The annual budget process is usually an exercise in planning for uncertainty. Add to that, it’s challenging, time consuming, and complicated. Then, when finalized, all you know for sure, is that it is at best a pro forma. That’s because financial institutions (along with everyone else) operate in an environment with multiple variables they do not control…and that has become even more evident in 2020.
Will there be another stimulus bill to relieve the COVID-19 caused recession? How many stimuluses might get passed in 2021? What steps will competitors take to gain ground in these conditions? Where can costs be cut? What about revenue?
To be fair, 2020 is an extreme example. Even so, the pandemic is the undisputed primary driver in the decisions shaping 2021 FI budgets. Now, how do you plan for an even more uncertain future?
Sean Peyton, the coach of the New Orleans Saints, continually reminds his team to “control what you can control” - this is a useful mantra for all people, including leaders at banks and credit unions. For those aiming to control what they can when setting their budgets for 2021, here are a five areas that are (reasonably) predictable and add value to the bottom line.1. Prepare Revenue for a Low-Interest Economy
Let’s start with what we know - The Federal Reserve has signaled its intent to keep rates low into 2023. While the Fed’s tactic can aid economic growth, it also means an extended period of compressed net interest margins. Given this squeeze on interest income, institutions should closely examine what’s likely their largest source of non-interest income - payments.
Card payment volumes have continued to grow during the pandemic (thanks in part to the acceleration of e-commerce and “contactless” transactions), generating new opportunities for interchange. Both debit and credit card programs warrant a fresh look; although outstanding balances have trended downward in 2020, they are still an actionable source of interest revenue.2. Adapt Reward Programs for Online and Contactless
There has never been a more important time for community-sized banks and credit unions to seek out ways to push their payment cards to become the default form of payment. Travel rewards have lost much of their pre-pandemic appeal, creating an opening to re-shuffle card preferences. To benefit, institutions will need to highlight their card reward program and make sure their cardholders are aware of its benefits. If the rewards being offered are not moving the needle, adapt them to what’s most relevant to the cardholders.
While the benefits of increasing card use are an important consideration for community financial institutions every budget cycle, in 2021 the increase of transactions online and from digital wallets will continue to grow. Issuers must find a way to add value within that environment. For institutions under $10 billion in assets, adding enough value to drive customers and members toward debit card use will generate revenue that can offset some of the revenue losses due to the compression of interest rates.
Finally, an institution that has issued contactless enabled cards should educate cardholders on the benefits of these cards. Generally, the benefit of “tap and go” is the convenience it delivers. However, in the current context, the benefit most likely to hit home with cardholders is related to personal health. In a germ-conscious world, reminding users that the contactless card issued to them may be a safer choice at checkout.3. Account for Price Creep
In a “normal” budget cycle, increased revenue offsets the other costs that creep, year-on-year. Budgeting in the time of COVID may require accounting for cost increases that are higher than what has been seen during previous budgeting cycles.
For example, vendor contracts related to providing accountholders with self-service channels often contain volume-related pricing terms. When the COVID-19 lockdowns began, closed branches and health concerns spiked activity in these channels – looking ahead to 2021, this trend is unlikely to relent (if ever).4. Negotiate for Buried Savings
To reduce costs that offset reductions in revenues and increased investment in the self-service channels - without impacting account-holder satisfaction - first look within the institution for hidden opportunities.
Start with expiring contracts, especially those covering technology. Since market rates have been on a downward trend in most categories, many multi-year agreements may be due for a price concession. For engaging in renegotiation, SRM offers eight rules of engagement for vendor negotiation strategy.5. Automate the Revenue Search
There are new solutions leveraging automation, such as with vendor contract auditing and credit decisioning, which banks and credit unions can use to replace repetitive manual tasks and find areas that could be permanently migrated to a remote work model - there may be millions of dollars in savings that have been previously hidden in areas such as these. If ever there was a time to unlock these savings, it is now.
The Bottom Line: For most of those in banking, these times present unprecedented challenges. To budget for these pandemic-grade variables, control what you can control. Begin by driving more interchange from payments, adapting to the times, and leveraging smarter tools to find revenue.
A final piece of advice on setting budget plans in a time of uncertainty - consider having one ready for the best case, worst case, and most likely case scenarios.
Whatever happens in 2021, business as usual is off the table, and creative strategies will be in high demand as banks and credit unions adapt their revenues and cut costs.
For even more SRM insights for your 2021 planning, download our latest Infographic of vendor consolidations from 2017-2020.