Welcome to the May issue of This Month in Retail Banking. Volatility and instability are the big headlines around the world, creating more challenges for retail bankers than had been expected even a couple of months ago.
It may be tempting to freeze in place until things settle down, but chances are that your competitors aren’t staying still. That doesn’t mean you only have to offer the highest rate in the market. Instead, successful providers will take the opportunity to use the right tools and information to help identify what customers want and need — as well as what the institution wants and needs to support its strategy for today and beyond.
Stale Customer Messaging Won’t Work in Fast-Moving Market
Inflation. Rising rates. Geopolitical instability. COVID-19. Supply-chain disruptions.
One of the biggest challenges for banks in this difficult environment is figuring out how to protect and defend the existing book of business. At the same time, providers need to get a fair share of deposit growth — without heating up the rest of the book.
Our wide-angle lens on deposit behavior across the industry enables us to identify a variety of different attitudinal and behavioral segments. And it’s clear that the segments within a typical deposit book will respond to rate very differently. The winning institutions will be those that can distinguish between depositor risk profiles and send relevant marketing messages to each — all while keeping and growing deposits for lowest cost of funds.
The element of speed is also critical: the ability to dynamically respond to changes in the market is an important advantage when prices are moving quickly.
Unfortunately for most traditional banks, marketing campaigns still require at least a four-to-six-week lead time to execute. Add another four to six if you want to include some A/B or multivariate testing for optimization. Under this scenario, chances are that the market will have moved on by the time you get out of the gate.
The good news is that it is still possible to make significant progress in testing in this calendar year. The path to success lies in scoring customers on the basis of their likely retention risk and rate sensitivity. That means there is no time to waste. To minimize runoff, pre-build tests now that can be deployed quickly to identify the optimal treatment for each segment.
Direct Banks Boost Savings Rates
In our last issue, we looked at the rise in direct bank CD rates that began even before the Fed started raising rates in March. It’s now time to take a peek at direct bank savings rates.
While savings rates at branches haven’t yet moved materially, we are observing direct-bank betas above 80% for top savings rates. (See Figure 1.) Indeed, the average of the top 10 rates has increased by 22 bp. That is already a faster pace than the last rising-rate cycle and doesn’t yet even take into account the Fed’s 50 bp rate increase earlier this month. (Stay tuned for the impact of that hike.)
In addition, balance trends continue to show clear risk as rates continue to rise. High-balance checking accounts have increased materially over the last two years, leading to the potential of significant runoff as rates continue to rise. Data from the Curinos CDA Consumer Executive Summary show that 40% of checking balances now sit in accounts with more than $100,000 — up 10% from early 2020.
Figure 1: Direct Bank Savings Rates Dec’21 — Apr’22, Top 10 Average Bank Rates
More Branches Don’t Mean More Customer Acquisition
There have been many discussions over the years about the S-curve, which shows the relationship between branch share and the share of deposits in a market. We have seen a weakening of this relationship over time as deposit balances have moved from local and regional providers to national direct banks. Additionally, banks in some markets have achieved dominant deposit share without the largest branch network.
Building on that theme, recent Curinos research has found that banks with more branches also don’t necessarily capture an outsized share of new customers.
As customer behaviors have continued to shift away from the branch, Curinos evaluated the relationship between branch share and the share of new customer acquisition represented by new-to-bank checking sales per population. Looking at three regional banks, we saw the same general pattern: higher levels of branch share don’t continue to deliver higher share of acquisition – the rate of acquisition actually starts to diminish. (See Figure 2.)
It is also interesting to notice that the slope of the lines in Figure 2 is different for each bank, indicating a different level of acquisition performance. We attribute these differences to the strength of the bank’s value proposition or perhaps the use of marketing to drive incremental sales performance.
Additionally, there are a number of outliers for all banks, indicating that it is possible to achieve higher levels of sales performance with fewer branches under the right conditions. Understanding where and how you are able to achieve more with less can inform your strategy.
With continued pressure on earnings, retail teams will be asked to identify another round of branches for closure. While the industry has trimmed aggressively over the last two years, there is still excess capacity in the system if you know where to look for it.
Figure 2: Branch Share vs. New-To-Bank Checking Sales per Population
Volatile Markets Put Focus on Digital Investment Capabilities
There’s nothing like widespread market volatility to underscore the importance of digital capabilities for investment platforms, especially when it comes to customer experience, service and product offerings. After all, this is the time when consumers are reconsidering their risk appetites, which may increase their engagement with these platforms.
In these times, providers with robo and traditional advisory capabilities or fund management services may have the upper hand. Although customers are more likely to try purely self-directed journeys when the market is going up, they are more inclined to seek help and guidance when things start to look difficult. But whether they are handing the reins over to a computer or placing their funds with a human advisor, consumers need to feel that the service is complemented by other functionalities.
Market uncertainty is likely to push consumers toward goals and targets that can be updated as circumstances change, but surprisingly few providers really engage customers in this area. Other valuable features include hypothetical and historical performance charts, auto rebalancing, portfolio management buckets and interactive sliding scales that allow users to define their risk tolerance.
The ability to meet customer needs comes at the same time when investment providers are integrating new areas of opportunity, like crypto, IPOs and NFTs. As a result, they also need to spend time and effort on education tools and financial awareness.
This isn’t the time for disruptive innovation that upends user experiences and product offerings. Instead, innovation should be rolled out continuously as part of an evolutionary customer experience.