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This Month in Retail Banking | September 2020

This is typically the time of year when people return to normal routines after the relaxed summer months. That is usually the case for banking, too: consumer shopping for primary bank relationships normally spikes in the fall. But as we all know, 2020 is anything but normal.

The widespread uncertainty about everything from schools to job growth will continue to impact retail banking around the country. Some cities are opening up more fully, while others that are seeing spikes in COVID-19 cases are once again restricting movements. Jobless claims are still high but appear to be falling and it’s unclear the degree to which the government will provide continued economic stimulus. These developments and the associated trends in retail banking will be important for bank leaders to consider in the months to come.

This Month in Retail Banking will track trends in checking units, movement patterns, surge deposits, pricing and other key areas of interest that will address the near- and longer-term implications for the industry. With planning for next year already in full swing, we also focus this month on the 2021 budget and forecast implications from COVID-19.

SUMMER CHECKING SALES AND TRANSACTIONS DEPRESSED

Life events, bad service and fees continue to be the largest drivers of new checking relationships across the industry. But checking sales are still below pre-COVID-19 levels (and far below 2019 levels) as some consumers stay away from branches. In addition, overdraft fees across the industry are down more than 20% due to a combination of stimulus checks and fee forgiveness. There has certainly been normalization, though: checking sales have been increasing ever since the April low (down 60%) and now stand only 15-25% below pre-COVID levels. Branch transactions fell about 40% this spring and are now only down about 15%.

Reasons for Shopping

Week 1-3
Week 4-6
Week 7-9
Week 10-12
Week 13-15
Week 16-18
Week 19-21
Week 22

Sample: FABB shoppers – week 1-3/30 to 4/5 (N=157), Week 2-4/6 to 4/12 (N=215), Week 3-4/13 to 4/19 (N=365), Week 4 -4/20 to 4/26 (N=275), Week 5-4/27 to 5/3 (N=304), Week 6-5/4 to 5/10 (N=282), week 7-5/11 to 5/17  (N=167), week 8 – 5/18 to 5/24 (N=123), Week 9 – 5/25 to 5/31 (N=96)
Note: Other – Reasons include first time openers, bank mergers, and fraud protection; **Answer option added on week 4
Source: Novantas Customer Knowledge | COVID Pulse Survey #3

Reasons for Shopping

Sample: FABB shoppers – week 1-3/30 to 4/5 (N=157), Week 2-4/6 to 4/12 (N=215), Week 3-4/13 to 4/19 (N=365), Week 4 -4/20 to 4/26 (N=275), Week 5-4/27 to 5/3 (N=304), Week 6-5/4 to 5/10 (N=282), week 7-5/11 to 5/17  (N=167), week 8 – 5/18 to 5/24 (N=123), Week 9 – 5/25 to 5/31 (N=96)
Note: Other – Reasons include first time openers, bank mergers, and fraud protection; **Answer option added on week 4
Source: Novantas Customer Knowledge | COVID Pulse Survey #3

Industry Consumer HH Production*

Acquisition
Attrition
Net Growth

INDUSTRY CHECKING ACCOUNT PRODUCTION*

Acquisition
Attrition
Net Growth

Source: Novantas’ Comparative Deposit Analytics, representative sample of banks submitting weekly
Note: Average reflects all bank branches, does not exclude closed branches

All markets are certainly not equal, though. We continue to see large differences across geographies, with some like Oklahoma barely impacted while others like San Francisco are still down as much as 40%. The largest differences, though, are occurring within markets as work-from-home policies trigger massive traffic declines in work centers. Furthermore, retail-store traffic in work centers is down as much as 80% in markets like New York, Los Angeles and San Francisco, reducing the attractiveness of the bank branches in those areas.

Banks need to identify what these changes (and the geographic variation) mean for the investments and plans for 2021.

Work Center Visitation

(Change in Weekly Visits vs. Jan. 27 – Mar. 2)
Los Angeles, NYC, San Francisco
Baltimore, Buffalo
Memphis

Hybrid Visitation

(Change in Weekly Visits vs. Jan. 27 – Mar. 2)
Los Angeles, NYC, San Francisco
Baltimore, Buffalo
Memphis

Feeder Visitation

(Change in Weekly Visits vs. Jan. 27 – Mar. 2)
Los Angeles, NYC, San Francisco
Baltimore, Buffalo
Memphis

Work Center Visitation

(Change in Weekly Visits vs. Jan. 30 – Mar. 4)
Los Angeles, NYC, San Francisco
Baltimore, Buffalo
Memphis

Hybrid Visitation

(Change in Weekly Visits vs. Jan. 30 – Mar. 4)
Los Angeles, NYC, San Francisco
Baltimore, Buffalo
Memphis

Feeder Visitation

(Change in Weekly Visits vs. Jan. 30 – Mar. 4)
Los Angeles, NYC, San Francisco
Baltimore, Buffalo
Memphis

Source: Novantas Analysis, NovaLocation, PlaceIQ

Market Type Definitions (click + to expand)

  • Feeder – Markets with very few businesses and daytime population (residential) is much larger than nighttime population (working)
  • Hybrid – Markets that have a combination of workers and residential population within the market
  • Work Center – Markets where more people work than live

PLANNING FOR 2021

It’s never an easy task to plan for the upcoming year, but trying to guess what will happen in 2021 feels like a fool’s errand. It seems like the number of planning scenarios are endless and many are tied to non-financial developments, such as school openings, COVID vaccines and return-to-work policies. That said, there are numerous things that clearly need to be front and center in the planning process.

As rates stay low for the foreseeable future, we would expect to see growth in liquid products, particularly checking and low-yield savings, while CD growth will decline. Banks will focus on growing new-to-bank relationships, managing surge deposits, reducing non-interest expenses, increasing fee income and deepening relationships with existing customers. The strategies for all of these will differ significantly from prior years.

REDUCING NON-INTEREST EXPENSES

As banks look to reduce costs in 2021, the normal candidates will all be on the table – branches, staffing and marketing spend. The challenge for many banks is that they are already at or near minimum staffing levels and reductions in any of the other areas comes at the cost of potential growth. This means banks must be very surgical about cost cutting and, in many cases, drive reinvestments in other areas to make up for potential gaps.

Branch closures: While banks have been closing branches for years, a Novantas analysis of recent closures found that at least 20% of branches were the “wrong” branches. In general, banks have been hesitant to close large branches based on deposit size even when there are other branches nearby that will limit sales and attrition losses. As the industry moves from a world where branch proximity and convenience was key (‘I need a branch really close to my home and work’) to a world where branch access is key (‘I want a bank that has a branch near my new normal life’), banks will increasingly need to re-envision the network to determine which locations make the most sense. In other words, closing the bottom 5% of branches for four years in a row won’t create the right network in four years.

Branch FTE: Many banks believe that 40-50% of their branches are at minimum staffing levels, though these numbers vary widely from bank to bank. For banks to increase productivity in the network requires getting more creative about ways to reduce branch staffing levels or finding ways to use more of the staff’s time for other activities. This will likely require changing branch operating hours/days, creating branch clusters, reducing spans of control or driving simplification. In one example, Australia’s NAB achieved enhanced productivity from existing staff by closing rural branches in the afternoon and redeploying staff to call-center activities. Alternatively, banks could use spare time during the afternoons to improve relationship management by having staff make outbound calls

Marketing: While marketing historically has been one of the first places CFOs turn to for budget reductions, most banks have identified that 20% of new-to-bank checking accounts are now driven by marketing. This number is only likely to increase in the coming years as more branches close and digital transformation continues to take hold. Sponsorship and event dollars will likely drop in 2021, while spend in lending products could also provide some cost savings depending on the bank’s strategy (and historic budgets).

Banks will increasingly need to re-envision the network to determine which locations make the most sense.

GROWING CORE RELATIONSHIPS

As the role of branches in primary checking acquisition continues to decline, the importance of marketing and branding is rising. This doesn’t mean that marketing is the only way to drive growth in the new age, but it means that branches alone won’t be sufficient. Proximity to the three or four branches in the neighborhood just won’t be enough to drive new accounts. Instead, consumers will focus on details they know about the brand, such as great service, investment in the community or innovative digital capabilities.

Deepening Existing-Customer Relationships

Even with branch lobbies closed during the pandemic, many banks have been able to deepen relationships with existing customers. This was due to more outbound calling programs that checked in with customers and helped identify other products and services that would be valuable to them. Moving forward, this type of outbound relationship management will be critical. It will also be multichannel, combining outbound calling with email, direct mail and digital display.

Banks still have a long way to go in relationship development relative to other industries – they still tend to limit communication until they run campaigns to sell something. Other industries have learned to leverage all of their content to maintain more (and more relevant) contact with customers, while directing them to additional products at the appropriate time – even if it isn’t during a campaign.

The fact that outbound calling is still so effective across the industry illustrates why there is a need to develop the right goaling and incentives in 2021 despite widespread uncertainty about what can be achieved in this operating climate. There are many different approaches being used across the industry to solve for this – from activity-based goaling to releasing goals on a monthly basis to ensure relevance. The right approach will probably vary for each institution, but goals and incentives still always need to be simple, opportunity-based and realistic in order to be effective.

MANAGING RETAIL SURGE DEPOSITS

The industry appears to be at an inflection point in retail “surge” deposit dynamics for the first time since COVID-19 took hold. Novantas data have recorded the most prolonged decline in balances among customers who received stimulus payments in April. The past few weeks are also the first period in which total consumer balance growth is tracking below last year’s monthly levels, reflecting that some of the shorter-lived “surge” balances are leaving the system.

As communicated in our CDA Weekly Tracker, customers who received stimulus funds are seeing declines across all balance tiers and are now materially below their high water marks.  Absent another jolt of government intervention, we anticipate that these balances may continue to decline – a potentially troublesome development for the economy at large.

Change in Identified Stimulus Funds

Indexing to Stimulus Received Week of 4/18/20
$0-$2.5K
$2.5K-$5K
$5K+

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

More broadly, aggregate consumer checking balances are now declining and the recent growth trends are well below the respective monthly averages from last year. Many retail bankers are trying to predict end-of-year balances, and the shifts within a particular bank’s portfolio should be considered in the context of that bank’s demographic make-up. Among things to consider: Are you relatively more or less exposed to customers who are benefiting from the mortgage and rent forbearance? Is your customer base at a relatively greater risk of salary impacts in the event of potential future lockdowns or benefits accompanying additional government intervention?

Checking Balance Growth from Existing Accounts

Annualized Four-Week Moving Average
Total Checking

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

This climate has prompted most banks to cease any type of higher-rate promotional pricing. At the same time, direct players are dropping rates quickly. Consequently, “on-sale” and “back-book” portfolio rates are near parity for the industry. For those institutions that experience the largest surge deposit declines, we expect a few may dip their toe back into the water with limited rate-based offerings in the first half of 2021.

Increasing Fee Income

While there will likely be some bounce back on overdraft fees in 2021, this improvement likely won’t be enough to account for low rates. It will therefore be critical for banks to diversify their fee income sources, increasing mortgage and wealth businesses where they exist and driving increased treasury management revenue from business clients.

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