need that human element. I mean, Manny said it exactly right. You're not going to take the people out of banking maybe. Sure. For some customer segments, the really low end, very simple needs, they're happy to do it all digitally. But the bigger, more complex needs really need that personal touch. The other thing that banks really have to think through is identifying those simpler transactions and enabling the customers to do that. So it's one of the biggest, as we do a lot of primary research, it's one of the biggest pain points is I just wanted to be able to get through this. This felt like a simple transaction, and you kicked me out of the simple workflow and made me talk to a person. And I was trying to do it on Sunday morning. I was trying to do it at 10 o'clock at night, and that opportunity is gone. It's a real difficult balancing act. Yeah.

Manny Tocco (19:42):

Yeah, I couldn't agree more. And again, going back, you've got a smaller operator, right? They're the cook, the chef, the bottle washer, they're running a family, they're running a business. They don't have time to mess around with those types of things. So they need probably more digitalization more than ever, but they also need help. So that's where transactional insights, actionable insights that you can provide to the customer that, oh, by the way, did you know that Mr. And Mrs. Operator that you're an X, Y, Z business and in this geographic footprint you appear to be paying more in rent expense or your cost of goods sold is higher than X, Y, Z in terms of benchmarking. I think those sort of value add type of insights, actionable insights that they can actually action on, I think are going to start to become increasingly more table stakes for financial institutions over time. And in the near term, at least be somewhat distinctive.

Penny Crosman (20:42):

And is citizens doing that today?

Manny Tocco (20:45):

We are launching a partnership with a new FinTech partner in Q1. So that provider is going to be able to help us in terms of plugging in with our ERP data. Customer can get real-time cashflow forecasting, actionable insights on everything I just mentioned, Penny. So we're pretty jazzed up about that opportunity and we think our customers are going to enjoy the offering.

Penny Crosman (21:10):

So I'm guessing you can't say who the partner is.

Manny Tocco (21:13):

I would, but my corporate comms partner might give me a dirty look. Okay.

Penny Crosman (21:18):

Okay. Fair enough. And is there anything else you're doing for these routine account questions? Do you have a virtual assistant for small businesses or do you offer any sort of special help with those simpler questions?

Manny Tocco (21:32):

So another offering that we got a lot of capital investment this year within business banking. Fortunately before things started to get a little bit tighter, but our dotcom instance is going to be completely self-service where a customer can go in fundamental decision tree logic around, I need merchant processing, I need this, I need that. We'll end up making a recommendation. And then on the back end of that, either a branch banker or a business banker can end up engaging with that customer. We ended up launching digital account opening this year as well. And so that was somewhat primitive at launch with just single purpose entities like LLCs and sole props. But that has now gotten more sophisticated and able to open up S corp and more exotic corporate structures, and we're starting to see a steady flow of business that's starting to come through that channel. So I do think there's this migration over to digitalization. I don't think that any bank is out on the forefront that's doing it exceptionally well, but I do think if you haven't gotten out of the started blocks at this point, you could start to get lost a little bit behind the curve.

Penny Crosman (22:41):

Someone was talking about 10 minute account openings. Is that a goal or does it matter getting at that?

Manny Tocco (22:48):

Yeah. Is that like five minute abs or six minute abs? Right. Yeah. I mean, I don't know, 10 minutes, eight minutes. I don't know what the timing is, right, but I could tell you it's quicker than getting in your car and driving to a branch.

Penny Crosman (23:03):

Okay, fair enough. So then we want to talk about if branches are less important then how to small business go about choosing that primary bank and what are the things that banks could be doing to kind of draw people in? So I guess, Adam, you want to walk through what you've seen?

Adam Stockton (23:24):

Yeah, so in the old days it was really simple. There were really two paths, more or less, maybe three. One was you gave them credit, two was there was a referral, three was you had great branch locations because they were going into the branch every week, if not every day. Now that they're not going into the branch every week or every day, we're starting to see a lot more things pop up. And we've moved to a place where there's an ability to do a lot more research online ahead of time. So products and services. And as much as I half agree with the comments earlier that we as bankers love to think about products, our customers, I agree from the perspective of the framing is wrong. The customers think about their needs and how banks can meet them, but they're now doing research into how banks can meet them and how much they cost.

(24:30):

And so it used to be somebody would walk into a branch and you'd push the place mat across the desk and they would pick which of the three options on the place mat they wanted. Now businesses can come into a branch and say, these are the things I need. So do you have the right bundles? Are they communicated in the right way? That's one of the big, those are two big places that we see banks falling down is there just aren't logical combinations. You have to go to four different places on the website to look for a DDA versus the TM services versus the lending versus the payroll. How do I put that together? And then the second is how it's marketed. Are you using the language of a bank or are you using the language of a business? So much of the website materials, the places that businesses do research are still focused around the language of the bank as opposed to solving the businesses' problems and how we can help you do that. There's a lot of other interesting stuff on here too that we won't have time to get to, but fraud online and mobile, all of these other things are more important now that branches.

Manny Tocco (25:48):

Yeah. Yeah, I couldn't agree with you more. And you look at this steady decline as it relates to new checking household acquisition, just in light of the fact that everything that we've been talking about around brick and mortar, you couple that with the fact that you have churn, everybody has churn within the retail network of colleagues. And so there tends to end up being a little bit of a shortfall as far as acumen is concerned as well. And so one of the places that we've really leaned into is trying to, how do you negate that? So sort of a guided conversation within the branch instance and create a digital shopping cart experience so that it's not just a standalone checking unit, and then you have a month on book four runoff issue, which we've experienced until we started launching a little bit more capabilities and making that experience more cohesive. But now you can have that meaningful conversation that branch colleague can around, oh, how are you collecting? How are you getting paid? Oh, merchant processing. Oh, there's a card opportunity for payables. And so despite some of that churn, I think some of those digital capabilities within the branch instance I think can really kind of get after some of the deepening and the primacy conversation.

Adam Stockton (27:06):

And even some of the conversations you were talking about earlier, linking the deposits and lending and while, alright, at a certain size, we're going to require that we get the primary operating relationship in order to give you the loan. That can be what we need conversation or it can be how we can help you conversation or it can be not a conversation at all as we've seen it at some banks, but if you've moved from the, alright, it is a conversation, have you sat down to listen to what your bankers are saying and how they're framing it up is that, yep, we're going to spend 98% of our time here focused on the credit and oh by the way, I need the DDA, we got to get you signed up for that. That's just one of the pre-reqs in here. Or is it, we really think we have some ways to help you better meet that we're going to need to get you over in order to finalize this. But there are some really exciting things that we can do for you and ways that we can help you run your business better. It's a very different conversation.

Manny Tocco (28:11):

It's also the engagement. How are you engaging your customer after they've either walked into a branch or even if a business banker has brought in the relationship and despite however you're effectuating that and actually getting everything opened, but how are you engaging with that customer to ensure that they're actually using the product offering that they signed up for? We see that a lot where we have great acquisition as far as card is concerned through our pre-approval process, even at the teller line. So customer agrees, they've been pre-approved, they activate no utilization. I mean, that's not good for anybody right now. You're just layering an additional overhead as far as the bank is concerned. So it does come back to a little bit on the marketing side and making sure the customers are engaging and actually using the product offering.

Penny Crosman (28:59):

Yeah, it's interesting. Two people said on Monday, I think that you have to do that within the first six months. After six months. It's like engagement just goes to, oh yeah, nothing. I didn't know that. So our last topic, the last minute and a half is segmentation. So I guess traditionally banks segment their small business customers by industry and by size. Is there a new way of thinking about that? Are there other ways to segment? Yeah, many. Yeah,

Manny Tocco (29:29):

Somebody had said it earlier, one of the presentations. I don't think that customers think of themselves as, I'm a 5 million operator. I get Susie as my banker, or I'm a 15 million operator and I get Johnny, right? I mean at the end of the day, we're looking very hard at our coverage model. And we currently, right now we're a bit segmented by revenue size, not revenue to the bank. But I think there is an opportunity to show up collectively and deliver a culture of local where you have a market leader who's driving activity, true perennial leader in the market has their hand on the pulse of around influential people and you're kind of in this partnership and driving activity together, whether it's junior and senior. So I think coverage is certainly something that people continue to look at and will tinker around with. And then the other thing I would also mention is around verticalization and creating that specialty strategy.

(30:32):

And we're looking at that through a couple of different lenses, not only being a subject matter expert in that, and a live Oak comes to mind as you think about that. They have bankers that are not just generalists, but they're leaned into veterinarians or dentist practices, et cetera, but not just from the credit perspective or a liquidity tool, but also with payments, embedded payments. And so there's a couple players that have done a pretty good job at that as well. And it's something that we're trying to pull the thread on as we get in the next year.

Adam Stockton (31:04):

One of the just really big opportunities is to move also beyond sales size and vertical into needs and behaviors. So again, what businesses need and what they're looking for from a bank or a partner is really different. This is a place that fintech's have moved a lot further than banks. And it goes back to what Ben from Chase said at the very beginning was, if you don't have scale, you have to be excellent at something. And I know there's been a lot of talk about the deposit rich verticals and we're going to be the best at healthcare banking. There's an opportunity to move beyond that though, into thinking about what are the solutions that businesses are looking for? How do they want to interact with a bank? So are they looking for advice on how to grow their business and how could we put an entire relationship around that?

(32:11):

Do they have huge growth aspirations or are they happy with where their business is and want to just keep things going? There are differences in terms of product preferences. There are differences in terms of channel preferences and how they want to interact with a bank. Understanding those underlying needs also can make you realize, hey, there are three or four verticals that have much bigger concentration in these segments of needs and behaviors and attitudes. And so it can lead you to bundle certain things together that you might not think of otherwise. And it really, in a world of constrained resources where you can invest in the right tools, products, digital experiences makes a big difference here too.

Manny Tocco (33:00):

Yeah, I couldn't agree more. I think you nailed it when you said experiences and what we've been starting to embark upon and we're going to end up launching for next year is around this digital platform. And it's where you're going to start. The operator's going to start their day and end their day with citizens and all of this kind of tying in with open banking and bringing visibility in terms of office deposits and other capabilities as well that can tie into that with widgets. So we're in a new error and banks are going to have to up their game. I think one of the underlying themes out of this conversation is what got you here won't get you there. And it's a combination of human capital, having sophisticated conversations, meeting the customer where they are, and providing digital capabilities.

Penny Crosman (33:49):

Alright, well unfortunately we're out of time, but Manny and Adam, thanks so much for joining us.

Adam Stockton (33:55):

Thank you.