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This Month in Retail Banking | February 2021

BANKS SEE MORE IMPACT FROM PANDEMIC

With vaccination programs picking up steam and cases of COVID-19 declining, a cautious sense of optimism is on the horizon – even as the deep freeze across much of the country creates new struggles for many. Despite the positive trends in the pandemic, the impact of COVID-19 on retail banking will be felt for a long time.

“This Month in Retail Banking” discusses the impact of COVID-19 on brand awareness for branch-based banks. (Hint: it’s not good.)  Similarly, we look at the pandemic’s impact on branch staffing models and the need to clearly define and drive down minimum staffing levels. Looking across a longer time horizon, we reaffirm that branch scale matters, although some banks are breaking through with thin-branch share approaches.

Finally, we look ahead to the new administration and the potential shifts in policymaking.

Agenda for This Month

COVID-19 Impact on Bank Brand Awareness

In a year of reduced and restricted consumer movement patterns and slashed marketing budgets, branch-based banks experienced a drop in brand awareness.

Unaided (unprompted) awareness has traditionally been tied to banks’ branch presence and marketing spend, both of which were severely affected by the COVID-19 pandemic. While the average number of top-of-mind banks cited only fell slightly, super-regional and national banks were hurt the most on both unaided and aided awareness. (See Figure 1.)

Figure 1: Awareness by Bank Type

Unaided Awareness

2019
2020

Aided Awareness

2019
2020
Average Number of Banks Cited per Respondent
2019 2020
National 1.49 1.34
Super Regional 1.13 0.88
Regional 0.99 0.98
CU/Community 0.11 0.12
Direct 0.05 0.08
Neobanks 0.02 0.04
Total 3.8 3.5
Average Number of Banks Selected per Respondent
2019 2020
National 1.91 1.95
Super Regional 2.38 1.92
Regional 1.66 1.52
CU/Community 0.21 0.34
Direct 1.61 1.37
Neobanks 0.42 0.84
Total 6.2 6.9

Source: Novantas Customer Knowledge | 2019-2020 U.S. Shopper

Figure 1: Awareness by Bank Type

Unaided Awareness

2019
2020
Average Number of Banks Cited per Respondent
2019 2020
National 1.49 1.34
Super Regional 1.13 0.88
Regional 0.99 0.98
CU/Community 0.11 0.12
Direct 0.05 0.08
Neobanks 0.02 0.04
Total 3.8 3.5

Aided Awareness

2019
2020
Average Number of Banks Selected per Respondent
2019 2020
National 1.91 1.95
Super Regional 2.38 1.92
Regional 1.66 1.52
CU/Community 0.21 0.34
Direct 1.61 1.37
Neobanks 0.42 0.84
Total 6.2 6.9

Source: Novantas Customer Knowledge | 2019-2020 U.S. Shopper

Simply put, Americans who were stuck at home just weren’t exposed to the branches that they normally pass every day. They also attended fewer events where bank names are pasted on marquees and stadium walls. At the same time, many banks pulled back on advertising.

The winners in all of this are, once again, the industry disruptors with their focus on easy-to-use digital capabilities and relevant, personalized marketing. Neobanks improved their unaided and aided awareness in 2020 through distinct, supportive messaging throughout the pandemic, as well as unique product features. Chime, for example, gained media attention and new customers after developing a program that gave consumers access to their stimulus checks before the money had been deposited into their accounts.

It will remain to be seen whether branch-based bank awareness will recover as consumer movement patterns and marketing investments begin to normalize following the pandemic. In the meantime, neobanks and digital players will maintain a strong platform throughout 2021.

Staffing Levels Need More Focus

As discussed last month, COVID-19 has dramatically impacted branch sales and service activity, leading to increasingly lower levels of branch productivity. Branch sales are down 15% compared with pre-COVID-19 levels and teller transactions are down 26% (with limited expectations for a transaction rebound). More than half of bank branches already had fewer than 4,000 transactions per month prior to COVID-19, leading us to conclude that nearly two-thirds of bank branches are operating at a sub-scale level.

These low transaction and sales numbers are resulting in more and more branches reaching “minimum staffing levels.” An analysis of our benchmark data suggests, however, there is not a clear minimum staff level either within or across banks. Figure 2 shows the distribution of branch staffing levels for three banks. If there were a consistent minimum staff level for each bank, we would expect to see a clear “edge” on the left side of their respective distributions. Instead, there is a slow ramp up in the staffing levels for their branches. Additionally, the three banks have a very different distribution of staffing levels despite having very similar levels of sales and transaction activity.

This data suggest that most banks have an opportunity to further refine their definition of minimum staffing levels and can seek opportunities to set a lower floor for the staffing levels that they currently use.

Figure 2: Distribution of Staffing Levels by Bank

DISTRIBUTION OF FTE per BRANCH – EXAMPLE BANKS

Bank A
Bank B
Bank C

Source: Novantas SalesScape 2019

An Analysis of Deposit Growth Across Market Archetypes

A recent Novantas analysis of retail deposit growth over the last three years across various market archetypes has reaffirmed what many of us already know: scale matters. But even those banks that have thinner branch networks can achieve success.

To start, we analyzed the market situation for each of the top 100 banks in the U.S. Markets were categorized as either Metro or Community based on a population of above or below 500,000. Within the Metro markets, we categorized the bank as either having Dense Share (>6% branch share), Thin Share (3-6%) or Ultra-Thin Share (<3%).

The results show that the largest banks in the country (Chase, Bank of America, and to a lesser extent, Wells Fargo) are heavily concentrated in Metro markets where they have Dense Share. (See Figure 3.) For each of the subsequent tiers, the banks have more of their branches in Thin and Ultra-Thin markets, along with a moderate increase in representation in Community Markets.

Figure 3: Branch Distribution Across Archetypes

Dense Metro
Thin Metro
Ultra-thin Metro
Community

Note(s): Metro areas are CBSAs with populations above 500k; Ultra-thin branch networks are markets where a bank has less than 3% branch share; Thin-branch networks are markets where a bank has  between 3-6% branch share
Source: Novantas BranchScape 2020; Novantas Analysis

Once we characterized the banks by their market archetypes, we indexed their three-year deposit growth relative to the growth for the specific market. An index of 1.0 would mean that the bank grew in line with the market. While not a surprise, we found that the three national banks outgrew the competition across all four market archetypes. (See Figure 4.) Additionally, we saw that, within each tier, the growth in markets where there was a Dense Share (often a “hometown market”) outperformed markets with Thin or Ultra-Thin share. Finally, we see that the banks in the 26-50 tier outperformed the other cohorts. This is in large part due to some high-fliers and isn’t necessarily consistent across the tier.

Given the concentration of branches within thin markets for most regional banks, finding a winning strategy – perhaps with insights from the high-fliers – will be critical for sustained success.

Figure 4: Growth Index by Archetype and Bank Size

Note(s): Metro areas are CBSAs with populations above 500k; Ultra-thin branch networks are markets where a bank has less than 3% branch share; Thin-branch networks are markets where a bank has  between 3-6% branch share
Source: Novantas BranchScape 2020; Novantas Analysis

Product Innovation is Crucial in New Washington Era

As the Biden administration settles into the next four years, retail banks are already preparing for an activist Consumer Financial Protection Bureau (CFPB) and Office of the Comptroller of the Currency (OCC). Given the COVID-19 pandemic and the administration’s priorities of racial and social justice, these regulators are expected to increasingly focus on fair access to liquidity and protection of consumers from unfair fees.

The CFPB nominee, Rohit Chopra, is at the core of the two priorities. With his extensive background in consumer protection within banking, the CFPB is likely to push for credit policy reform, more progressive lending criteria and an overhaul of overdraft fees.

This is a key opportunity for banks to drive liquidity and fee innovation through product design, especially as reliance on fees has already declined significantly. In 2020, the top 50 banks saw overdraft fee revenue slashed roughly by a quarter from 2019. Increased competition from neobanks like Chime that advertise low or no fees, combined with the regulatory focus, means that overdraft revenue is only likely to keep declining – and at an even faster rate.

This intensifies the need for banks to design products that drive alternate sources of fee revenue by creating value-add services for consumers. As an example, Novantas’ Product Research indicates that there is increasing appetite for subscription pricing. The addition of this type of service can drive a 25% lift in switching in certain segments, according to the research.

Lastly, the OCC’s agenda with the Biden administration is expected to impact the role of fintechs in the landscape, putting even more pressure on banks to innovate. The agency granted a bank charter to Varo last year and hurdles could continue to drop in the new regime. Michael Barr, who is shortlisted as a nominee to head the OCC, is considered to be friendly to fintechs because he has served an advisor to Ripple, was on the board of Lending Club and has been a member of a fintech advisory council at the Bill and Melinda Gates Foundation.

Value-add services can drive switching by

0
25
%

But fintechs could face more hurdles and oversight under Mehrsa Baradaran, who is also considered a frontrunner for the job. That said, she would also be expected to pressure banks to overhaul existing lending and fee practices. This will also fuel the need for more product innovation.

In some ways, the people who head these assorted agencies shouldn’t be the drivers of bank activity. Instead, banks must acknowledge that they need new products and more innovation in order to remain competitive in this new era of banking.

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