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This Month in Retail Banking | November 2020

Looking Ahead to 2021: A Year for Bank Agility

As the election continues to wrap up, there are now big questions looming for the nation’s banks – from the potential of another stimulus package to regulatory changes that may accompany a Biden administration.

Unfortunately, COVID-19 cases are rising across the U.S., leading many state and local officials to set new restrictions on businesses, social activities and schools. On the positive side, there are indications that potential vaccines are showing some early promise.

Even pre-COVID-19, banks had been closing branches amid changing customer preferences. The transformation is now accelerating, however, due to tighter cost controls and a surge of low-cost deposits. The latest COVID-19-related shutdowns are likely to mean that a growing amount of these short-term disruptions have lasting impact on how consumers live their lives and interact with the branch network (e.g., more corporations have announced plans to allow employees to work from home). At the same time, banks must balance the need for consolidation with the lingering attachment to branches.

Banks should consider what can be learned from the previous shutdowns and use that intelligence to inform short-term expectations on account growth and transactions, as well as the long-term restructuring that will be required.

With uncertainty about the coming regulatory landscape in a very competitive industry, banks need to establish their product strategies and ensure that they are ready for the transformation of the cash management suite that will be required in the next 12-18 months.

Deposit balances have been surging, driven by a combination of government actions and changes in customer behavior. As we look ahead to a winter with unclear incremental governmental intervention and lockdowns that might further depress consumer spending, deposit forecasts for 2021 vary widely – from a flat or declining trajectory to an increase of more than 10%.

Surge Deposit Outlook: A $1 Trillion Question

A deposit surge tied to COVID-19 propelled the industry’s consumer balances by nearly $1 trillion in 2020, roiling budgets that had assumed an increase of just $400 billion, or 4-6%.

Most of the surge has been tied to government actions related to COVID-19, including direct stimulus payments, enhanced unemployment benefits and rent and mortgage forbearance. Depressed consumer spending, most notably during the lockdowns, delivered the balance.

The amount and pace of these deposits, however, may vary based on customer mix. In general, more affluent franchises have received these surge deposits from depressed spending dynamics, while less affluent portfolios have benefited from the government actions. Both consumer spending/savings and government actions face an uncertain winter.

An accurate deposit forecast will be critical in 2021, especially as a cushion of deposits could provide a buffer for other actions.  But forecasting 2021 consumer balances is tricky. Relative to the $7 trillion industry base, reasonable scenarios could take deposits up another 10% or more in 2021 or down overall – a $1 trillion differential. (See Figure 1.)

Banks must start thinking now about franchise dynamics and how they will impact deposit performance next year. Will the franchise be affected more by spending trends or government actions? How might “good” health outcomes, such as a vaccine, affect deposit performance? This is a time when bankers must keep close watch on the world around them.

Figure 1: Potential 2021 Consumer Deposit Growth | Actions and Impact on Deposits

Major 2021 stimulus

Early vaccine, but slow deployment

Additional shutdowns & 2020 stimulus

  • No stimulus before EOY 2020
  • Significant stimulus in 2021 including EIP, rent forgiveness
  • Unemployment remains elevated
  • No new stimulus
  • Consumer spending retrenches
  • EIP and incremental unemployment
+
0
10
%
-
0
5
%
-
0
10
%
  • Deposits down modestly Q420
  • Sharp increase when stimulus passed
  • Continued growth from rent and stimulus payments
  • Runoff of existing stimulus
  • Return of consumer spending
  • Rent payment backlog eases
  • 2020 stimulus increases EOY balances
  • Substantial runoff in 2021
  • Growth rates Y/Y sharply down

Major 2021 stimulus

  • No stimulus before EOY 2020
  • Significant stimulus in 2021 including EIP, rent forgiveness
+
0
10
%
  • Deposits down modestly Q420
  • Sharp increase when stimulus passed
  • Continued growth from rent and stimulus payments

Early vaccine, but slow deployment

  • Unemployment remains elevated
  • No new stimulus
-
0
5
%
  • Runoff of existing stimulus
  • Return of consumer spending
  • Rent payment backlog eases

Additional shutdowns & 2020 stimulus

  • Consumer spending retrenches
  • EIP and incremental unemployment
-
0
10
%
  • 2020 stimulus increases EOY balances
  • Substantial runoff in 2021
  • Growth rates Y/Y sharply down

Source: Novantas analysis

Sales & Transactions

Banks experienced a staggering 50-60% decline in new-to-branch checking acquisitions when initial shutdowns occurred in April. Most banks conducted selective branch closures and kept locations open by requiring appointments and maintaining the drive-through. Such strategies were generally considered very effective.

Sales have been growing since the initial decline and are now only down about 10% from pre-COVID-19 levels. Digital originations spiked in April and May, but those numbers evaporated as markets slowly opened up and branch-based sales returned.

Teller transactions initially fell by about 30-40% for most banks and remain down as much as 20% for many banks. Since we did see many customers change behavior during the restrictions, we are expecting a year-over-year decrease of about 10-15% in a post-COVID-19 world compared with the typical 5-6% annual decrease in transactions that has been experienced over the last decade. The interesting dynamic is that the “branch traditionalist” segment didn’t change behavior during the crisis. Instead, it is the customers who already were using some digital channels who have shifted a higher proportion of their transactions to digital. (See Figure 2.)

Moving forward, because many consumers already have adapted to the new environment, we don’t anticipate the same level of sales declines even if more major shutdowns are forthcoming. Another round could, however, result in more permanent declines in teller transaction volumes. It is noteworthy to remember that November and December are always slower months for new checking accounts.

Figure 2: Channel Segmentation Trends

2014
2015
2017
2020

Branch Dependence and Attachment

Source: Novantas | 2020 U.S. Branch Centricity (N=1008)* weighted
2020 N=1,008, 2017 N=4,351, 2015 N=4,346, 2014 N=4,125

Branch Consolidation

Banks across the industry have been announcing permanent branch consolidation, which makes sense given a combination of COVID-19 and the constrained expense environment. In the first round of branch shutdowns, many banks didn’t have a clear view of the planned network strategy. Decisions on actions for the branch network, therefore, were based largely on which branches had drive-through lanes or could install plexiglass and other barriers in branches to protect staff and customers. Now banks should consider their ultimate network strategy as they make another round of temporary closures, including the acceleration of outbound calls to customers to communicate alternatives during these closures.

As banks consider network strategy plans, there is a strong bias toward realizing near-term cost savings. The major caution is that consolidations result in lost sales for the bank and most institutions haven’t found ways to drive increased sales outside of the branch network. As a result, most banks will likely see a decline in new relationships after closing branches.

Product Transformation

The combination of a potentially more active CFPB and continued pressure from neobanks and new entrants will continue to emphasize the need to transform the cash management product set.

With banks still making the majority of overdraft revenue from 30-40% of customers (and these accounts represent roughly 70% of consumer banking fee revenue), they are increasingly at risk of losing relevance and fee income if rules tighten and other alternatives become available. Overdraft income was already declining before COVID-19, with an average decrease of about 1% annually over the past decade. Those rates have fallen even more dramatically in recent months, including a 50% decline between the second quarters of 2019 and 2020 that was partly driven by banks waiving these fees.

Although there will be plenty of time before any new regulations take effect, one of the challenges with product changes is that any substantial changes in the product structure require a significant amount of time to design, pilot and build. Any significant delay typically results in losing income, and potentially the ability to re-position strategically.

A growing number of banks are already exploring subscription pricing models, which are particularly appealing for younger consumers. Additionally, being able to tie the deposit products with short-term credit (through means beyond overdraft) could be an attractive way to really amplify the banking relationship.

In a time where branch-centricity continues to decline, development of innovative product sets will be an increasingly important way for banks to differentiate themselves. Those that can drive differentiation, spend marketing strategically and find ways to amplify with their sales force will be successful.

Digital Spotlight

Digital capabilities are at the top of the list for banks as they adjust operations to accommodate restrictions from the COVID-19 pandemic. That said, banks are still struggling to figure out exactly which initiatives should get the most attention. That is a concern, particularly as neobanks woo customers with whiz-bang digital capabilities. And while there seems to be plenty of executive support for digital initiatives, bankers are having a difficult time setting priorities.

The following results reflect September responses from 32 financial institutions that range in size from less than 100 branches to more than 2,000.

Novantas will continue to track these developments by surveying how financial institutions are responding to the pressures that COVID-19 uncertainty has placed on their branch networks.

Improving the quality of digital sales received the most “high priority” scores

Top priority
Very high priority
High priority
Low priority
Very low priority
Bottom priority

Source: Novantas SalesScape Comparative Analytics Survey, fielded September 2020
Question: What is the highest priority distribution challenge by end of 2020? Please rank with 1 being highest.

Top priority
Very high priority
High priority
Low priority
Very low priority
Bottom priority

Source: Novantas SalesScape Comparative Analytics Survey, fielded September 2020
Question: What is the highest priority distribution challenge by end of 2020? Please rank with 1 being highest.

Source: Novantas SalesScape Comparative Analytics Survey, fielded September 2020
Question: What is the highest priority distribution challenge by end of 2020? Please rank with 1 being highest.

Banks with fewer than 100 branches place a high priority on digital sales quality. Those with more than 500 branches are more focused on achieving a “new normal.”

Improving Quality of Digital Sales

Increasing New-to-Bank Customer Acquisition

Getting to a "New Normal"

Top priority
Very high priority
High priority
Low priority
Very low priority
Bottom priority
Top priority
Very high priority
High priority
Low priority
Very low priority
Bottom priority
Top priority
Very high priority
High priority
Low priority
Very low priority
Bottom priority

Improving Quality of Digital Sales

Top priority
Very high priority
High priority
Low priority
Very low priority
Bottom priority

Increasing New-to-Bank Customer Acquisition

Top priority
Very high priority
High priority
Low priority
Very low priority
Bottom priority

Getting to a "New Normal"

Top priority
Very high priority
High priority
Low priority
Very low priority
Bottom priority

Source: Novantas SalesScape Comparative Analytics Survey, fielded September 2020
Question: What is the highest priority distribution challenge by end of 2020? Please rank with 1 being highest.

Focusing investment and prioritization are the highest barriers to improving quality of digital sales. Executive sponsorship ranks lowest.

Top priority
High priority
Low priority
Bottom priority

Source: Novantas SalesScape Comparative Analytics Survey, fielded September 2020
Question: What are the barriers to improving the quality of digital sales quality? Please rank with 1 being highest.

Top priority
High priority
Low priority
Bottom priority

Source: Novantas SalesScape Comparative Analytics Survey, fielded September 2020
Question: What are the barriers to improving the quality of digital sales quality? Please rank with 1 being highest.

Source: Novantas SalesScape Comparative Analytics Survey, fielded September 2020
Question: What is the highest priority distribution challenge by end of 2020? Please rank with 1 being highest.

Overall digital activity is up, though a few banks saw declines in app downloads and enrollments.

Decrease more than 10%
Decrease 0-10%
Increase 0-10%
Increase 11-25%
Increase 26-50%
Increase more than 50%

Source: Novantas SalesScape Comparative Analytics Survey, fielded September 2020
Question: Please quantify the changes in customer behavior that your FI has experienced since the COVID-19 pandemic began.

Decrease more than 10%
Decrease 0-10%
Increase 0-10%
Increase 11-25%
Increase 26-50%
Increase more than 50%

Source: Novantas SalesScape Comparative Analytics Survey, fielded September 2020
Question: Please quantify the changes in customer behavior that your FI has experienced since the COVID-19 pandemic began.

Source: Novantas SalesScape Comparative Analytics Survey, fielded September 2020
Question: Please quantify the changes in customer behavior that your FI has experienced since the COVID-19 pandemic began.

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