This Month in Retail Banking: Setting a New Tone

It wasn’t so long ago that the banking industry was seen as a lumbering behemoth, slow to respond to customers and the outside world. Those days are clearly over.

The industry is now scrambling to keep up with a flood of new products and policies – many of which have been created and adopted by new entrants. With higher rates just around the corner, banks and credit unions will have to work even harder to retain current customers and acquire new ones.

There is no better example of this than the fast-moving overhaul of traditional overdraft policies, many of which have eliminated fees altogether. Needless to say, this will cut deeply into non-interest income. We suggest three actions that banks can take to stay relevant in this area. Meanwhile, “buy now, pay later” products are expanding even as they are being adopted around the world. In a bid to attract older customers, a growing number of providers are now offering physical cards.

At the same time, banks must consider their workers as The Great Resignation takes hold and employees re-think what makes them satisfied.

Expectations for rates are also speeding up, with some economists now projecting as many as seven increases this year. The faster pace can wreak havoc with internal plans, highlighting the need for scenario planning that incorporates multiple paths.

Agenda

Overdraft Overhaul Speeds Forward

The industrywide overhaul of overdraft shows no signs of slowing down and customers are paying attention. Consumers now expect limited (or no) OD/NSF fees at all from their current banking provider and/or the banking institution they are considering. In fact, Curinos research has found that this expectation is even apparent among the mass affluent segment, with more than half of mass affluent consumers saying they believe it is important that their checking product doesn’t have OD fees.

Recent announcements from large institutions like Truist and TD Bank, combined with previous news from the likes of Chase, Bank of America, Capital One and Wells Fargo, are focused on new types of overdraft and access to liquidity features. Credit unions and smaller institutions are also taking action. First National Bank of Texas, an institution with relatively high fee revenue, has launched a “One-Day Rewind” feature that automatically refunds customer overdraft fees within 24 hours (if the account balance isn’t overdrawn by more than $12 at the end of the next day).
Credit unions also are revisiting their overdraft fee structures to counter the positioning from big banks. Chicago’s Alliant Credit Union, for example, is eliminating overdraft fees.

Curinos believes that banks and credit unions can pursue three actions to remain competitive in this fast-moving environment:

Modernize the Checking Suite
Re-structure your checking suite and fee schedule to maintain competitiveness and to fend off attrition without upending the balance sheet.

Maximize Value with the Current Base
Given the major pressure on both sides of the traditional banking U-curve, the importance of driving higher value with current customers/members is greater than ever before.

Innovate Into Your Next Act
As the fee-friendly and OD space becomes crowded, the next act of differentiation is up for grabs. The level of differentiation is contracting across the industry (including for neobanks). This is a key opportunity to develop the next-generation product and experience to build a competitive moat for acquisition, engagement and quality retention. 

Given the increased pressure on the fee side of the traditional banking revenue curve (and the upcoming pressure from rising rates and direct banks on the margin side of the curve), banks and credit unions have no choice but to act. (See Figure 1.) Inaction will impact the ability to acquire new customers and will also likely lead to higher attrition as consumers seek out the newer options.

Figure 1. Traditional Banking Revenue Curve

Source: Curinos Analysis

Reading the Tea Leaves on Higher Rates

The Fed has clearly indicated that rates will be rising soon and there are increasing views that these hikes will be more frequent and faster than what was initially expected. But those perspectives vary widely.

Many financial institutions are still working through old forecasts that call for two or three Fed increases this year. Others have already shifted expectations much more significantly. Bank of America’s economists, meanwhile, have publicly projected seven increases this year and another four next year.

The markets are also pricing in more aggressive increases, especially due to the news that inflation surged 7.5% in January to a 40-year high. According to the CME Ratewatch, which tracks Fed Funds futures, the markets now believe that the Fed Funds target rate is likely to increase by 50 basis points in March compared with previous expectations of a 25 bp rise. The markets also anticipate six or seven total increases for 2022.

Banks need a concrete plan for a much more aggressive Fed stance even if the bank’s internal forecast continues to lag. How will you respond if the Fed hits 1.00% by June? How do you keep costs in line while retaining your most valuable customers?

Scenario planning is also critical. Expectations have shifted very quickly and may continue to do so in the future. Playbook-based planning with multiple plans can keep banks on the front foot, allowing for proactive rather than reactive response and maximizing the potential of success.

BNPL Frenzy Sets Sights on Older Shoppers 

The “buy now, pay later” (BNPL) craze is targeting older spenders with physical cards. The move is an effort by providers to drive additional spending from the over-45 crowd – the fastest-growing segment for the short-term liquidity product even though millennial and Gen Z consumers are still the biggest demographic.

Research from Ascent found that the use of BNPL services by U.S. spenders over 54 years old had doubled to 41% in March 2021 from July of 2020. Indeed, older consumers may already be familiar with the BNPL concept due to old-fashioned installment and layaway plans.

Klarna has launched a physical card in Sweden and Germany and reportedly has 400,000 people on its U.K. waiting list. The company also plans to introduce physical cards to the U.S., where Affirm launched physical cards last year. Butter rolled out its physical cards at the beginning of December and expects them to eat into the credit card market. And Zip Co. Limited, which formerly operated in the U.S. as Quadpay, announced a physical Zip card in November.

While it isn’t clear if these new cards will take hold among consumers, banks must continue to closely follow developments in this fast-growing area.

The Great Resignation and the Bank Branch

It’s no surprise that The Great Resignation has implications for the nation’s bank branches, where exhausted staff members have been frontline workers throughout the pandemic. As a result, banks are challenged to maintain sufficient staffing levels to keep branches open (especially through the latest omicron surge) even as transaction volumes are down 25%.

While omicron is receding in many parts of the country, the fundamental issues with the retail branch workforce model remain. The transaction-focused nature of the historical branch model requires relatively low-wage, clerical and repetitive work – exactly the types of roles that are experiencing high levels of attrition during The Great Resignation. A recent study quoted in Forbes found one of the most significant factors that attracted people to a new job was “more meaningful work.” (See Figures 2 and 3.) Do job postings for teller positions address this interest of prospective employees?

Consumer behavioral changes and rising expectations around the in-branch experience provide an opportunity for banks to shift from a transaction focus to one on advice and financial health. The next generation of branch workforce is especially attuned to providing a positive impact on the places where they live and work. Branch roles should be repositioned to demonstrate the value and impact branch associates can have on the financial wellbeing of their communities. 

Figure 2: What Made the Grass Greener?

Figure 3: What’s Causing The Great Resignation?

Factors that attracted people to a new job

The biggest causes of quitting 

Flexible working practices
77%
Low salary
67%
Better salary
77%
Limited career opportunity
66%
Better employee benefits
77%
Not being valued by manager
65%
More stable work (salaried 9-5 vs. varying shift work)
77%
Relationship with my colleagues
64%
More meaningful work
75%
Inadequate pandemic health measures
64%
Prospect of career growth
74%
Poor employee benefits
64%
Wanting to change job industry entirely
62%
Negative interactions with customers
57%
Being forced to return to on-site work after working remotely
55%
Seeing other colleagues quit
54%
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