This Month in Retail Banking
In too many cases, financial institutions are reacting to the continuing compression of net interest margin by reducing operating expenses. This includes closing branches and reducing marketing spend. The downside to this approach is that branches and marketing are the primary drivers of the core customer growth that supplies banks with low-cost funding. Reducing them makes a bank even more reliant on rate to acquire new customers. What to do?
Curinos believes FIs can and should both actively manage the retail cost of funds and drive core customer growth. The way to do this is by capitalizing on the unique circumstances that define each of its markets.
When measured by branch share density, an institution’s markets typically display their own performance characteristics. Consider, for example, two discrete markets in a bank’s footprint with a similar number of branches but significantly different branch share – dense (12%) and thin (2%). Dense markets often have larger average deposits per branch and higher levels of brand awareness, which makes its marketing more efficient in acquiring new customers. In thinly branched markets, marketing is relatively inefficient when it comes to driving new relationships.
In the dense market, a promising option may be to double down on customer growth even though the bank already enjoys relatively strong share. Inherent network efficiencies, even if only incremental, may help fund the marketing investment.
In the thin market, a bank may use rate aggressively to achieve deposit growth while at the same time softening the impact of having to reprice markets where there’s a larger back book. And because it’s playing the rate card, the bank may not need as many locations to pursue its strategy, thereby providing funding for deposit acquisition that may have gone into physical locations.
This simple example illustrates the need to understand and activate the right investment mix by market, irrespective of branch share density. In dense markets, investments in branches and marketing may pay off. In thin markets, the principal lever to funding growth may be rate. In seeking efficient growth bank-wide, look to the differences in penetration by each market and calibrate your resources accordingly.
