Welcome to the November 2022 issue of “This Month in Retail Banking,” which examines the latest trends in branches, mortgages, account switching and digital capabilities.
We start with a look at the FDIC’s most recent report on branches that shows the pace of retail branch closures has slowed since the height of the pandemic but is still higher than the steady 2% declines we have seen in recent years. Banks are accelerating their retreat from supermarket branches, a logical development due to the high costs of such outlets and the rise of digital payments. Curinos continues to believe that more branch closures are needed — a topic that we addressed in a recent webinar and will examine further in the next issue of the Curinos Review.
We then turn to the mortgage industry, providing some strategies for lenders as they combat challenging times. Technology and servicing should be key areas of focus.
Meanwhile, some providers are taking steps to keep customers who may be wooed by higher rates from competitors. Curinos is seeing an increased rate of promotions and cash offers for existing customers amid a rise in account switching.
Finally, we shift to digital advancements in credit cards, where issuers are developing new tools that help potential applicants identify the most appropriate product for their financial needs. Such capabilities may be useful in other areas of retail banking, as well.
Banks Slow Pace Of Branch Closures
– For Now
The FDIC’s latest report on branches and deposits confirms the trends that we have seen throughout the year. After years of steady 2% declines in retail branch counts, the pace of closures doubled to 4% as many banks tried to play catch-up with pandemic-driven shifts in customer behavior. (See Figure 1.) In 2022, however, the net change in retail branch count has slowed to 3%.
Even though the numbers continue to fall, Curinos believes there is still excess capacity in the system — especially because customers are continuing to move toward the digital channel. Depending on the upcoming economic cycle, banks may be forced to once again accelerate closures to bolster earnings.
One interesting observation on the branch closures over the past few years is the dramatic pull-back from in-store branches. While in-stores represent only 4-5% of retail bank branches, net in-store branch reductions have risen to as high as 22% of closures. For many banks, in-stores were a mass-market play, with lower balances but (potentially) lower operating costs.
While banks have been shuttering supermarket branches for several years, the recent overhaul of overdraft policies has altered the economics of serving mass-market customers. As a result, more supermarket closures are likely in the future.
Figure 1: Shifts in Customer Behavior
Mortgage Lenders Need Strategic Focus As Volumes Tumble
The November hike in interest rates means that the 40% decline in third-quarter mortgage originations experienced by many lenders isn’t going to ease any time soon. New home sales are now below recession levels of 2000 and have fallen all the way to 1996 levels, when interest rates were near 8%. (See Figure 2.)
Curinos believes that lenders should focus on a few strategic areas:
- Servicing Sales. Lenders with a servicing portfolio should consider monetizing that asset at a time of strong market demand due to higher rates and lower prepayment speeds. Many lenders have already capitalized on this strategy and are using it to prop up earnings.
- Optimize Tech Stacks. Technological advancements are key to creating operational efficiencies and thereby drive down operational costs for lenders. To create scale and secure profits, now is the time to reconsider technology platforms and providers and find those that recapture existing customers, entice new customers and eliminate redundancies.
- Margin Preservation. Despite some consolidation, competition remains amplified and pricing wars persist. Lenders that create visibility to all margin economics (price exceptions, risk-based pricing, purchase pay-ups) with a data-driven approach and strong leadership will succeed and create opportunities to preserve market share and even increase margins in this challenging environment. This will create even more opportunity if the Fed pivots its strategy.
- Counterparty Risk. Because lending is relationship-based, lenders should focus on developing trade partnerships with well-capitalized institutions that are experienced and transparent. To diversify counterparty risk, it is prudent to have multiple outlets with similar product offerings.
Figure 2: Mortgage Volume Trends
Rise In Account Switching, Attrition Triggers Provider Response
It has taken a while, but some financial institutions are responding to the increased pace of account switching and attrition among retail customers. Deposit coffers remain adequate, but it appears that some providers are unwilling to let their customers go — perhaps because they are concerned about the prospect of reacquiring them at a higher price down the road if they need to shore up liquidity and funding.
Some financial institutions have started making cash offers for savings balances instead of only checking. Others are offering exception pricing for high-balance accounts. And there are even some promotional rates for retention.
These efforts come against the backdrop of a record gap between base rates and the highest rates for savings/MMDA accounts. (See Figure 3.) In the 2019 rising-rate cycle, online providers offered rates of about 2.25% compared with 1.5% from traditional institutions. Today, some online rates are above 3.5%, while traditional institutions are offering about 0.30%.
Looking ahead, it will be important to follow movements in the 40% of consumer checking accounts that have balances in excess of $100,000. Will those customers chase higher rates and take their money elsewhere?
Figure 3: Savings/MMDA Rates
New Digital Tools Help Customers Choose Credit Cards
Self-service is the defining paradigm of digital banking, and nowhere does this ring more true than in product discovery.
Credit-card providers lead the pack when it comes to introducing tools that help potential applicants identify the most appropriate product for their financial needs.
For example, card issuers that offer prequalification forms enable customers to check their eligibility before starting an application. This can be an incredibly powerful way for issuers to filter the selection process. Applicants also benefit from product selection tools designed to provide direct comparisons of similar benefits or card types. Adding third-party cards in these tools can also help to keep applicants in the journey.
A number of providers have integrated filter systems to inform applicants of the ideal credit cards for them, providing a personalized, self-service journey. Even better experiences integrate APIs to pull in existing customer data.
Leaders in the field integrate tools to help the applicant select the best card, guiding the user through the journey using engaging interactive visuals. One major U.S. player not only provides feature filters with tick boxes — a side-by-side card comparison tool that enables users to compare two cards simultaneously as they narrow their selection. The tool also offers a robust rewards calculator.
As the credit-card market becomes increasingly competitive, providers must continue to add new services to entice new customers. By building out self-service product discovery journeys, lenders can offer personalized guidance and highlight the specific benefits of each of their card offerings.