Welcome to the July issue of This Month in Retail Banking. We are halfway through 2022 and so much has changed since the year began. Sure, everyone figured that the Fed was likely to raise rates, but did anyone really think a move of 75 basis points was likely — or 100? And did anyone guess that home-equity volume could hit $80 billion this year?
Market forces are moving quickly and that creates even more complexity than usual as the 2023 planning season gets started. There will certainly be fresh pressure on costs in an industry that is pouring investments into a digital future. It will be critical to identify and justify those cost savings and investments — whether it is closing branches, raising rates for primary customers, modernizing the antiquated home-equity process or taking a close look at the value of marketing in your organization.
More Branch Closures are Needed
The FDIC reporting deadline of June 30 has passed, which means it is time to prepare for the upcoming quarterly release of the FDIC Summary of Deposits. Despite a need for more branch closures, Curinos anticipates the report will show a slower pace of shutdowns.
Prior to 2021, there were six years of steady declines — just under 2% — in the number of U.S. retail bank branches. (See Figure 1.) The net decline in bank branches then doubled in 2021 to 3.8%, partly spurred by the COVID-19 pandemic. While that rate of closure seems small against the myriad branch closure announcements, the doubling of any growth rate is significant. The reality, however, is that we still have a lot of banking institutions and too many branches.
Despite continued shifts in consumer behavior that suggest the industry needs fewer branches, Curinos expects the FDIC to report that the branch decline has slowed to around 2.5%.
On the face of it, this makes no sense. Curinos benchmark data from more than 20,000 bank branches show a decline of more than 30% in teller transactions per branch from the beginning of 2019 versus the same period in 2022. At the same time, the industry experienced a channel shift from branch to digital of nearly 20% for new checking customer acquisition.
In short, there is much less activity in our branches, so why aren’t more of them closing?
One reason banks have slowed branch shutdowns is that the flood of retail deposits fueled by government stimulus programs and that temporarily reduced customer spending during the pandemic resulted in higher revenue per branch – even as net interest margins stayed low. Another reason is that banks fear (rightfully so) a decline in their ability to acquire new customers with fewer locations. But with acquisition shifting to digital, are banks just putting off the inevitable?
The problem is that headwinds are too strong to continue with this strategy. Fee income from overdraft and insufficient funds is declining. Mortgage fee income is way down. Despite rising rates and the promise of more margin, it isn’t clear if anticipated loan growth will materialize. Finally, wage pressure is increasing the cost of branch operations.
All of this means that Curinos expects banks will need to accelerate their branch optimization programs to help meet earnings targets in the later part of the year.
Figure 1: Historical Retail Branch Count
Rate Gap Widens Between Direct Banks
and Traditional Players
As the Fed continues to take an aggressive posture, we are still seeing a bifurcated market in which direct banks are increasing rates steadily while traditional banks lag in retail rates. This is a significant issue for both sets of providers, especially since the futures market is indicating an additional 150-250 basis points (bp) of hikes by the end of the year.
Direct banks continue to lead the way with rate increases on both their savings/money market and CDs. As a result, the rate gap between direct players and traditional ones is widening. Curinos data reveal that direct banks have raised savings rates by 22-67 bp on average (corresponding to a 45% beta) since the Fed hiked rates in May. The average of the top 10 savings rates now stands above 1.00%, with the highest rates tracked by Curinos nearing 2.00%.
When will branch banks follow suit? This depends on several factors such as loan growth and speed of deposit outflows, including the potential need for retail deposits to replace any outflows in commercial deposits. While not all banks will need to compete for deposit growth, we expect to see initial rate increases over the course of the third quarter. Primary relationships remain critical – both for institutions looking to grow and those looking to defend existing customers. Even for banks that aren’t looking for growth, the maintenance of existing primary relationships will ensure a profitable base moving forward.
If the gap between direct and traditional banks continues to widen, the industry also risks heightened churn to online deposits as customers have grown more comfortable with online banking during the pandemic. Monitoring this churn will ensure that banks do not lose ground.
Home Equity Process Speeds Up
Amid Volume Surge
The burst of activity in home equity shows no sign of abating and it looks like providers are finally getting the funds to their customers faster.
The latest Curinos data show that cycle times (the point from application to disbursement of funds) now averages 58 days, down from a peak of 80 days in January. That’s good news for customers who are eager to pull equity from their homes for improvements and large purchases.
Even better, this acceleration comes at a time when home equity volume has increased by 40%. Curinos now estimates that home-equity volume is headed toward $80 billion for 2022. That would be the highest level since 2019, when interest rates were hovering around 5%.
Long cycle times have been a big stumbling block for home-equity providers, especially when other sources of short-term funding are available more quickly.
The question now is whether lenders can continue to improve their operational efficiency with their current technology platforms or whether more investment dollars are needed to speed the pace even more.
Marketing Plans for 2023: Conflicting Forces
The role of marketing and branding has continued to become more critical over the last several years and is now a larger contributor to sales across the industry than the branch network. As we look forward to 2023, though, we are seeing a divergence in marketing investments across institutions that will have significant impact on acquisition trends for the coming years.
Some institutions, including Chase, have announced more investments in marketing because customer acquisition is core to their strategy. Other institutions are planning to reduce marketing spend due to concerns about a potential recession and reduced non-interest income from NSF/OD fees.
As banks set their marketing budgets for 2023, it will be critical for them to understand the full impact of changes in marketing spend. (See Figure 2.) Banks have already been shifting toward digital marketing and away from mass marketing for several years. Given an uncertain environment in 2023, there is even a stronger bias toward digital marketing because it is easier to flex dollars up and down. On the other hand, banks haven’t discovered how to replace the brand impact of the branch network. Therefore, it will be critical to ensure that customers understand the value proposition of the bank – a goal that can be hard to replace in digital channels. Additionally, with 2024 as both an election and Olympics year, 2023 may be a year in which it is easier to capture attention of potential customers.
In general, Curinos believes that the trends away from the branch and toward other levers, including marketing and brand, means that bank marketing budgets should be increasing despite the headwinds. That said, costs are sure to be under pressure in 2023 and CMOs should be ready with different scenarios throughout the year -with an expectation that budgets could change at any moment. Ensuring that the bank has enough reserves to conduct the “must do” paid media, including paid search, throughout the full year will be critical to drive the bank’s efficiency.
Figure 2: Changes in Marketing Spend
Headwinds: Reasons to Reduce Investment
Tailwinds: Reasons to Increase Investment
Recession may be coming
Customer growth is still a primary metric for all banks and marketing is more critical
Losses in fee income will make mass market economics challenging
Rising rates mean path to lower beta customers is valuable
Cost savings needed to make up gap in NIM and from NSF/OD changes
2024 is an Olympics and election year
Disproportionately drives digital account openings, which still have low quality
Incentives particularly important to acquiring more affluent customers
What Do Curinos Clients Think?
Nearly 100 people joined our recent webinar titled “How Are Consumers Responding To Higher Interest Rates?” In the session, we asked participants about their priorities and expectations.
Here are the results:
What is your bank’s official forecast for Fed Funds as of December 2022?
What is your biggest priority for 2H22?
Driving Loan Growth
Replenishing Non-Interest Revenue
Is your organization currently prioritizing unsecured lending as a strategic line of business/area of focus?
What is your organization’s biggest challenge?
Understanding Market Trends
Customer & Retention
New Customer Acquisition