Welcome to the August issue of This Month in Retail Banking. It took a while, but it’s pretty clear that bank customers are growing more aware of the recent increase in interest rates.
Switching behavior is on the rise, triggering a round of CD promotions from providers who want to lock in balances now. But banks still often have a tough time engaging with customers, especially those who are acquired through digital channels. The percentage of unfunded accounts that are originated in digital channels, for example, is actually going up at a time when it should be going down. New marketing strategies can help, but that means marketers will have to work harder to justify their return on investments during budget season.
And while they’re at it, banks must pay more attention to the account-closing process. Otherwise, they may wind up on social media for all the wrong reasons.
CD Promotions Ramp Up
After a slow start, customer behavior is beginning to respond to rising rates. Curinos Comparative Deposit Analytics benchmarking data reveal a substantial upswing in rate-seeking behavior in June and July. Switch from savings to CDs has surpassed 50% of peak levels from the 2019 rising-rate cycle and internal churn to higher rates has doubled from the first quarter. (See Figure 1.) As a result, more banks are turning to CDs as a tool to retain rate-seeking customers and maintain margins on larger savings and MMDA books.
Reference rates have increased across the board, with the weighted average market price for 12-month CDs up by an average of 0.51% across markets around the country between May 1 and August 12 to an average of 0.85%. Competitive offers are now commonly above 1.00%, with more aggressive rates now hitting 2.00%.
With rates poised to increase further, the benefit for banks offering aggressive CDs is to lock in rate-sensitive depositors and retain valuable relationships at an attractive rate for consumers before the competition intensifies even more. In this rapidly-changing environment, careful tracking of both local competitive rates and resulting customer movements is more critical than ever.
Figure 1: Savings/MMDA Switch to CD
Better Communication Tops The List For Customer Engagement
Providers of checking accounts have many whiz-bang features at their fingertips, so why do they still have problems engaging with customers? Sure, these features often compete with price and interest rates that are the main attractions when consumers consider switching brands, but providers just can’t seem to find the holy grail — a channel mix that can retain and grow retail checking clients.
U.S. new-to-bank checking account originations have just barely recovered to pre-pandemic levels and, unsurprisingly, the digital channel has made big strides. The percentage of new-to-bank checking accounts now stands at more than 40%, up from less than 20% before the pandemic took hold.
But banks aren’t doing enough to make that shift worthwhile because these digitally-originated customers relationships are still of lower quality than the ones that came from a branch. The average balance for digitally-originated accounts at the end of the first month on book is between six and twelve times lower than branch. And the average balances are still significantly lower even when normalizing for factors such as age.
Adding fuel to that fire, the percentage of unfunded digitally-originated accounts at the end of the first month on book is getting worse, not better. Nearly 70% of these accounts are unfunded, up from 50% a year ago and compared with 6% for branch-based accounts. And it gets even worse: the percentage of digitally-originated customers who attrite within the first year is roughly two thirds versus only a quarter for those who onboard in person. Given the low level of survivorship for digitally-originated accounts, the balance gap does close over time, but is still two to three times lower than the branch.
Proving The Value Of Digital Marketing
There’s little doubt that financial institutions have made improvements in digital marketing over the past couple of years. That’s a good thing because these capabilities are driving customer acquisition even faster than anticipated.
But significant hurdles remain as marketers feel pressure from the C-suite to prove the value of these efforts — pressure that will only intensify if a recession takes a bite out of bank profits. (See Figure 2.) It is also important for institutions to spend wisely in order to achieve growth objectives and stay competitive.
Therefore, it is critical to adopt tools that can measure the benefits of these operations as costs per acquisition rise. Providers need to analyze the return on investment from marketing to drive funnel and channel mix decisions for continued improvement. This is especially important because accounts that are acquired digitally are typically lower in quality than those originated in the branch.
Unfortunately, most institutions have trouble in making this a reality. Marketing management is often decentralized across regions, it is difficult to attribute results to specific channels and data management is often disparate. Furthermore, the traditional belief that the densest markets should get the most investment doesn’t necessarily hold true for institutions that are pursuing thin-market expansion.
It’s pretty clear that the day of reckoning is coming for digital marketing — if it hasn’t already. It will be essential to prove the value of these operations if you want to retain — and potentially expand — next year’s budget.
Figure 2: Industry Spend by Channel (2019-2022)
Breaking Up Shouldn’t Be So Hard To Do
Financial-services companies often don’t spend too much time on the account-closure process, but maybe they should.
New rules from Apple require providers that support account creation also must allow users to easily initiate account and personal data deletion within the app. While Apple has given some leeway to industries like financial services, the rule highlights a growing belief that the end of the customer journey should be supported just as much as the beginning.
Regulators around the world have varying degrees of guidance about how providers support account closure and how they should facilitate the end of the relationship. Most regimes — such as is the case in Europe — focus on the deletion of the exiting customer’s personal data rather than the ease of the service itself. That said, there’s a growing movement to ensure consumers can end relationships in the channel in which they initiated them. In the U.K., for instance, a rule was passed at the end of last year that stipulates insurers must make it as easy to close an account as it was to open it. That means anyone who takes out a policy in-app should also be able to close it the same way.
Looking across digital banking, different brands facilitate in-app closures in different ways. Providers are required to inform users how long they will hold their data, but different degrees of simplicity and friction exist. At Chime, a straightforward conversation via the chat function is enough. An agent informs the customer that a check for the account balance will be sent to the postal address on record and the last four digits of the social security number are required to confirm account closure. Revolut aims to facilitate a straightforward closure journey through a few clicks, but the app needs to be upgraded to finalize the process. Dave’s app contains a process for closing the account that starts with a list of incentives to keep it open, including an offer of three months of free service. A researcher at our Digital Banking Hub didn’t receive a response to a secure message when trying to close an account, forcing the need to contact an agent through the live chat function.
Banks historically have been content to leave (or even build) friction in the account-closure process, hoping that the dissatisfied customer will change their mind or give up on an arduous, time-consuming journey. Is this really the best way to end a relationship? In the digital world, after all, the unhappy and exiting customer still has a lot of power. Dissatisfied consumers are the ones who make social posts and leave online reviews that are read by potential new clients. It is understandable if a provider tries to keep the customer by displaying benefits and incentives, but the digital closure journey still needs to be streamlined.