This Month in Retail Banking: Keeping Up with the World Around Us

Spring is in the air, but there’s no time for retail bankers to sit back and smell the flowers.

This is the time for financial-services companies to move quickly and definitively in order to keep pace with rising rates, global unrest and customers who are increasingly savvy about digital engagement.

Agenda

Branch Goal Setting: Difficult, But Do-Able 

We recently surveyed banks and credit unions to better understand some of the challenges they face in setting fair and equitable goals for branches as they also support customer growth objectives for the financial institution. The upshot: changes in customer behavior, rising interest rates and staff vacancies are making it difficult for providers to accurately target expected performance levels.

As discussed repeatedly in this monthly publication, the industry is undergoing a significant disruption from a combination of customer, competitive and regulatory forces. Indeed, that was the rationale behind the survey that was conducted during our recent webinar, “Reimagining Branches: How to Adapt Your Goal Setting to a New Reality.”

When asked about the biggest uncertainties when it comes to setting branch sales goals, participants cited customer behavioral shifts, followed closely by changes in interest rates. (See Figure 1.)

Figure 1: What are the largest uncertainties that cause concern for setting branch sales goals?

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Competition from neobank and fintech providers

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Customer behavior shifts affecting branch traffic

0%

Anticipated interest rate shifts and competitive reactions

0%

Increased focus on lending sales (esp. home equity)

0%

Regulatory scrutiny on sales practices

Sources: Results from participant polls, Curinos Webinar: “Reimagining Branches: How to Adapt Your Goal Setting to a New Reality,” March 30, 2022

As for KPIs for branch goal setting, financial institutions are using a mix of product-specific and product category goals with some also using non-sales KPIs (e.g., customer satisfaction). (See Figure 2.) We also solicited feedback on individual versus team goaling; most institutions were using a combination of both.

Finally, when asked about the biggest challenges for goal setting in 2023, participants were most concerned with staffing and vacancies as well as sales skills and productivity. (See Figure 3.)

Given the changing dynamics, financial institutions need to move beyond setting goals merely based on past performance. Leading institutions are setting goals based on opportunity-adjusted performance norms established using peer bank data on a branch-by-branch and product-by-product basis. This level of calibration helps increase the likelihood of branches achieving their goals and, in turn, achieving the desired growth goals for the institution. 

Figure 2: What is your bank’s current approach for goal setting?

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Branch goals are set for units and/or balances by product

0%

Branch goals are set for units and/or balances by category

0%

Branch goals are set based on non-sales KPIs

0%

We do not utilize branch goals by units and/or balances

Sources: Results from participant polls, Curinos Webinar: “Reimagining Branches: How to Adapt Your Goal Setting to a New Reality,” March 30, 2022

Figure 3: What are the biggest challenges that you foresee as you set goals for your branches and staff?

0%

Competition from neobank and fintech providers

0%

Customer behavior shifts affecting branch traffic

0%

Anticipated interest rate shifts and competitive reactions

0%

Increased focus on lending sales (esp. home equity)

0%

Regulatory scrutiny on sales practices

Sources: Results from participant polls, Curinos Webinar: “Reimagining Branches: How to Adapt Your Goal Setting to a New Reality,” March 30, 2022

Direct Bank Rates March Higher

And away we go.

The higher rates from direct banks that Curinos first observed in October are continuing their ascent, with the average of the top 10 in-market CD rates now exceeding 1.40%. Since October, top rates have increased by 57 bp for 48-month CDs and 63 bp for 60-month CDs, with notable jumps in February and April. (See Figure 4.)

Figure 4: Direct Bank CD Rates Oct-21 – April-22,
Top 10 Average

Sources: Curinos standard rate data

The moves come as the Federal Open Market Committee (FOMC) last month announced its first rate hike in three years, with more to come. Another rate hike — widely expected to be 0.50% — is expected at the May 4 meeting. The market now projects Fed Funds to reach 2.50% to 3.00% by the end of the year.

Direct banks have historically been the most aggressive when it comes to price increases, a trend that is continuing in this cycle. The driving factor in this cycle is the uneven distribution of surge deposits that have flooded into the system since the pandemic started. Much of that money, both in the form of stimulus checks and foregone spending, have built up largely in primary checking accounts — a category in which most direct banks typically don’t compete.

Indeed, while Curinos isn’t seeing significant increases in savings and MMDA rates at traditional banks, top savings rates from direct banks have increased by more than 10 bp since late last year.

With numerous increases projected for 2022, Curinos anticipates this trend with direct banks to continue. While most traditional banks have excess deposits, direct banks in many cases don’t. Some traditional banks may be willing to accept runoff of rate-sensitive customers, but all banks must be careful that valuable customers and relationships aren’t the ones who are fleeing. Timely relationship analytics are critical to ensure that direct banks don’t grab customers that primary banks will want to keep.

ARMs See Resurgence As Rates Rise

Curinos has long predicted that certain slumbering mortgage products will come back into favor when rates start to rise. It’s now clear that adjustable-rate mortgages are at the top of the list.

The volume of conforming ARMs tracked by Curinos has increased nearly 100% since early January, reflecting increased consumer appetite as the mortgage market remains heated and rates are rising. (See Figure 5.)

Non-conforming ARMs also swelled by 225%, accounting for 37% of total non-conforming volume tracked by Curinos at the end of the first quarter, up from 22% at the start of the 2022. (See Figure 6.)

Figure 5: Total Conforming Benchmark ARM Volume

Note: Total Conforming Benchmark Volume: 3,5,7 & 10-Year ARMs
Source: Curinos LendersBenchmark

Figure 6: Total Non-Conforming Benchmark ARM Volume

Note: Total Non-Conforming Benchmark Volume: 3,5,7 & 10-Year ARMs
Source: Curinos LendersBenchmark

The appeal of ARMs is likely to grow through the year as rates continue to rise, widening the spread between fixed rate mortgages and ARMs, especially for those loans that have initial fixed rates for seven and 10 years. The speed of this shift away from fixed-rate mortgages is occurring faster than in recent memory.

So how can lenders position themselves for success in this dynamic and complex market? For banks and credit unions, it is crucial to have insight and market intelligence available at their disposal to be proactive in product and pricing decisions.

Meanwhile, mortgage bankers who must sell loans (since they generally don’t have the ability to retain loans in their portfolio) must develop relationships with banks and credit unions that have an appetite for ARMs. A continued focus on building and nurturing such relationships is integral given competition within the market and among investors.

The Rise of the Banking Bot

Imagine a world in which a banking app is simply a virtual assistant where journeys are based on voice or text message- activated dialogue that direct users through the entire banking experience.

It isn’t so farfetched, especially since virtual assistants are now benefiting from enhanced machine learning. A slew of technology developments have led to many chatbots responding accurately between 80-to-90% of the time. That compares with just a few years ago when a 35% positive return would have been considered a success.

On top of that — or maybe because of it — consumers are increasingly comfortable with this type of engagement in retail and other settings.

Virtual assistant providers now offer unauthenticated as well as authenticated experiences. While the former is still general, the latter is being made up of increasingly sophisticated journeys, built around real-life conversations that users have with bots. And then there are common journeys like money transfers, transaction management, account administration and applications.

Financial providers have struggled with standard menu-based apps that rely on linear flows to direct journeys along specific paths. While bots have been subject to the same limitations, new memory capabilities allow them to remember contexts and deal in terms of nonlinear flows. A function like paying a bill may contain multiple actions, but bots are quickly learning to condense information.

In the past, the bot would have asked sequential questions: “What do you want to do? Who do you want to pay? Which account do you want to pay from? How much? When?”

Now, market-leading bots can take all that information from a single instruction from the user. The experience can be tailored according to previous interactions with customized advisory services built in.

Banks that want the app to be completely built as a virtual assistant must craft the conversational design and create the integrations required to bring it up to par with the capabilities that exist in the current mobile app.

Of course, not everyone likes a bot and departing from the accepted menu-based interfaces with linear structures could be too much for some consumers.

But those that dare to innovate and challenge the traditional framework often gain the upper hand.

Does Your Marketing Adapt in Tough Times?

Curinos has long advocated that a personalized marketing approach can build customer loyalty and engagement and that is also the case during times of economic and global unrest.

One Curinos client recently saw higher levels of email engagement with customers under age 30 when reaching out with messages that emphasized security and protection. Perhaps this isn’t surprising given the simultaneous presence of COVID-19, the Fed hike and turmoil in Ukraine. The response was unusual, however, because this demographic typically is most engaged after receiving emails that are witty or suggest they may be missing out on an offer or program.

This reinforces the need to be flexible and dynamic in the way providers communicate with their customers. Personalized messages are often based on previous behavior and needs, but that doesn’t mean that financial-services companies can’t reach out with a virtual hug in tough times.

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