Growing Fee Income Without Raising Fees

Haberfeld CEO, David Furnace, was interviewed for a Featured Podcast by the Editor-in-Chief of the ABA Banking Journal, Evan Sparks, at the ABA Annual Convention in October 2018.

Evan Sparks: Well, we are here in the ABA Annual Convention Expo Hall. My name’s Evan sparks. I’m editor in Chief of the ABA Banking Journal and host of the ABA Banking Journal podcast, and I’m here with David Furnace. David, tell us about yourself and where you’re from.

David Furnace:                  Very good. I’m the CEO of Haberfeld Associates out of Lincoln, Nebraska.

Evan Sparks:                       What does Haberfeld Associates do?

David Furnace:                  Yeah, so we help community banks all around the country with core customer growth or core deposit growth.

Evan Sparks:                       And I know banks are looking for core deposit growth. Banks are also looking for fee income growth. How are community banks and large banks kind of thinking about that?

David Furnace:                  Yeah. So a lot of banks, when they’re talking about a fee income growth for example, will think about raising fees, increasing fees, going into new areas. And for at least community banks, we think that dynamic is very different and there’s a much simpler answer for both fee income growth and core deposit growth. And that is, if you look at the average number of customers compared to a community bank’s footprint and their branch size, then you compare that to big banks, the bigger banks will have four to five times the number of customers in a similar footprint. So, in particular, coming out of the great recession, community banks made a lot of decisions that might’ve made sense at the time, but we think now when loan to deposit rates are increasing, when banks are needing fee income growth and core deposit growth, we think it’s really important to revisit some of the core assumptions that they’ve made. And one of the key ones is this: community banks build these really, really expensive factories that they call branches, and then they run them at a fraction of their capacity. So there’s lots of opportunity to grow. And in our view, at least, copying the big banks doesn’t necessarily make sense because we think foundationally the business model’s very different.

Evan Sparks:                       So copying the big banks doesn’t work. From your perspective, what is that single best strategy for community banks to increase fee income?

David Furnace:                  Get more customers. As simple as that. So, if you run a business where you’ve already spent all the money for the factory, you’ve already plunked down the infrastructure, you’ve got the facilities, you’ve got the staff for it, and you could service a lot more people through it -then we think what’s important is to look at marginal revenues from one more customer compared to marginal costs. And there the data’s unambiguous. Marginal revenues for a typical community bank from one more core customer than they were getting at run rate, marginal revenues are many multiples of marginal costs.

Evan Sparks:                       Yeah, so is there a risk that if community banks adopt this strategy losses could go up?

David Furnace:                  Absolutely. In fact, losses will and that’s something that’s very difficult for community bank CEOs and CFOs to embrace, right? The strategy that’s going to cause my losses to go up. But it’s really important to get to the data and look at what the data says. The data is really unambiguous that while marginal losses will go up, marginal revenues will go up in many multiples of that.

Evan Sparks:                       That’s great, terrific insight. Um, is Haberfeld doing a session here at the convention?

David Furnace:                  We are, we’re speaking from 11:30 to 12:15 and actually that topic is “Increasing Fee Income Without Raising Fees.”

Evan Sparks:                       All right, for our listeners here, we should check that out. And Dave, thank you so much for sitting down to talk to me.

David Furnace:                  Evan, it’s been a pleasure. Thank you, sir.



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