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This Month in Retail Banking | June 2021

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SOME PANDEMIC TRENDS MAY STICK AROUND

There’s little doubt that we are in a vastly different place than we were one year ago. Just this week, California and New York lifted most pandemic restrictions, including capacity limits and social distancing. Vaccination rates are still inching higher even though the pace has slowed, with more than half of the U.S. population having received at least one vaccine.

But the June issue of “This Month in Retail Banking” shows that some trends that emerged during the pandemic aren’t going away anytime soon.

First, we dive into the latest sales trends that show new-to-bank and cross-sold accounts are on the rise. Not surprisingly, teller transactions are continuing to decline as banks close branches and transactions migrate to online channels.

Next, we examine the growing popularity of video banking, which has experienced fits and starts in the past. The pandemic gave a boost to the tool, which is increasingly being adopted and expanded by institutions of all sizes.

Then we look at the current state of deposits, which remain elevated despite higher spending and rising inflation. Uncertainty about how long they will remain high underscores the need for banks to pivot quickly.

We track trends in the mortgage business with a detailed look at volumes for cash-out mortgages and home equity. (Hint: cash-out is winning as borrowers take advantage of ultra-low rates.)

Finally, we want to acknowledge the predicted wave of overdraft innovation, including PNC’s introduction of Low Cash Mode, Huntington’s launch of Standby Mode and Ally’s elimination of overdraft fees. This momentum is not only adding pressure to banks to address overdraft and access to liquidity, but it’s also making its way to consumers who will increasingly demand innovation in this space. We will be writing more about this issue in coming weeks.

This issue incorporates data from Informa Financial Intelligence’s FBX business, which joined forces with Novantas earlier this month. Stay tuned for more insights and analysis from the powerful new organization.

Agenda for This Month

Signs of a Vaccine-Driven Sales Resurgence

As the U.S. accelerated vaccinations this spring, life across the country has started to revert to “normal.” This is reflected in branch-based account sales, with both new-to-bank and cross-sell account sales popping out of the COVID-19 trough. Our latest data show sales are up roughly 50% as compared with the last few quarters. (See Figure 1.)  While this surge seems immense, it only brings new-to-bank sales back to 2019 levels and still leaves cross-sell rates 10% shy of 2019 levels.

Figure 1: Benchmark | Performance Metrics Per Branch Per Month

Teller Transactions

New-to-Bank Account Sales

Cross-Sell Account Sales

Source: Novantas SalesScape
Note: Traditional branches only. Divisor is current branch list, not adjusted for COVID-19 closed branches. Overall benchmark includes 18 banks, 7 of which are super regional banks who each have more than 1,000 locations in their networks.

Meanwhile, as expected, we haven’t seen the same rebound in teller transactions. Although they have recovered slightly from the lows of last summer, teller transactions are still more than 20% below 2019 levels. Considering banks are closing branches and stuffing more customers and teller transactions into fewer branches, this falloff is significant indeed and likely to continue.

Video Banking: An Important Digital Tool

Video calling became part of everyday life last year as consumers adapted to the constraints of social distancing. Despite the recent return to in-person interactions for work or social contexts, consumers have now experienced the flexibility and convenience offered by video calling. It also provides financial institutions the opportunity to interact with a wider base of customers beyond traditional in-person channels. The inevitable reduction and redistribution of branch networks means that banks still need to address customer requirements for personal interaction in complex customer journeys, higher-value services and problem resolution.

Video can continue to help fill that void.

Pre-dating the pandemic, video banking served as a particular powerful problem-solving tool for customers willing to use digital channels. Video has now, however, progressed from an optional solution to a potential game changer and competitive advantage for institutions that can deploy it effectively, particularly as an extension to live chat and chatbot capabilities.

US Bank, with its ambitions to be a digital leader, has moved ahead of its major competitors by launching co-browsing with the added benefit of a live video banker. By enabling bankers to walk customers through online journeys, users receive an extra level of guidance and personalization – particularly valuable for those who don’t find digital to be intuitive and need the reassurance of a visible banker.

video banking3

Video calling still remains noticeably absent from most leading banking brands, although there has been a handful of implementations among smaller banks and credit unions such as New Jersey-based OceanFirst Bank. For brands looking to forge ahead with video, there are three key considerations:

  • Integrate video seamlessly into existing digital platforms, including mobile apps
  • Deliver frictionless access and manage the flow of customers to video calls intelligently
  • Ensure effective training and support for customer-facing employees

With conversational video platforms such as Unblu tripling annual recurring revenue in 2020, changing consumer behavior and the lasting impact of the pandemic, video banking is finally becoming one of the essential features for digital interaction.

Consumer Deposits Stay Elevated Despite More Spending, Inflation

With all eyes on rapidly-rising levels of consumer spending and alarming levels of inflation, the effect on consumer deposits has been minimal so far. Banks continue to sit on elevated levels of liquidity even as the country has largely reopened and consumer spending patterns have returned much closer to historical levels than any point in the last 15 months.

The Novantas Weekly CDA Tracker shows deposit levels falling a modest 3-4% from peak levels for all tiers of customers who received stimulus funds. (See Figure 2.) We have now returned to one-third of customers having spent their entire amount of stimulus money and another one-third having saved the entire amount, levels that have remained largely consistent over the last year.

Figure 2: Spending, Inflation Show Minimal Impact on Consumer Deposits

Stimulus Deposits by Tier

Peak Level
5-Jun-21

Source: Novantas SalesScape

Forecasting season is approaching, but data remain insufficient to be able to predict outflows. While airline bookings and car rental availability suggest spending will ramp up further this summer, consumer spending for April is only equal to pre-pandemic levels.

With surge deposits representing approximately 15% of total consumer deposits, the difference between conservative and aggressive spending assumptions could deplete a bank’s entire consumer book by 5-7%. The uncertainty reinforces the need for scenario-based planning and the ability to rapidly pivot based on evolving conditions.

Cash-Out Mortgage Volumes Outshine Home Equity

While many factors have contributed to the increase in cash-out mortgages versus home equity over the past few years, overall levels of cash-out mortgage rates have been the main contributor. Among lenders that offered both options, cash-out mortgages comprised 45% of total volume (27% of units) between home equity and cash-out in May 2018. That percentage has now jumped to 65% of total volume (45% of units).

The historic drop in mortgage rates drove cash-out volumes even as the spreads between cash-out mortgages and home equity offerings have gone up and down. Home equity and cash-out volumes traditionally have an inverse relationship, with cash-out volume generally increasing while home equity volume typically declines. (See Figure 3.)

Figure 3: Market Home Equity Access Product Preference (Booked/Funded Loan Amount)

Volume between cash-out and home equity was closest to an even split in mid-2018. As spreads increased in 2019 to 1.7% between HELOC and cash-out, market volume started to shift heavily to the cash-out loans. And overall levels of rates in cash-out mortgages kept volume levels high for the product even as spreads began to decline.

Capacity issues in the mortgage space briefly shifted the trend in the third quarter of 2020. That’s when the time between application and funding increased much more for cash-out mortgages than home equity due to the crush of mortgage loans in lenders’ pipelines. As those constraints have eased, however, the demand for cash-out mortgages has risen once again.

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