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The Dos and Don’ts of Banking in a Post-COVID-19 World

Navigate today. Anticipate tomorrow.


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It has been a year since COVID-19 rocked every aspect of our world, but there are finally some reasons to be cautiously optimistic about the future. The pace of vaccinations is accelerating around the world — one in 10 Americans has now received at least one dose even as cases continue to ebb and flow around the world. Those who are vaccinated can now tiptoe back to more normal lives, a development that is likely to help the economic recovery.

Such progress is heartening after many sobering months. For bankers, the issue now is to take a breath, look around, figure out where we are and how to plan for what is likely to be an uneven future.

There are some certainties. Interest rates will stay low through the year. The flood of deposits that entered the system last year won’t flow out until there are clear signs that the economy is back on track. The new administration in Washington will keep close tabs on the banking industry and the impact of fees on consumers, keeping pressure on net interest income. Fintechs are experiencing a burst of confidence as investors plow money into companies that want to release the traditional banking industry’s grasp on consumers and businesses.

Such progress is heartening after many sobering months. For bankers, the issue now is to take a breath, look around, figure out where we are and how to plan for what is likely to be an uneven future.

There are some certainties. Interest rates will stay low through the year. The flood of deposits that entered the system last year won’t flow out until there are clear signs that the economy is back on track. The new administration in Washington will keep close tabs on the banking industry and the impact of fees on consumers, keeping pressure on net interest income. Fintechs are experiencing a burst of confidence as investors plow money into companies that want to release the traditional banking industry’s grasp on consumers and businesses.

Amid it all, the outlook for banks looks favorable for the year. But this isn’t time for banks to rest on their laurels and merely point to recent improvements in the bottom line. Instead, they need to take advantage of short-term favorable trends to defend their turf. They also must reinvest to address secular changes in the industry. This approach mightn’t provide immediate revenue growth, but can position institutions for the future.

As you consider the future, Novantas is pleased to provide the following dos and don’ts.

DON'T

BET THAT BRANCH ACTIVITY WILL RETURN TO PRE-COVID-19 LEVELS

Branch sales are down 15% compared with pre-COVID-19 levels and teller transactions are down 26%. While those numbers are likely to edge higher once customers feel comfortable interacting in the confines of a branch, don’t expect a huge rebound. Even before the pandemic, more than half of bank branches already had fewer than 4,000 transactions per month. As a result, Novantas estimates that nearly two-thirds of bank branches are operating at a sub-scale level.

TARGET CUSTOMERS WHO AREN’T WITH THE BANK FOR THE LONG HAUL

Depth of relationship becomes increasingly important at times like this. Customers have so many banking choices at their fingertips, but banks should focus on those who are interested in maintaining a true and lasting relationship.

UNDERESTIMATE THE STAYING POWER OF FINTECHS TO FRAGMENT THE CUSTOMER WALLET

It seems that fintechs are creating new financial-services solutions every day — from treasury to savings accounts. As a result, it is now easier than ever for consumers to fragment their wallet.

DO

FOCUS ON CORE RELATIONSHIPS

There is no substitute for acquiring customers who have the potential of being core to the bank. Gone are the days when it may have made sense for banks to scoop up dribs and drabs of customer balances. And using rate as a lever for funding growth just isn’t effective in an era when customers can quickly and easily find a better deal with a few keystrokes. Today it is much easier to ascertain if the bank holds the customer’s core deposit account — accounts that show good cash flow and long duration. These are the customers who will turn to the bank when they need a mortgage or financial advice and will be more receptive to cross-sell opportunities. But it is important to recognize that there isn’t a universal definition of those customers. Each bank must determine what core means to them, why and when that definition may change.

ENGAGE DIGITAL CUSTOMERS

It is increasingly clear that customers who open accounts digitally just aren’t as engaged with the bank as those who open accounts in a branch. (see Cracking the Code on Digital Empathy). The trick for bankers, of course, is figuring out how to interact successfully with customers whom they’ve likely never met. That means going the extra mile to use machine learning and AI to develop ways to form a bond with these customers. The traditional method of using a branch to build brand loyalty doesn’t translate in a digital world. Lollipops just aren’t going to cut it.

DESIGN VALUABLE PRODUCTS THAT ATTRACT CUSTOMERS

One of the most talked-about banking offers of 2020 didn’t come from a bank. It came from Chime, the whiz-bang fintech that turned heads when it offered customers access to their stimulus checks before the government even sent the payments. Of course, we don’t know the long-term implications that offer will have on the upstart, but Chime certainly demonstrated creativity in meeting the needs of its customers. That will be even more important for banks this year as reliance on fees has declined significantly — the top 50 banks saw overdraft revenue slashed by roughly 25% between 2020 and 2019.

There is little doubt that the importance of branches as a driver of awareness and consideration are declining. Advertising can help, but it is expensive. This intensifies the need for banks to design targeted products that can drive core relationships and associated fee revenue. As an example, Novantas research indicates there is an increasing appetite for subscription pricing — a service than can add revenue and develop loyalty. Products like these will be important tools to grow new-to-bank accounts and can help offset the declining value of the branch.

CLOSE THE RIGHT BRANCHES

The past year has created whiplash for bank executives who are trying to determine which branches should be shuttered next. As we all know, the lowest-hanging fruit has already been clipped from the distribution network. But the next round of shutdowns may look different today than it did a year ago. Branches in high-traffic business centers and shopping centers have experienced a dramatic drop in activity as people work from home and restrict their movements due to the pandemic. The question now is, will those branches start seeing more traffic as people slowly start resuming normal activity or should they be shuttered for good?

MANAGE THE BALANCE SHEET FOR SYSTEMIC EXCESS DEPOSITS

The flood of commercial deposits into the banking system aren’t going away any time soon, especially as loan growth stays anemic. That means bankers have some serious decisions to make about how to stem the inflow and how to put the remaining deposits to good use. This isn’t a one-time action, however. Banks need to keep close tabs on economic factors and changing customer behaviors in order to make the proper adjustments for their position. And, of course, they need to assess balance growth down to the customer level. (See Funding Optimization is Crucial as Surge Deposits Linger.)

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