Welcome to the October issue of “This Month in Retail Banking” that explores a range of topics from fair lending to marketing spend.
We all know the digital channel is eating up investment time and money at institutions around the country, but are they getting good value from it? Curinos unpacks the latest data from Acquisition IQ (AIQ) that show retail marketing spend has now soared beyond 2019 levels.
Then it’s time for a monthly look at the latest in rate trends as banks pump up their offers for savings and CD accounts. The push for higher rates will continue and institutions that lag the market are likely to lose customers.
Elsewhere in retail banking, providers are girding for a potential big shift in the way regulators assess their compliance with fair banking rules. This comes after the Consumer Financial Protection Bureau recently expanded its anti-discrimination oversight and enforcement beyond lending to cover all consumer finance products.
And finally, Curinos is providing a sneak peek into its upcoming 12th annual U.S. Banking Shopper Survey, which this year includes some new questions about consumer perceptions of brands, experiences and channels when they shop for a checking account.
Retail Marketing Spend Surpasses 2019 Levels, Driven By Digital
After dipping during the pandemic in 2020, retail marketing spend has now surpassed 2019 levels, led by the continuing growth of allocation to digital channels, according to new data from Curinos Acquisition IQ (AIQ). First-quarter investment in customer acquisition was 30% higher than in the first quarter of 2019 and, reflecting a trend that started in early 2021, digital channels accounted for more than half of dollars spent, compared with only 8% three years earlier. (See Figure 1.)
The spending growth reflects the increasing importance of retail marketing in general and the growing reliance on digital acquisition that was spurred and sustained by stay-at-home account shopping borne by the pandemic.
Greater spending, however, hasn’t meant greater efficiency. The average cost of acquiring a new customer (cost per acquisition, or CPA) is now 69% higher than it was in 2019, jumping from $437 to $743. During the same period, the marginal cost of acquisition (mCPA) rose 27%, from $1,820 to $2,322. Although this is a lower rate than CPA growth, it reflects the increasing difficulty of acquiring each additional customer. (See Figure 2.)
Figure 1: Industry Marketing Levels – Indexed to 2019 Average
Figure 2: Average Marketing CPA in 2019 vs 2022
While digital channels may continue to represent the dominate share of spending in the future, using them comes with a cost. In line with acquisition trends, the shift toward digital channels has also yielded accounts of lower quality – those that typically exhibit lower balances and roll off more quickly – than branch originations. These accounts also come with less cross-selling potential and greater incidents of fraud.
As customer acquisition becomes more challenging due to greater competition for slowing deposit growth, a key lesson for retail bankers is to be surgical. Identify the right customers through better segmentation and focus on the channels where they can be reached at an acceptable CPA. Because of increased reliance on digital acquisition, which is, by definition, remote and DIY, it will also be increasingly critical for marketers to ensure a high-quality activation experience at the end of the funnel.
Rates Pass Inflection Point, Lag Is Lifting
Even as the Fed continued to increase the Fed Funds target rate, most branch banks were lagging deposit rates through June. Only 12% of banks offered a savings account rate of 0.50% or higher and only 8% of banks offered a short-term CD rate of 1.00% or higher. Even with competition from internet banks, customer behavior hadn’t started to react to the higher rates and banks were able to broadly lag betas.
That is changing. As deposit runoff has picked up and competition has stiffened, more banks are increasing rates for deposits. As of September, 28% of branch banks offered a savings rate of 0.50% or higher, while 11% of branch banks were pricing at 1.00% or higher. (See Figure 3.) And CD rate increases are even more significant, with 43% of banks offering a short-term CD rate of 1.00% or higher and 16% offering at least 2.00%. (See Figure 4.)
Curinos expects institutions will remain under pressure to raise deposit rates, especially as the Fed pursues additional increases in a bid to tamp inflation. Those that don’t act will likely experience higher levels of balance attrition.
Figure 3: Distribution of Savings Acquisition Rates |
Jan ‘22 – Sep ‘22 (% of banks offering a savings/MMA product of at least the following rates)
Figure 4: Distribution of CD Acquisition Rates |
Jan ‘22 – Sep ‘22 (% of banks offering a <24-month CD of at least the following rates)
A Fair View Of Fair Banking
The Consumer Financial Protection Bureau’s (CFPB) recent update to the Unfair, Deceptive, or Abusive Acts or Practices (UDAAPs) examination manual has drawn the ire of the Consumer Bankers Association (CBA) and other financial groups. They suggest the changes, which take the agency’s anti-discrimination oversight and enforcement beyond lending to cover all consumer finance products, represent an enormous “self-expansion” by the bureau. According to the CBA, “not only do these actions raise profound substantive and procedural legal concerns, they also threaten banks’ ability to deliver the products and services millions of Americans rely on to meet their financial needs.”
For banks, it could mean compliance departments may get busier. UDAAP exams basically ensure that the banks are following the Equal Credit Opportunity Act (ECOA), which makes it unlawful to discriminate when extending credit and which the CFPB is authorized to enforce. Firstly, the CFPB’s changes extend the traditional fair lending analyses to all of an institution’s consumer-facing products and services – including deposits and payments. Secondly, examiners will now review models, algorithms and decision-making processes for potentially “unfair” discrimination, and monitor employees and third parties for discriminatory conduct.
Indeed, findings from the Curinos Fair Banking Compliance mystery shopping programs suggest that unfair practices do exist.
As financial institutions offer more personalized products, services and marketing, it will be more critical than ever for them to evaluate the treatment of customers to ensure they are complying with these rules. The changes unveiled by the CFPB means that the risk of running afoul of the regulator has increased substantially. Thorough testing and evaluation are important to ensure that staff and point-of-sale procedures are delivering fair banking.
Coming Soon: An Expanded U.S. Banking Shopper Survey
The 12th annual U.S. Banking Shopper Survey is in the works at Curinos and includes new questions about consumer attitudes toward social media reviews, the reasons for quitting a bank and other relevant topics.
The survey targets recent shoppers (consumers who have recently switched to a new primary bank) and examines their brand perceptions, shopping experiences, channel preferences and attitudes – providing clear reasons for why they chose the primary bank.
Many of the survey’s enhancements explore more fully preferences for digital delivery, including mobile-payment technologies, peer-to-peer payment providers and relationships with fintechs and other non-traditional banking sources. To many categories we’ve added to the list of offered responses. For example, because mobile has become the dominant mode of digital interaction among many consumers, the survey now makes a clear distinction between online and mobile preferences.
This year’s survey also solicits the impact of positive reviews on social media, app stores and review sites as well as the significance of comments and recommendations through social networks. To the list of why a respondent may have left a bank, we have added response options that include whether online banking or mobile apps may have influenced their decision. Drilling down further, we ask about online and mobile bill payments, live chat and how quick and easy it has been to pivot from digital to a live representative.
The survey covers the top 69 DMAs. Findings will be released later this year.