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How Financial Institutions Can Stay Profitable in a Shifting Economy

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Tricia Anderson
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In December last year, FDIC acting Chairman Martin Gruenberg warned that higher inflation, higher interest rates, and geopolitical uncertainty could reduce bank profits in 2023. No one has a definitive forecast, but clouds of a possible recession also continue to appear on the horizon. In this uncertain economic climate, how will your financial institution prepare to weather the possible storms?

 

Analyze Before You Act

The first step in strategic planning should always be a careful analysis of what worked well for you recently and what needs improvement. This analysis should begin with running thorough reports and examining them to get a clear picture of your best income generators and any flexible expenses you can reduce without losing key operating benefits.

Besides knowing your own strengths and weaknesses, consider planning with agility in mind. While some community banks take a long-term approach to planning, agility becomes more important when the economic outlook is uncertain. For example, Sunrise Banks in St. Paul, Minnesota, takes agility seriously by readjusting its strategic plan every 90 days, an approach that has worked well for them for seven years.

When you have a clear picture of what has worked well for you and how often you want to adjust your strategic plan, consider these ways to improve:

  • How can you expand on what worked well?
  • How can you trim expenses without losing quality?
  • How can you reach current and potential customers in creative ways?
  • Can you benefit from partnerships with others?

 

How can you expand on what worked well?

One way to profit in uncertain times is to capitalize more on what you do best. For example, if mortgage loans have been a major source of income for your financial institution, look for ways to generate more income from mortgage loans in 2023. With rising interest rates, it may be harder to generate new loans. The housing market has cooled recently due to high interest rates, resulting in fewer mortgage loans. So your strategy could be to generate more income by selling loans quickly to realize an immediate profit from the loans you originate. Then look for adjacent income options you can tap into, such as maintaining the mortgage servicing rights to keep some ongoing income from the sold loans.

You may also want to look at other ways to protect your income, such as expanding on your bank-owned investments. Diversifying by investing more in annuities, mortgage-backed securities, and CDs you purchase from other institutions can help you create new revenue streams.

In other words, exploring other income sectors you might not have used in the past can give you a broader income base that helps protect you against the volatilities in the economy.

 

How can you trim expenses without losing quality?

When you know what your biggest expenses were last year, look for the best ways to reduce them without sacrificing too much. One way to do that is to streamline your processes. If your processes include multiple manual steps, you can probably automate or even eliminate many of those steps. If you haven’t already done so, this is a good time to consider the value of investing in state-of-the-art technology. Even in an uncertain economy, the return for upgrading your software will far outweigh your investment.

For more ideas on how to cut costs, please see our previous blog, “5 Strategies to Cut Costs at Your Financial Institution.”

 

How can you reach current and potential customers in creative ways?

Whenever the financial future seems less than sunny, you need to be sure your current and potential customers have good reasons to choose you over the competition. If you can, of course, you should first offer more enticing products and rates. But you can also get and keep customers by making banking easier and more pleasant. Look for ways to distinguish yourself as the bank that cares about their needs. “You can’t just be the community bank that looks like the bank across the street. You have to give people a reason to bank with you,” said Tim Reimink, managing director in the Crowe LLP performance consulting group in Chicago.

To keep current customers loyal, don’t overlook the appeal of simple ideas like having free-coffee Tuesday at your branch. Especially if you have consistent walk-in traffic, such inexpensive gestures can set you apart as the friendly place to bank. But it isn’t news that more and more customers prefer not to visit a physical branch for their routine banking needs. According to a recent survey by $13.2 billion-asset Provident Bank in Jersey City, N.J., 91% of 600 customers they polled said they do their banking digitally. Although 58% still visit their local bank branch, nearly half of those did so to complete a transaction they couldn’t otherwise do online. Only one in four respondents visits the branch because face-to-face is their preferred way of interacting.

The solution? Meet your customers where they are. Besides the obvious answer of offering robust electronic and mobile banking options, think of other ways to break free of your branch’s four walls. For example, you might consider meeting at a coffee shop, in the customer’s office, or setting up a booth at a grocery store.

 

Can you benefit from partnerships with others?

Community banks can often reap big rewards from alliances with other local banks outside their service area. For example, you can meet with other institutions like yours regularly to ask how they’re solving their problems. Because local banks aren’t competing with banks outside their geographical area, sharing ideas this way boosts everyone’s chances of staying viable against the larger financial institutions.

How can you find others who are willing to share their ideas with you? Associations like ICBA, of course, can connect you with financial institutions facing challenges like yours. Even discussing simple issues such as whether or not they charge for paper statements can help you remain competitive by understanding how other banks of similar size manage.

Remaining competitive also means maximizing your return on your necessary investments in technology. Thinking beyond the obvious, your core software provider can also refer you to others who use the same software so you can learn how your peers use that technology efficiently.

 

Conclusion

Predicting what will happen in the financial sector is much like forecasting the weather. You need the right tools to give you accurate information, and then you must remain alert to the shifting winds. You can’t wait to build a boat when the rivers are already rising. Strategic planning and creative problem solving will help you stay afloat no matter what storms are on the horizon.


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