20 The events of the pandemic have challenged our institutions in ways previously unknown and, in some cases, unimagined. Today, we are faced with three challenges: a prolonged low-rate environment with continued margin compression, waning loan demand in many institutions, and an increasing number of customer transactions moving to the digital arena. Much has been written lately regarding the validity of the branch in the current environment. Has community banking been changed forever based on consumers’ digital behaviors? Possibly. Is some of this for the best? Definitely. Does the branch still have value? Absolutely! Community banking is about community support. It’s about being present and accessible. Unless your strategic plan is to shutter your branches and vacate your communities, we encourage you to keep reading. Margin compression is real. So, what can you do? You can offset a portion of it by shifting your deposit mix toward low- or non-interest-bearing deposits. Adding long-term, low-rate deposit relationships should always be the foundation of any strategy, and community bank data shows your branches are the key to shifting your deposit mix. While new core relationships are strategic in managing and maintaining your margins, they are also a key driver of additional non-interest-income (NII); this is a critical component in the shorter term. Financial institutions must increase their NII to offset some of the interest income/margin challenges. To accomplish growing those new relationships, you must do three things: 1. B ring more new customer relationships into your organization. 2. S erve all of your customers better than any other financial institution has previously. 3. Make them loyal customers by increasing relational intensity over time. The Loyalty Factor Bringing in more relationships should be data-driven, and the data shows the checking account and the branches are key. Looking at data from over 100 community-based financial institutions, and over 2.5 million households/ businesses illustrate this point (see fig.1). The vast majority, or 72%, of consumer and business relationships at community financial institutions, begin with a checking account. In other words, the checking account provides the best opportunity to create customer loyalty; it is the gateway to primary financial institution status (PFI), allowing your bank first right of refusal on other products and services 68% of the time. In addition, customers who have their checking account with your bank outpace other customers when it comes to regarding products and services, generating additional NII. Even during the pandemic, and with limited access to community-based financial institutions branch networks, client data shows that over 90% of new PFI relationships have come through branch channels (in-person, appointments, drive-thru, telephone). The value of your branches cannot be ignored. The more customer loyalty you build, the more interest income and NII they The Loyalty Factor: Translating Relationships into Non-Interest Income By Achim Griesel and Sean Payant , Haber feld
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