Mixed Messages
One of the toughest parts of retail banking today is making sense of all the mixed messages. If consumers are traveling, why are deposit coffers still so full? If those coffers are so full, why is borrowing on the rise? If branch transactions are down, why aren’t there more staffing cuts?
This is the first retail monthly report under our new brand, Curinos. It comes at a time of head-scratching developments in the COVID-19 pandemic. From banks to bistros, businesses are scrambling to address new rules triggered by the fast spread of the virulent Delta variant. Plans that seemed solid just a month ago are now being scrapped amid new mask mandates and, in a growing number of cities, new vaccination requirements.
And this is all coming at a time when bankers are starting to plan for 2022. There’s no doubt that agility and flexibility will be paramount in the months ahead.
Agenda
Branches | Primacy | Deposits | Borrowing
The Branch Rebound That Wasn’t
As we approach planning cycles for 2022, we are confronted by the fact that COVID-19 has created lasting changes to retail branch banking. Any hopes that we can ignore the last two years and treat 2019 as our “baseline” are quickly fading. The following factors will complicate branch sales goaling and staffing forecasts for the upcoming year:
- COVID-19 isn’t going away quietly, especially in states with low vaccination rates
- Teller transaction volumes haven’t (and won’t) rebound
- Branch sales volumes have slipped after an initial “post-vaccine bounce” in the spring
- Shifts from branch to digital for new customer acquisition are sticking
The surge of the delta variant is further complicating bank plans for a return to normalcy in the branch. While many banks have recently deferred return to office plans, the branch staff is still coming to work, just as they did during the height of the pandemic last year. A return to mask mandates risks additional staff burnout. Like other industries, many banks are having challenges in hiring and retaining staff. Demand for talent, combined with minimum wage floors set by some of the largest banks, are likely to drive up branch operating costs.
Additionally, branch teller transaction volumes are down 32% compared with 2019 levels and, despite some monthly variability, they appear to have stabilized at these levels. (See Figure 1.) To make this more concrete, this decline is equivalent to 1,450 teller transactions per month or more than one teller FTE worth of transactions. The upshot: If your teller staffing levels haven’t come down by one FTE over the past year, then you’re not keeping up with the industry’s evolution.
Figure 1: Branch Sales and Transactions
The news on the sales front is equally unnerving. Like teller transactions, an initial “post-vaccine bounce” appears to have fizzled, with both new-to-bank account sales and cross-sales to existing customers down from 2019. New-to-bank sales are down 13% while cross-sales are down 21%. As expected, some of this activity has shifted to digital channels. Customer acquisition via digital has increased by 65% since 2019 (an absolute mix shift of 13% from branch to digital). (See Figure 2.) This new level of digital sales appears to be holding steady.
Figure 2: Customer Acquisition via Digital Channels
While it remains to be seen where branch sales will plateau in the months ahead, the uncertainty will create challenges for 2022 goaling. We recommend the use of opportunity-adjusted sales performance expectations, scenario-based forecasting and dynamic planning horizons in order to prepare for the year ahead.
Customer Primacy – How To Measure, Manage And Improve
Primary customers have always been the lifeblood of a bank: their low-cost, long-term deposits provide a competitive advantage that cannot be matched by any other funding source. In addition, primary customers provide more transaction fees and better risk-adjusted yields on credit. All of this contributes to a bank’s ability to generate excess returns.
In today’s deposit and rate environment, however, the value of a primary customer (and their deposits) is being challenged more than ever. Most banks have an excess of deposits with limited opportunities to deploy funds into high-yielding assets. This has led some banks to pull back on investing in primary customer growth as a way to manage expenses. But while some banks are pulling back, others recognize that primary customers are “on sale” and are doubling down by investing in marketing, digital and people.
Why? Because they recognize that primary customers generate more in transaction fees, providing much-needed revenue relief as spreads are compressed in today’s environment. Furthermore, they will be doubly valuable as interest rates rise because their balances are stickier and typically less rate sensitive. These banks also recognize that investments in primary customer growth cannot be turned on and off at will, but require a consistent, long-term commitment. (See Figure 3.)
Figure 3: Customer Attrition and Cost of Deposits
While many banks are striving to acquire and convert more primary customers, they are often challenged by how to measure and manage primacy. Sure, most banks can measure checking activity by tracking direct deposits or number of transactions per month, but how can banks use that information to increase primacy? Who should the banks focus on converting to primary customers and what are the best actions to take to accomplish this?
A customer primacy segmentation helps banks not only measure how primary their customers are (while comparing with industry peers), but also recommends actions to take to increase primacy across each segment. As an example, which customers are not fully engaged, but could be pulled in with outreach by the bank? Which customers are more likely to react to incentive offers (whether rate or cash) and which customers are motivated by other factors?
The customer segmentation can be tracked over time to analyze customer migration across segments and determine the success of various bank initiatives. For example, to what degree were new-to-bank customers converted into low-, partial-, or fully-engaged customers over a two-year time period, and how does that compare with peers? (See Figure 4.)
Figure 4: New-to-Bank Customer Migration Patterns
(Engagement level of new-to-bank customers two years later)
This information enables banks to determine how they are performing in acquiring and converting the customers they want and help optimize which actions to take and which customers should be targeted.
In a world where primary customers still are king, measuring primacy in an effective and actionable way is key to ensuring that the steps taken are generating the success that each bank wishes to achieve.
Deposits Stable As Summer Spending Disappoints
Despite record domestic travel and nearly all pandemic-related restrictions being lifted in June and July, data released by the U.S. Bureau of Economic Analysis show spending has merely returned to pre-COVID levels, not spiked above them. As a result, deposits levels are stable; the consumer deposit surge hasn’t grown since the third round of stimulus payments in March nor has it run off meaningfully.
Indeed, weekly CDA data from Curinos show that modest runoff in May and June has now reversed, with deposit growth in July nearly equaling the prior month’s runoff. (See Figure 5.) With the Delta variant now causing some restrictions to be reinstated and back-to-work plans being delayed, the deposit surge may have a longer life than originally anticipated.
Figure 5: Checking Balance Growth per Month
Return of the Borrowers
After months of lagging record-busting mortgage activity, tepid patterns picked up in the second quarter across credit card and a variety of other consumer and business loan types.
Teasing those bears out has been no easy task, with banks and financial institutions being forced to offer increasingly competitive products and services. According to the Federal Reserve’s July Senior Loan Officer Opinion Survey, lending standards across all products – commercial and industrial (C&I) loans, auto loans, residential loans, multifamily loans and credit cards – have eased. In fact, not even at the peak of the 2005 housing bubble was it so easy to take out a loan.
This has triggered the seismic growth of new and creative products, not least the proliferation of buy now pay later (BNPL) offerings. For consumers, BNPL offers flexible payment terms. For banks and financial institutions, it is an opportunity to pull customers into a state-of-the-art digital user experience.
And it looks like BNPL is here to stay. Chase, for example cited the product as one of four cornerstones of the future of banking. (The other three were automation, personalization and real-time payments.) Regulators are taking it seriously too. In July, the Consumer Financial Protection Bureau (CFPB) issued a cautionary note, warning that the product can carry late fees and doesn’t have the same protections as other types of credit. Will some form of oversight discussion be in the offing?
Appetites for credit and debt may well only increase as the economy stabilizes and more vaccines are administered. Expect heightened competition to deliver innovative new products, services and even more progressive digital banking experiences.
