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Digital Prowess Will Guide Success As COVID-19 Lingers

The COVID-19 pandemic has pushed banks to act swiftly, a characteristic that is often rare in the industry. From closing branches to navigating the complexities of the Paycheck Protection Program, banks have demonstrated admirable flexibility and focus in the first months of the ongoing crisis.

At this point, there is the possibility that the industry will emerge from the pandemic less harmed than after the 2008 recession. Banks are flush with deposits and they have much more capital to help sustain them.

Still, earnings are under intense pressure and costs will be cut dramatically. Credit losses will be a big wildcard in coming months as banks curtail forbearance programs, landlords press tenants for rent and government benefits expire or change. At the same time, economies around the world will stay fragile as the pandemic ebbs and surges.

It is tempting to slash costs as a way to bolster financial goals. But such strategies have repeatedly proven damaging to the core franchise. Forward-thinking banks have an opportunity to preserve and grow the franchise by investing in core capabilities that cement customer relationships. It’s always good business to focus on the core franchise. It’s even more important to do so in a tough economic environment.

Still, earnings are under intense pressure and costs will be cut dramatically. Credit losses will be a big wildcard in coming months as banks curtail forbearance programs, landlords press tenants for rent and government benefits expire or change. At the same time, economies around the world will stay fragile as the pandemic ebbs and surges.

It is tempting to slash costs as a way to bolster financial goals. But such strategies have repeatedly proven damaging to the core franchise. Forward-thinking banks have an opportunity to preserve and grow the franchise by investing in core capabilities that cement customer relationships. It’s always good business to focus on the core franchise. It’s even more important to do so in a tough economic environment.

Unlike previous economic upheavals, an abundance of real-time technology and data-driven insights can now help banks achieve these goals. This will be especially critical because some customers have likely changed their banking habits forever.

Novantas believes the banks that use these capabilities to identify, attract and retain the best customers will be in the strongest position to weather potential credit problems and other fallout from the pandemic.

Other Industries Have Done It

The history books are filled with companies that used technology to develop new products and find opportunities in difficult and uncertain times.

After the airline industry was deregulated in the late 1970s, for example, carriers started investing in reservation systems to better gauge demand and created frequent flier programs to build customer loyalty.

But just 9% of 4,700 companies studied by professors at Harvard and Northwestern flourished after an economic downturn, according to a 2010 article in the Harvard Business Review. In addition to cutting costs and improving efficiency, these successful companies “develop new business opportunities by making significantly greater investments than their rivals do in R&D and marketing,” the authors wrote. Other companies that have emerged strong from an economic crisis by investing in technology and products include Target, Apple and Warby Parker.

Banks can take a lesson from these success stories by cutting costs surgically. Preserving the core franchise is always the goal during a crisis, but this time, future growth won’t come from traditional sources like new branches. Instead, banks need to invest in digitally-driven capabilities.

The challenge can’t be taken lightly. The current crisis has already brought a number of companies to their knees because they didn’t anticipate changes in customer behavior, didn’t adjust when those changes became apparent or were unable to meet the changing needs of their customers.

Other Industries Have Done It

The history books are filled with companies that used technology to develop new products and find opportunities in difficult and uncertain times.

After the airline industry was deregulated in the late 1970s, for example, carriers started investing in reservation systems to better gauge demand and created frequent flier programs to build customer loyalty.

But just 9% of 4,700 companies studied by professors at Harvard and Northwestern flourished after an economic downturn, according to a 2010 article in the Harvard Business Review. In addition to cutting costs and improving efficiency, these successful companies “develop new business opportunities by making significantly greater investments than their rivals do in R&D and marketing,” the authors wrote. Other companies that have emerged strong from an economic crisis by investing in technology and products include Target, Apple and Warby Parker.

Banks can take a lesson from these success stories by cutting costs surgically. Preserving the core franchise is always the goal during a crisis, but this time, future growth won’t come from traditional sources like new branches. Instead, banks need to invest in digitally-driven capabilities.

The challenge can’t be taken lightly. The current crisis has already brought a number of companies to their knees because they didn’t anticipate changes in customer behavior, didn’t adjust when those changes became apparent or were unable to meet the changing needs of their customers.

Deposits Surge

At first blush, it may appear that banks don’t need to worry about deposits. The industry is flush with liquidity, partly due to government programs that were created to prop up consumers and companies. A steep drop in consumer spending has kept money in consumer bank accounts, leading to an estimated $1 trillion increase in deposits, according to Novantas research. (See Figures 1A & 1B.) On the corporate side, companies that are concerned about liquidity have drawn down credit lines, causing coffers to swell more than 20% since the pandemic took hold in the U.S.

Deposits Surge

At first blush, it may appear that banks don’t need to worry about deposits. The industry is flush with liquidity, partly due to government programs that were created to prop up consumers and companies. A steep drop in consumer spending has kept money in consumer bank accounts, leading to an estimated $1 trillion increase in deposits, according to Novantas research. (See Figures 1A & 1B.) On the corporate side, companies that are concerned about liquidity have drawn down credit lines, causing coffers to swell more than 20% since the pandemic took hold in the U.S.

Figure 1A: U.S. deposits are on pace to peak at roughly $18.6 trillion, up $3.3 trillion from pre-COVID-19 levels

U.S. Deposits

Base
Corporate Draws
Flight to Quality
CARES | Corporate Loans
CARES | Small Business Loans / Grants
CARES | Individual Payments
CARES | Local Government
CARES | Other
Fed Direct Lending

Source: Federal Reserve H8 Data (April 15, 2020), CARES Act (March 27, 2020), and PPP Enhancement Act (April 23, 2020) 
Note: CARES encompasses both the original CARES and PPP Enhancement Acts

Additional Notes (select + to expand)

Assumes only CARES – Corporate Loans will be repaid, and all other stimulus disbursements will be grants or forgiven | Assumed 50% disbursement for CARES – Corporate and 66% for Fed Main Street lending program

But it’s unclear how long banks will hold onto those deposits even as interest rates hover near zero across the industry.

For one thing, a continued weak economy will trigger deposit drawdowns as consumers and companies struggle to pay bills. This will become more apparent if businesses stay shuttered and unemployment remains high when government stimulus programs expire.

Meanwhile, neobanks are luring consumers with distinctive features, driving efficient acquisition costs that are often less than $100 per account compared with more than three or four times that for “efficient” traditional banks. About 20% of people who switched their primary checking relationship in 2019 opened with one of the neo-banks (largely with Chime or Varo), according to Novantas Shopper Research. That number is only expected to continue rising.

Corporate deposits will also remain volatile as the economic slowdown crimps revenues and hurts businesses of all sizes.

Figure 1B: Consumer savings

Savings / MMDA Growth

Acquisition
Change to existing, net of switch
Attrition
Growth

Source: Novantas Comparative Deposit Analytics (CDA) Database, May ‘20 | Simple average used to protect participant anonymity

The key for banks, then, is to determine how to identify and retain consumer and corporate deposits during a wave of liquidity and a period of ultra-low rates that can make all deposits look the same. Textured customer treatments and precision customer-level management will be critical to protect relationships and demonstrate to the customers that their bank is on their side. These are the customers whose relationship with the bank extends beyond the basic deposit account, generating fee income and contributing stability in the credit portfolio.

Figure 1A: U.S. deposits are on pace to peak at roughly $18.6 trillion, up $3.3 trillion from pre-COVID-19 levels

U.S. Deposits

Base
Corporate Draws
Flight to Quality
CARES | Corporate Loans
CARES | Small Business Loans / Grants
CARES | Individual Payments
CARES | Local Government
CARES | Other
Fed Direct Lending

Source: Federal Reserve H8 Data (April 15, 2020), CARES Act (March 27, 2020), and PPP Enhancement Act (April 23, 2020) 
Note: CARES encompasses both the original CARES and PPP Enhancement Acts, Assumes only CARES – Corporate Loans will be repaid, and all other stimulus disbursements will be grants or forgiven | Assumed 50% disbursement for CARES – Corporate and 66% for Fed Main Street lending program

Figure 1B: Consumer savings

Savings / MMDA Growth

Acquisition
Change to existing, net of switch
Attrition
Growth

Source: Novantas Comparative Deposit Analytics (CDA) Database, May ‘20 | Simple average used to protect participant anonymity

But it’s unclear how long banks will hold onto those deposits even as interest rates hover near zero across the industry.

For one thing, a continued weak economy will trigger deposit drawdowns as consumers and companies struggle to pay bills. This will become more apparent if businesses stay shuttered and unemployment remains high when government stimulus programs expire.

Meanwhile, neobanks are luring consumers with distinctive features, driving efficient acquisition costs that are often less than $100 per account compared with more than three or four times that for “efficient” traditional banks. About 20% of people who switched their primary checking relationship in 2019 opened with one of the neo-banks (largely with Chime or Varo), according to Novantas Shopper Research. That number is only expected to continue rising.

Corporate deposits will also remain volatile as the economic slowdown crimps revenues and hurts businesses of all sizes.

The key for banks, then, is to determine how to identify and retain consumer and corporate deposits during a wave of liquidity and a period of ultra-low rates that can make all deposits look the same. Textured customer treatments and precision customer-level management will be critical to protect relationships and demonstrate to the customers that their bank is on their side. These are the customers whose relationship with the bank extends beyond the basic deposit account, generating fee income and contributing stability in the credit portfolio.

Creating Capabilities

This is the time for banks to harness data that create a holistic view of what customers want, how they act, where they spend and what they need. Metrics like deposit stickiness, CD runoff and credit risk can help the bank paint a portrait of their best customers and then initiate strategies to keep them at the bank.

Creating Capabilities

This is the time for banks to harness data that create a holistic view of what customers want, how they act, where they spend and what they need. Metrics like deposit stickiness, CD runoff and credit risk can help the bank paint a portrait of their best customers and then initiate strategies to keep them at the bank.

Once those characteristics are identified, banks need to redefine the way they engage with these customers. The industry is filled with bankers who have never interacted with customers outside of the branch, as well as a whole generation of bankers whom have only worked in the boom times. With branches closed and many customers feeling financial distress, banks need to pivot the way they connect.

So far, banks seem to be falling short – even when it comes to providing simple services that customers want, such as balance updates via email or text. (See Figure 2.)

Figure 2: Banks aren’t meeting customer needs in the crisis

Bank Features: Most Useful vs. Implemented

Source: Novantas Customer Knowledge | COVID Pulse Survey
Sample: FABB shoppers week 16/17 (N=212)

Once those characteristics are identified, banks need to redefine the way they engage with these customers. The industry is filled with bankers who have never interacted with customers outside of the branch, as well as a whole generation of bankers whom have only worked in the boom times. With branches closed and many customers feeling financial distress, banks need to pivot the way they connect.

So far, banks seem to be falling short – even when it comes to providing simple services that customers want, such as balance updates via email or text. (See Figure 2.)

Figure 2: Banks aren’t meeting customer needs in the crisis

Source: Novantas Customer Knowledge | COVID Pulse Survey
Sample: FABB shoppers week 16/17 (N=212)

These challenges are likely to remain even after the virus retreats. Fewer than half of people shopping for a checking account say they’re likely to return to branches once restrictions are fully lifted, according to a recent survey from FindABetterBank.com. (See Figure 3.) That means banks will have to serve these customers from afar – either with outbound calling or monitoring of their digital activity so that the banks can provide assistance when needed.

Figure 3: Less than half of consumers say they are likely to return to branches once COVID-19 restrictions are lifted

(Week 1 = 3/30 to 4/5, Week 18 = 7/27 to 8/2)

LIKELIHOOD TO RETURN TO BRANCHES

Somewhat / Very Likely
Neither likely nor unlikely
Somewhat / Very Unlikely

Source: Novantas Customer Knowledge | COVID Pulse Survey
Sample: FABB shoppers week 16/17 (N=212)

Digital Openings and Onboarding:
A Big Opportunity

One of the most important things that banks can do to engage with customers is to improve the inadequate process of digital account opening and onboarding. While it is a priority during the pandemic, these capabilities will also be essential for the future. Afterall, consumers are interacting with brands like Zoom, Amazon and Seamless more frequently than ever in their day-to-day lives and their sophisticated digital engagement with these companies sets the bar in terms of expectations. Banks must raise that bar quickly, especially when it comes to onboarding and personalization.

Figure 4: Digital account openings are full of jargon and other pain points

MOST CHALLENGING PARTS OF OPENING AN ACCOUNT ONLINE

Understanding financial jargon

Filling in forms online

Accessing the necessary personal information

It took a long time

Source: Novantas Customer Knowledge | FABB DAO Survey
Sample: FABB shoppers who opened an account digitally (N=205)

Unfortunately, too many banks are still offering sub-par digital service. As a result, Novantas estimates that current attrition rates are above 50% for accounts that originate in the digital channel. Furthermore, customers encounter far too many pain points during the process – from application to account funding to setting up direct deposit. (See Figure 4.)

Although these issues are difficult to solve, customization and personalization can also help create a bond once the account is open. That may mean redirecting billboard advertising into more personal experiences, such as sending emails directly from a dedicated banker to making exclusive online offers that can deepen the relationship. The upshot: corporate and retail customers have distinct communication preferences. It is the bank’s job to identify those preferences and meet them.

Digital Openings and Onboarding:
A Big Opportunity

One of the most important things that banks can do to engage with customers is to improve the inadequate process of digital account opening and onboarding. While it is a priority during the pandemic, these capabilities will also be essential for the future. Afterall, consumers are interacting with brands like Zoom, Amazon and Seamless more frequently than ever in their day-to-day lives and their sophisticated digital engagement with these companies sets the bar in terms of expectations. Banks must raise that bar quickly, especially when it comes to onboarding and personalization.

Unfortunately, too many banks are still offering sub-par digital service. As a result, Novantas estimates that current attrition rates are above 50% for accounts that originate in the digital channel. Furthermore, customers encounter far too many pain points during the process – from application to account funding to setting up direct deposit. (See Figure 4.)

Figure 4: Digital account openings are full of jargon and other pain points

MOST CHALLENGING PARTS OF OPENING AN ACCOUNT ONLINE

Understanding financial jargon

Filling in forms online

Accessing the necessary personal information

It took a long time

Source: Novantas Customer Knowledge | FABB DAO Survey
Sample: FABB shoppers who opened an account digitally (N=205)

Although these issues are difficult to solve, customization and personalization can also help create a bond once the account is open. That may mean redirecting billboard advertising into more personal experiences, such as sending emails directly from a dedicated banker to making exclusive online offers that can deepen the relationship. The upshot: corporate and retail customers have distinct communication preferences. It is the bank’s job to identify those preferences and meet them.

There is little doubt that the next few months will be fraught with difficulties. The good news is that advances in AI and other technologies mean that banks are in position to serve customers when they need help the most.

Rick Spitler

Rick Spitler

Co-CEO, CMO

gordon g

Gordon Goetzmann

Managing Director & Mid-Market Bank Client Lead

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