Although COVID-19 has finally begun to release its most deadly grip on the nation, the effects of the pandemic continue to challenge the return to normal that so many people hoped would be forthcoming. Branch transaction volumes are down permanently more than 30%, meaning significant overcapacity is now built into the distribution system. With inflation running high, rapidly-rising interest rates are likely to reach levels that drive customer churn in only six months — half the time of previous cycles. This means rate shopping and rising costs of funds are right around the corner and not a “next year” problem.
Digital challengers are well positioned to take advantage of their cost advantages both in infrastructure and deposits. That leaves big questions about how they will affect the post-COVID-19 environment and if the big banks can maintain their defensive high ground through the cycle. For those large players, responding to the challenge means getting beyond a “compliance” mindset and staking out new distinctive territory in the minds of the customers.
It’s Time to Close Branches
We are all still trying to navigate the COVID-19 pandemic, especially as new variants emerge. With respect to branch banking, however, it looks like there is a new floor of stability.
That’s because, despite the ebbs and flows of the pandemic, the percentage of customers visiting a branch each month for the last year has declined by more than 30% and has barely changed since. (See Figure 1.) This is consistent with Curinos benchmark data from Canadian banks that show teller volumes have declined by 30% to 35%.
But despite the steep fall-off, banks have only reduced teller staffing levels by 20% (while staffing levels for bankers and management have stayed relatively unchanged). The resulting decline in productivity follows a pattern seen in other markets, where banks are unable to reduce operating expenses in line with the decline in customer activity.
Figure 1: Percent of Individuals Using Branch Channel in last Month for Any Activity
In other markets such as Australia, banks are trying to address the disconnect by closing branches to offset the productivity decline. But Canadian banks continue to resist closing branches despite being a highly-concentrated market. Why?
While nobody wants to be the first mover, customer behavioural shifts will continue to put pressure on banks to rethink their approach — not just for branch locations, but also for branch roles and responsibilities.
Are You Ready for Customers to Start Chasing Rate?
The Bank of Canada’s recent moves to raise interest rates haven’t sent consumers scrambling for more yield on their accounts, but that may soon change.
The central bank is expecting to announce another hike on June 1, following a 0.50% increase in April that raised the target rate to 1.00% and represented the biggest one-time increase since 2000. Bank of Canada Governor Tiff Macklem has said he wouldn’t rule out even larger increases in the future. The April increase also came on the heels of a 0.25% increase in March.
Banks remain awash in deposits, but higher rates increase the likelihood that consumers will start searching for better deals. So far, there hasn’t been much switch from chequing to savings, but 1.00% is usually the point at which that happens. (See Figure 2.)
Curinos believes that customers are more elastic than in past cycles because the sophistication of digital channels make it easy to move. As a result, switching will occur at a faster pace, especially as rates above 1% become available. That said, there will be notable different responses by customer segment.
The challenge for providers, then, is to decide which customers are worth keeping and which aren’t. Many institutions are already deploying analytics that capture customer-level drivers of balance movement. Providers that use these tools can avoid costly portfolio repricing by identifying customers who are most likely to switch institutions or products. After all, why offer higher rates to customers who weren’t planning to move anyway? As for the valuable customers who are at risk of chasing rate elsewhere, they can be targeted with either proactive or reactive offers, depending on their expected long-term value and the bank’s funding needs.
Strategies like these will be critical for banks to retain the right balances without significant increases to posted rates. Analytics can help capture assorted aspects of deposit balances to identify the right treatment for each customer:
- Discretionary Liquid Balance – how much of a customer’s balances are for day-to-day cash flow versus excess savings that are more likely to be shopped
- Price Sensitivity – how will a customer respond at a given offer rate
- Balance Persistence – how much of a customer’s balance will remain
- Shopping Behaviour – how likely is a customer to augment balances
Financial institutions will certainly face significant challenges as rates begin to rise because they won’t be able to rely on previous cycles of behaviour. The ones that closely track customer behaviour and respond rapidly will be ahead of the game.
Will This Be the Year for Digital Disruption?
The biggest banks are gaining even more ground in the race for customers, but the growing appeal of digital engagement threatens to shake up the industry.
The latest Curinos Shopper Survey found that the level of unaided awareness has bounced back to 2019 levels, especially for branch-based banks. (See Figure 3.) In fact, the Big 5 now capture 72% of new-to-bank primary customer acquisition, up from 65% in 2020. The December 2021 survey of 1,852 people in 11 markets also found that the Big 5 perform much better than most competitors in distinctiveness and perceived convenience — the key brand metrics that drive acquisition
Figure 3: Trended Unaided Awareness
But this isn’t the time to sit back and relax; digital players are a looming threat. After all, the most important driver of convenience for consumers is useful online/mobile capabilities and branch-centric capabilities are declining in importance. This opens the door to digital disruptors. And there are other indicators too:
- The preferred and actual account opening channel is shifting further away from the branch and toward digital channels (See Figure 4.)
- Awareness of digital and non-bank players have increased dramatically over the past year
- The most distinctive players are digital players – topping the chart across almost all distinctiveness attributes
Indeed, digital players already capture a fifth of the new-to-bank primary bank shopper population, up from 16% in 2019. This growth will likely continue to increase as consumers become more aware and are more open to non-traditional players.
What does it all mean? With churn declining and growing success of new entrants, traditional financial institutions need to shift toward digital experiences, differentiate product features and optimize their branch networks.
Figure 4: Primary Checking Account Opening Channel
“Box-Checking” Doesn’t Always Work
Banking has accelerated into a digitally-led world where more than half of new primary checking accounts and the majority of everyday transactions are being completed on digital devices. This shift means that a well-designed customer digital experience is crucial for success across acquisition, onboarding and retention.
Many institutions have focused on “box-checking,” the strategy of providing as many of the features or functions as possible in order to reach or exceed parity with peers. It is clear why this is common practice — it is much easier to understand where you stand on different features and functions than it is to understand and dissect the subjective customer experience. That said, leaders in the space are not necessarily “box-checkers.” In the U.S., for example, Chime is considered best-in-class, particularly with onboarding. But the company only checks 59 digital-feature boxes compared with an average of 109 in the U.S., according to the Curinos Digital Banking Hub. And when we look at the areas that matter most for overall experience, Chime checks every single box due to its innovation of digital features and streamlined user experience.
Discovering what critical features and functions are important to consumers is the first step in building a good customer experience. To bring more robust quantitative analysis to the digital experience space, Curinos and Touchpoint have teamed up to assess consumer ratings and feedback on mobile app experiences in order to identify key drivers for a positive and negative experience. (See Figure 5.) Customer experience can be broken into four levels ranging from foundational (“Does it work?”) to emotional (“Does the experience leave me satisfied and happy?”). Within each level, attributes are derived from customer reviews and can be ranked against each other to determine the impact to the overall customer experience. App usability is the largest positive driver to customer experience and can be used at the granular level to measure effectiveness and determine where improvements are needed for the overall customer experience.