This Quarter in Canadian Banking: Assessing Customer Behaviour

Fiscal 2022 is winding down and uncertainty in the economy continues to be a major theme in Canadian banking. With the Bank of Canada continuing to push rates to their highest levels in decades, the portfolios at banks are finally showing signs of heating up significantly and betas have been rising since June. The excess deposits produced by financial support during the pandemic are finally burning off and consumer spending has returned to pre-pandemic levels.

It all means that deposit costs are only going up.

Meanwhile, the COVID-19 shock to the branch system continues. Transactions are rising, but where will the new ceiling be? Branch volumes are still down by 20% even as some of it recovers. Customer acquisition has returned to long term trends at the Big Six, although challengers are pressing hard on digital experience.

Rising rates and concerns about inflation will obviously impact credit risk. Savvy providers will turn toward alternative data, such as deposit behaviour, as part of the credit decision process.

The lingering changes in behaviour will take time to understand, but clearly the branch volumes are the canary in the coal mine. Businesses are increasingly favoring digital channels and consumers are breaking into distinct advice segments, challenging the one-size-fits-all model of FA-based advice.

Things to watch out for in the next quarter include continued upward pressure on rates and a growing funding squeeze as wholesale funding costs rise faster than retail. There will be downward pressure on asset prices and the possibility of rising provisions as the credit vice tightens.

Agenda

Betas Accelerate Quickly

Betas were already rising before the Bank of Canada announced a 75-basis point increase to the target overnight rate on Sept. 7. Through the first 2.25% of Bank of Canada increases, betas have far outpaced levels seen in the last cycle of higher rates.

High-yield savings betas were 145% before the latest increase, equating to a 1.45% increase in promotional rates for each 1.00% increase in the Bank of Canada overnight rate. That compares with 125% in the 2016-19 cycle. Similarly aggressive, GIC betas were 150% compared with 85% for the prior cycle.

With promotional rates increasing so substantially, precise margin management is more important than ever. The ability to understand — at a customer segment level — what rate is required and identify the most rate-sensitive customers will be a major differentiator between those institutions that hit their goals and those that miss.

Teller Transactions Rebound

During the early stages of the pandemic, teller transaction activity in Canada declined to roughly half of pre-pandemic levels. This decline was larger than in the U.S. where government restrictions were somewhat looser in certain regions. The Canadian decline wasn’t nearly as large as in the U.K., however, where transaction volumes plummeted to a quarter of pre-pandemic levels. (See Figure 1.)

Figure 1: Teller Transactions per Branch (Indexed to pre-pandemic)

Source: Curinos CWP (CA), Curinos SalesScape (US), Curinos eBenchmarkers (UK) — sample every 6mos., Curinos Analysis

Throughout the course of the pandemic, teller transaction levels in Canada remained 10-15% lower (on an indexed basis) than in the U.S. That gap was quickly closed in the fiscal second quarter as teller transaction volumes at Canadian banks accelerated to match levels in the U.S. Anecdotally, this transaction acceleration has continued into the fiscal third quarter. At the same time, teller transaction levels in the U.S. and U.K. have remained stable despite aggressive branch closure activity in both countries, which should have driven teller transactions higher in remaining branches. In fact, the U.K. is still seeing teller transaction volumes at half of pre-pandemic levels.

So, why are teller transactions surging in Canada but not elsewhere? After all, cash and cheque usage is higher in the U.S. than in Canada (as measured pre-pandemic). (See Figure 2.) Additionally, if we look at the transaction intensity of U.S. customers, we see that they averaged 1.47 teller transactions per month before the pandemic versus only 0.92 in Canada. In short, there was more transaction activity to squeeze out of the system in the U.S. Our hypothesis is that government mandates suppressed Canadian consumer activity more deeply and longer than in the U.S., and recent rebounds are finding a new waterline, although they are still well below individual transaction intensity in the U.S.

This doesn’t mean Canadian banks can rest on their laurels. There is still more teller activity that can be squeezed out of the system. The current average of 0.55 teller transactions per month is still well above the 0.13 transaction per month for consumers in the U.K.

Figure 2: Canada and the United States have similar payment environments

Source: U.S. — 2019 Survey of Consumer Payment Choice — Federal Reserve Board of Atlanta, 2019 American Payroll Association survey Canada — 2020 Canadian Payments: Methods and Trends — Payments Canada, 2022 Payroll Study — Payments Canada

Big Six Lose Ground In Digital
Customer Experience

Canada’s challengers have recently made significant advances over the Big Six incumbents in both the emotional and functional aspects of customer experience on the digital battleground.

It comes as no real surprise that challenger financial institutions whose business model focuses on digital and direct channels should pull ahead of those with substantial physical assets during pandemic lockdowns, but the advances that these challengers have made since the height of pandemic is stark.

Data from Touchpoint Group (showing consumer ratings and feedback on mobile app experiences and displaying key drivers for positive and negative experiences) and Curinos’ Canadian Shopper survey suggest huge changes in the ways customers are rating their digital banking experiences.

In the first half of 2021, the “Big Six” (TDCT, RBC, BNS, BMO, CIBC, NBC) were ahead of the “Challenger Six” (Koho, PC Financial, Tangerine, Wealthsimple, Simplii, Manulife) in their average engaged customer scores (app users who leave both a rating and a review in their app store feedback). There has been a significant divergence since then, with the challengers’ average scores increasing by 14 points (from 3.48 to 3.64) and the incumbents dropping a whopping 69 points (from 3.67 to 3.98). (See Figure 3.)

Figure 3: The “Challenger Six” has improved the average score by 14 basis points since the first half of 2021, while average scores for the “Big Six” have deteriorated by 69 bp

Source: Challenger 6 = Koho, PC Financial, Tangerine, Wealthsimple, Simplii, Manulife. Big 6 = TDCT, RBC, BNS, BMO, CIBC, NBC n=10014 (Challenger6 21H1), 7521 (Challnger6 21H2), 12348 (Big6 21H1), 9073 (Big 6 22H1), Engaged Customer Score = app users who leave both a rating and a review in their app store feedback

Figure 4: The “Big Six” has lost ground across all customer experience levels, but particularly in “Customer Love” and “Incremental Banking Features”

Source: Challenger 6 = Koho, PC Financial, Tangerine, Wealthsimple, Simplii, Manulife. Big 6 = TDCT, RBC, BNS, BMO, CIBC, NBC n=10014 (Challenger 6 21H1), 7521 (Challenger 6 21H2), 12348 (Big 6 21H1), 9073 (Big 6 22H1) Engaged Customer Score = app users who leave both a rating and a review in their app store feedback

The Challenger Six has moved ahead of the Big Six across all customer experience levels, but the biggest gains can be found in what Touchpoint refers to as “Customer Love” (including Customer Emotion, Customer Love, Customer Experience and Banking Experience), and “Incremental Banking Features” (including payments, transactions, budgeting and other in-app features). (See Figure 4.)

More specifically, the gap between the challengers and the incumbents has widened the most in customer banking experience, spend analysis and budgeting features.

According to Curinos’ 2021 Canadian Shopper survey, which examined consumers’ bank selection criteria and account-opening behaviours and preferences of recent purchasers over the past three years, neo providers were leading the way at the end of 2021 in offering good value. They also excelled at making it easy for customers to manage their finances and plan for the future. The top incumbents, meanwhile, were ahead for broadly serving banking needs, as well as the perceived convenience of their branch networks.

A rise in consumer interest in digital personal financial management tools is something we’re seeing in other markets, where indeed challengers are leading the way. For Canada’s incumbents, this serves as a clear warning that service expectations have changed with channel preference. And the challengers are unlikely to rest on their laurels.

A More Personalized Approach To Credit

Lenders are increasingly looking for alternative data to improve decisions across the credit spectrum. This is particularly important to drive financial inclusion for thin or no-file customers, including those who might be new to the country and have limited credit history.

Fortunately, deposit-holding lenders already have the right data within their firewalls. Curinos’ research and client experience has shown that on-us deposit behaviours are highly predictive of credit outcomes, both for credit risk and expected line utilization (including real-estate lending).

These types of analytics are particularly important in a market where most consumers are customers of just one financial institution. It means financial institutions have unique opportunity to look at their customer more holistically when making credit decisions.

By leveraging customer deposit insights to better understand ability and willingness to repay, Curinos has determined that lenders can approve as much as 10%-40% of applications that historically would have been rejected. (See Figure 5.) This same data can also be used to assess credit need, enabling more targeted line assignments (both for secured and unsecured) that avoid significant unused capital expenses.

For all these use cases, the right deposit metrics are critical. Simple metrics like total deposit balances do a great job discriminating overall risk. For example, those with more than $6,000 in balances are eight times less risky than those without. But that simple metric won’t materially help banks to approve more customers because those with more than $6,000 are already much more likely to be approved. To approve more customers without increasing risk, lenders must use advanced deposit metrics such the ratio of daily cash flow versus excess savings.

Lenders have a unique opportunity to create a more personalized approach to credit. By considering a customer’s whole relationship, deposit-holding lenders are uniquely positioned to expand access to credit, driving financial inclusion and deepening customer relationships.

Figure 5: Advanced Deposit Insights Rank-Order Risk within Traditional Credit Score Band

Source: Disguised client credit card and deposit data, Curinos Analyses Bad definition: ever 90 days past due next 24 months; Good: never more than 5 days past due next 24 months

Business Owners Embrace Digital-First Players

The pandemic has been a long and arduous journey that has pushed customer preferences to digital channels — including business owners. New research from Curinos finds that business owners now use more digital financial tools than they have in the past — an average 3.3 compared with 2.7 in 2018. They are also more keenly aware of non-traditional players like Shopify, Moneris and Mogo. (See Figure 6.)

Unsurprisingly, the research found that, just like with consumers, the importance of branch locations has also fallen for business owners and is no longer as much of a key driver of bank choice. On the other hand, the ability to provide superior products and services has significantly increased since 2018, pointing to a need to drive differentiation in products and experiences. (See Figure 7.)

Figure 6: Non-Bank Awareness — National

Source: Customer Knowledge Mobile Customer Experience Analytics | 2018 –Which of the following non-banks do you recognize as providing banking services to businesses? Individual Select | 2022 — How familiar are you with the products and financial services each of the following non-banks provide to businesses?

Figure 7: Attribute Importance

Source: Curinos Customer Knowledge | 2018 & 2022 Business Banking | 2018 n = 694 | 2022 n = 782 Q 22. Please select the three attributes that are most important to your company when selecting a primary bank.
As one of the industry’s lowest-cost sources of deposits, business banking will take on even greater importance as rates rise. But as business owners increasingly embrace digital-first players, it is critical for traditional institutions to innovate and drive a differentiated value proposition in order to compete for these relationships.

How To Capture The Under-35 Customer With Financial Advice

The younger generation needs financial advice — and they are often getting it from fintechs and digital-first providers.

New research from Curinos has found that new entrants have gained significant momentum with the under-35 crowd in capturing volume away from traditional institutions. This trend is a clear threat to institutions that are trying to build their future customer base of younger consumers. It also presages a potential outflow of existing balances when wealth transfers of money are passed to the next generation.

Other highlights from this “next-gen” research include:

  • They accumulate information, sourcing financial advice from multiple outlets compared to the handful that is gathered by those over 35
  • They also get information from non-traditional and digitally-forward sources, such as social media and community forums like Instagram, TikTok and Reddit
  • Financial advisors and bankers rank third as a source of information after family and friends, indicating professional guidance is still important to them (See Figure 8.)

Figure 8: Financial Advice Source Usage

Source: Curinos Analysis; 2022 Curinos Canadian Digital Advice Survey Q: How often do you use the following source(s) for financial advice? (Responses that weren’t “Never”)

The research suggests that traditional bank may be wise to team up with online platforms to draw in the next generation, whether through partnerships with influencers/trusted advisors or through marketing bank-led advice and tools that can help them reach their financial goals. Targeted marketing will play an important role in either route in order to reach the right audience with succinct messaging.

Additionally, banks must learn to overhaul and reduce the cost of the traditional advisor model so that it appeals to this generation. This can help the bank to nurture the relationship as the young customer grows up with the bank.

At the same time, banks must also communicate the advantages that a traditional institution provides, such as having full banking product suite all in one place. These products, combined with good advice, can help capture the next generation of consumers.

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