Increasing FinServ Market Share in a Rising Rate Environment

I am going to go out on a limb here and say that if you are a marketing leader in a FinServ company, then you are interested, and mandated to increase the market share for your institution. Great, I am a genius, we can all go home, right? Stating the obvious, and being able to execute effectively on those mandates are two separate matters entirely. The reality that I face, and I am certain if you are reading this you face as well, is that it is never easy to increase market share. Especially if the market you are trying to increase are investors. Especially in a rising rate environment. When Finding New Investors Seems Easy For those of us in the FinServ industry that ply our trade in investment banks, credit unions and certain funds, or are dependent upon rate to determine product value, we oft find ourselves at the whim and mercy of the Federal Reserve and general market forces. We like market stability, it is our friend. It allows us to predict, safely, the amount of capital we can raise. It also allows us to compete on something other than the rates we offer (which, let’s be honest is a whole lot more fun). However, if market stability is our friend, our bestie is a dropping rate environment. That is, when the Fed decides to lower rates, pushing down the value of investments (which costs us less) and rates for loans (which makes them more attractive). This is the butter zone for increasing market share for two reasons: more investors will grab rates before they drop (decreasing decision making time) and you can outpace competitors by being the last to lower your rates. Rising Rate Environment Unfortunately for us, we find ourselves in a rising rate environment. The most recent activity by the Fed not only came with a bump, but a strong indication that more increases are likely. What this means is that we cannot count on either differentiation or lagging rates as strategies. In fact both strategies, although they work in stable markets and dropping rate environments, are likely to cause a reduction in market share (or at the very least severely weaken your ability to retain investors). So regardless if your a brokerage firm, bank, or somewhere in between, I offer two key strategies to consider as ways to increase market share. Strategy 1: Do Not Worry About Cost of Funds Your senior banking or operations officer may not like this one. But, if you are like us, this is a fairly useful strategy. Before I go on, let me define Cost of Funds (COF) in its most basic terms: it is the weighted average of the interest yields owed to investors (here is a longer explanation). If you do not know your COF, talk to an analyst, find out what it is. Logical thought compels us to accept that an increase in our COF without a increase in loan yield (the weighted average of your capital deployed) means margins will get thinner and profits will drop. While this is technically true, there is one interesting phenomenon that as a marketer you should not ignore. At volume acquiring new customers above COF does not create a significant increase in COF. Let me explain. If a bank has a COF of 3.0% and total assets of $90,000,000 then acquires $10,000,000 in new capital at 3.5% the new COF would be 3.05%. The reason for this is that the new capital is a smaller percent of the holdings than the existing capital. The larger the financial institution, the less effect on COF is seen. The strategy then becomes to find a way to offer a special investment product at a rate that is above market average that only applies to new customers or new investments by old customers. In other words, do not be afraid to pay a premium to attract new customers because in this environment the best rate wins. Strategy 2: Do Not Be Afraid to Use Incentives The harsh reality faced in a rising rate environment is this: when investors know rates will rise, they are less likely to tie up capital now when they can wait. This is problematic even if you have competitive, or even premium, rates. They simply may not be as good as rates may be in six months or a year. This is compounded by the fact that competition is leveled down to a rate discussion as most investors make their decision to invest based on rate first, so again differentiation is almost meaningless in marketing terms. Do a Google search for investment advice, it turns out the advice most people give is to get the best rate you can. Not find a place you trust or a cause you believe in. So we have to be creative and find new ways to give potential investors a reason to invest with us that lies just beyond rates. If all things are equal, and rates are the same, what can you do for investors that others can’t that makes a difference? There are many paths you can go on here from personalized service to reduced or no fees to feature based investment products. The idea is simple, find incentives that match your core investors desires. The Truth of the Matter There is no guarantee that having better rates and nice incentives will help increase market share. It just does not. What it does do is it remove obstacles to growth and eliminates variables as your problem solve. Nor does having them mean potential investors will know about them. You still have to do the work to get the message out there. Grow the audience, deliver relevant and easily understood offers, and provide excellent customer service. Those things are critical, but absent a product offering that people actually want, they are equally as useless as good product offerings with no marketing. In the FinServ industry there are no shortcuts to increase market share.

Strategy

Increasing FinServ Market Share in a Rising Rate Environment

Nathan R. Elson

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Nathan R. Elson