Welcome to the October issue of This Month in Retail Banking. It has been a particularly busy month for bankers who are juggling everything from new overdraft policies to the growing specter of rising rates. And at the same time, executives are scrambling to finalize budgets for 2022.
This issue starts with a focus on marketing plans for the coming year. Curinos data find that the cost for digital media has grown by double digits, but it isn’t clear that marketers are pumping investments into the right areas. We look at the pockets of opportunity that are available.
We then take a quick look at rates, which many of us assume are heading higher next year. Bankers are certainly hoping that they can lag the Fed’s first moves as they traditionally do, but is that a feasible strategy when new entrants are likely to use rate to attract new customers? And which customers do you want to keep anyway?
Next up is our assessment of the mortgage market, where volumes are down and margins are tightening. We then look at whether the flood of changes in consumer overdraft policies will slide over to small business accounts. Finally, we highlight the growing importance of robust personal financial management tools.
Marketer’s Dilemma: Where and How to Spend
As acquisition budgets are solidified for 2022, bank marketers are gearing up for another year of hand-to-hand combat in virtually every market. The continued consumer shift to digital channels has increased the importance of marketing in driving new customers to bank franchises. That, in turn, has driven up spending, particularly in digital channels. Our Acquisition IQ benchmark data indicate the cost for digital media has increased by double digits, far outpacing the typical media inflation rate baked into most budgets. These headwinds certainly make it more difficult for marketers to wring more efficiency out of each dollar they have to invest. Our data, however, point to a few areas of opportunity.
The first big area of opportunity lies in calibrating spend allocations by market type. Too many bank marketers pursue the same strategies across all markets in their footprint when, in reality, there are significant network density differences that impact efficiency. We tend to see very different CPA profiles by market type in our benchmark, so if you’re not adjusting overall investment and channel allocations accordingly, you will likely have sub-optimal efficiency. The handful of marketers who maintain a consistent level of efficiency across high, medium and low-branch density markets make these plans part of their strategic agenda.
Another area of opportunity lies in better balancing upper and lower funnel allocations – and holding to those consistently. Too often we see banks investing the lion’s share of their budgets in lower funnel channels with sporadic investments in the upper funnel. Consistent brand and upper funnel spending is one thing that the most efficient bank marketers have in common. That investment drives both consideration and purchase dynamics, resulting in higher efficiency curves and lower CPAs. This has even held true during the pandemic; even though these most efficient marketers cut spending like everyone else, they kept their brand and upper funnel allocation balanced.
Which Customers Will You Want to Keep When Rates Rise?
Persistent inflation is prompting the Fed to take a more aggressive stance on both tapering (with plans to start in November and end in mid-2022) and rate increases. Half of FOMC committee members now anticipate an increase in 2022 and half also expect four or more increases by 2023. As rising rates move from a distant possibility to a near-term likelihood, banks need to begin to plan for rising rates even as they also deal with excess liquidity.
While most banks will hope to lag the first increases as they did in the last cycle, competitive pressure may have an impact on retention. Most branch rates are below 0.10% today, creating a potential for heightened attrition if direct banks raise rates from the current market-leading 0.50%.
Mortgage Volumes Fall and Margins Tighten as Rates Tick Up
The leaves are falling, and so are mortgage volumes. The past two years have been kind to mortgage originators with record volume and profit levels. According to our Curinos proprietary data consortium (accounting for more than 60% of all retail originations), total lock volume in September represented the lowest level since May 2020 and eroded 12% month over month. At the same time, refinance volumes declined 14%.
All of this is occurring despite only a modest uptick in rates; the 30-year conforming rate moved up five bp to 3.05%. (See Figure 1.) Rates rose only modestly because we’re already starting to see lenders reduce margins to feed the manufacturing machine as primary and secondary spreads tightened by roughly 20 bp from August to September.
Figure 1: First Mortgage Retail Lock Volume vs. 30-Year Rate (Lock)
Most industry experts predict interest rates to increase and mortgage volumes to continue eroding as we head into next year. Most of this erosion will likely occur within the refinance space because the purchase market remains healthy.
This tightening marketplace reinforces the need to ruthlessly manage your firm’s pricing decision-making process in a timely manner in order to optimize the volume/margin trade-off. This process should include a thorough understanding of your firms’ margins at a loan level (revenue versus variable and fixed costs), operational capacity and external market dynamics in a timely manner (market opportunity, market share, competitive pricing, etc.). The entire process should leverage the best industry intelligence to inform your decisions.
Will Overdraft Overhaul Come to Small Business Accounts?
Financial-services providers have announced a flood of new overdraft policies in recent months, with everyone from large banks to credit unions setting more consumer-friendly policies or eliminating the fees altogether.
So far, the overdraft fee and policy changes have been mostly limited to retail banking, which raises the question whether similar developments will also occur on the business banking side. After all, just like with consumers, these fees can be a real punch in the gut for the local entrepreneur.
When it comes to banking fee changes, retail banking generally leads the charge. The business banking segment typically lags, but eventually the developments from the retail banking side spill over into the business banking side and institutions implement similar changes.
Many financial institutions offer some flavor of overdraft protection to their small business customers. Typically, this comes in the form of linking the business checking account to another deposit account (savings or money market account), a credit card or a line of credit. If a business customer spends more than is available in the checking account, the funds are automatically pulled from these other products to cover the overdraft.
As of today, very few institutions have made any real change to their small business overdraft products. NorthOne, which is one of the country’s leading banking apps for small businesses, announced in June that it has officially eliminated all non-sufficient funds (NSF) and overdraft fees. And Huntington Bank has started offering its 24-Hour Grace feature to business customers, giving them additional time to cover overdrafts. Until 2020, this feature was only available to retail customers.
These two developments can be significant for the family restaurant that is struggling to keep the lights on, the florist that had a slow month or the trucker taking time off to be with family.
Although there is more regulatory and consumer-group pressure on the retail side to change the overdraft landscape, it would make sense for financial institutions to consider evaluating overdraft options and scenarios for their small business products. This way they can be prepared and ready to act when additional overdraft fee and policy changes start to emerge in the business banking segment.
The Growing Importance of a Good PFM
Digital banking has normalized financial planning for consumers whose banks and financial institutions have rolled out personal financial management (PFM) tools. These tools are becoming more sophisticated and have become sewn into users’ mindsets of what constitutes modern banking.
Across the globe, penetration is deep. In early October, Bank of America announced its “Life Plan” PFM was being used by five million customers who have seen their balances increase by $34 billion over the course of the past year. The UK’s NatWest launched a spending insights function with Tink last year and has sent 10 million insights to customers, 22% of which prompted the customer to take an action, such as moving funds from one account to another.
These capabilities are helping drive relationships between providers, too. In Portugal, Caixa Geral de Depósitos’s DABOX – which also uses Tink’s Money Manager toolkit – is accessible to all of the country’s banked population. Similarly, in the Netherlands, ABN AMRO’s hugely popular Grip app is now accessible by other Dutch banks including ING, Rabobank, ASN Bank and others.
Digital investment service providers are in on it too. Challengers such as Betterment and Wealthfront use customer data to provide bespoke goal-planning services and savings recommendations. Customers are prompted to set goals and targets that are then linked to create a consolidated financial picture. Any new goal is immediately added to the user’s plan, which is then reassessed and recommendations are made to make the new targets achievable.
Banks and FIs that don’t offer these type of financial guidance tools and functions aren’t providing a full banking service. Nor are they enjoying the benefits they bring (customers spending more time in-app, more regularly building data capabilities and cross-selling opportunities). The next challenge for these providers is coming from different angles, including embedded finance. As companies jostle for space, the ability to offer state-of-the-art financial insights and direction around wealth building will be a key differentiator.