Welcome to the September issue of This Month in Retail Banking. The summer slowdown has passed and bankers are focused on revving up the business as we speed toward the end of the year. And there’s a lot happening, as this meaty issue reveals.
First, we take a fresh look at branches. We all know that sales and transactions are down – and likely aren’t returning to pre-pandemic levels. So why are branches still open such long hours?
Then we provide some new context on the overdraft policies that are being shaken up around the U.S. In the latest development, some smaller institutions are following the lead of their larger brethren.
Next, it’s time to take a look at deposits, which are still flooding bank coffers as the spreading Delta variant cut into the anticipated summer spending season.
Finally, we offer up two perspectives on small and medium-sized businesses. These owners have specific digital demands, but banks usually aren’t meeting them. And it’s not just digital. There’s a whole new generation of small-business owners, many of them women, who are very different from their predecessors. We’ll have more research on that topic soon.
Branches: Open Too Many Hours With Not Enough Activity
As discussed repeatedly in This Month in Retail Banking, there has been a dramatic reduction in branch activity due to COVID-19. Teller transactions are down 25% from pre-pandemic levels and, for many banks, branch-based account sales haven’t fully rebounded either.
With 69% of branches in our SalesScape benchmark now processing fewer than 4,000 teller transactions per month, banks are unable to further achieve staffing efficiencies because they are bumping against minimum-staffing levels. Productivity levels are depressed, so banks are no longer staffing for volume. Instead, they are staffing merely for coverage.
The problem is that most bank branches are just open too many hours. Very few banks have taken advantage of customer shifts associated with COVID-19 to consider reducing their branch hours. In other countries, bank branches operate differently. In fact, the U.S. has fewer branches with shorter hours (< 35 hours/week) hours than Australia and Canada (pre-COVID-19). (See Figure 1.) In recent months, multiple banks in Australia have announced halving their branch hours in rural locations, amounting to roughly 10-15% of their networks.
While that may seem extreme to some, it is at least worth investigating substantive downshifts in branch hours to allow for further reductions in staffing levels that align with the reduced branch activity.
Figure 1: U.S. branches have longer operating hours than other countries
Credit Unions Join Others In Slashing Overdraft Fees
The momentum for changing overdraft policies and creating new liquidity products shows no sign of abating. And now, the changes that have stemmed from regulatory pressure and large financial institutions (e.g., PNC, Huntington, Bank of America and Ally) are trickling down to credit unions and smaller players.
A few credit unions recently have announced changes to their overdraft practices. For example, Oklahoma City-based WEOKIE Federal Credit Union earlier this month cut its overdraft fee almost in half, lowering it from $27.50 per occurrence to $15.00. UW Credit Union in Madison, WI slashed overdraft and NSF fees by more than 80% from $30.00 per occurrence to $5.00. And Alliant Credit Union, the largest credit union in Illinois, has taken the bold step of eliminating overdraft and NSF fees on its checking and savings accounts altogether.
Credit unions are making many of these decisions in the hopes of helping members who are experiencing financial hardship and to support their members’ overall financial wellbeing.
Retailers are adding even more competitive pressure with solutions that provide access to liquidity. Retail juggernaut Walmart is adding to that pressure by pricing overdrafts on its MoneyCard at $15.00, which is about half of the U.S. average based on the institutions tracked by Curinos. Walmart’s strategy is to try win over consumers who maintain low balances and are heavy transactors.
The growing competitive pressure is likely to drive down overdraft pricing and revenue throughout the industry. Curinos has found that inaction can lead to a decline in new-to-bank acquisition power by 27% and a decline in overdraft revenue by 40-60%. (See Figure 2.)
Is your institution willing to take that risk?
Figure 2: There are concrete implications for providers that don’t keep up
The Spending Surge That Wasn’t
With vaccination rates rising and cases declining across much of the country, many predicted a spending surge through the summer. The theory: pent-up demand for travel and recreation would drive consumers to spend their stimulus checks. Indeed, this prediction seemed to come true in the first half of the summer as spending peaked above pre-pandemic trendlines and retail deposits started to run off meaningfully for the first time since March 2020. (See Figure 3.)
Figure 3: Early summer spending has receded, leading to deposit growth
It has been a different story since mid-July, however. The emergence of the Delta variant has prompted a slowdown, spending has again receded and savings behaviors have come back to the forefront. As a result, retail deposits have resumed a growth trajectory since mid-July as caution has returned.
Data compiled by Curinos Comparative Deposit Analytics (CDA) show that approximately one-third of customers who received stimulus payments had spent the entire amount by May. That rose to a peak of 44% on July 10 due to summer spending, but then savings trends re-emerged.
Banks Overlook Digital Needs of Small Business
Mobile adoption among small businesses has skyrocketed in recent months, but banks have been slow to introduce services that directly meet their specific needs.
That’s not to say banks haven’t been busy. Within the first six months of the year there were more than 160 separate mobile app alterations and enhancements across 20 major U.S. banks, regional providers and digital challengers. Of those, however, only a quarter of providers offer a standalone, business bank dedicated app. The majority offer combined consumer and small-business apps.
Drilling into the stats suggests a story of neglect. On average, providers that offer a standalone business app have implemented just 0.5 change to the app so far this year. By comparison, the combined personal and small business app providers made on average 10 changes. Clearly the majority of changes are being implemented with retail consumers in mind.
Analyzing the mobile data further into key online journeys reveals how few changes and developments are introduced with business needs in mind. (See Figure 4.)
Figure 4: Number of App Developments by Journey
The journeys with the most limited developments thus far this year have been services-oriented around critical business needs and requirements. Issues such as cash flow management, invoicing solutions, tax support, payment controls, payroll and ACH services, receipt capture or employee management services just aren’t getting attention. And to make matters worse, these are the very areas in which small businesses need critical help – managing cash flow, acquiring visibility over the financials of the entire enterprise or simply streamlining the administrative burdens associated with expense reporting.
While the consumer digital banking market has exploded over the past few years, so too has demand for quality business banking solutions, in-app and online. Without doubt, a lot of user experiences have improved, but businesses have come to need much more.
The New Small-Business Owner Has Unique Demands, Needs
Small-business owners are demanding more from their banks. Not only are digital capabilities becoming more critical to bank choice and bank engagement, but businesses are increasingly looking for more differentiated product and experience propositions from their financial providers.
Next-generation business owners, in particular, are fundamentally different from their predecessors. Not only are they more likely to be women, but their companies are also more likely to be headquartered in metropolitan areas. Furthermore, more than half of these business owners are growth-oriented and use fintechs in their financial management – a vastly different trend than those who have been in business for at least 10 years. These trends are only accelerating during the COVID-19 pandemic.
As a result, a growing number of providers are paying attention. American Express bought small-business lender Kabbage last year and started offering small-business checking accounts in June. And payments provider Square began providing banking services in March after receiving a bank charter.
Given the importance of small businesses to growth of customers, deposits and assets, it will be critical for banks to develop a differentiated value proposition and strategy to truly win and compete in the space.
Stay tuned for more on this subject. Curinos is currently conducting research that tracks the shifting attitudes and behaviors of small businesses and identifies the critical white spaces that providers can tap to drive value proposition innovation.