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This Month in Retail Banking | March 2021

MYRIAD OPPORTUNITIES TO DRIVE IMPROVEMENTS

As we pass the one-year milestone since the COVID-19 pandemic ground life to a halt, we continue to look in our rearview mirror for learnings that can be applied as the retail banking industry moves forward.

In this month’s edition, we explore the impact that COVID-19 had on digital account opening during 2020 and the implications for banks (hint: it’s all about quality). Additionally, we analyze customer research from the U.S. and Canada regarding the nature of financial advice and the need for banks to think more broadly about omnichannel strategies for it. Separately, we examine branch operating hours and the opportunity to drive improved efficiency in the face of reduced branch transaction and sales activity. We also note that the next wave of stimulus payments have started to arrive, which will further bloat bank balance sheets with excess deposits.

Looking beyond COVID-19, we explore the impact of radical shifts in NSF/overdraft revenue. Whether through competitive forces (i.e. fintechs) or regulatory shifts, banks need to consider alternatives for supplanting this longstanding fee income stream.

Agenda for This Month

Mind the Gap: Digital Acquisition

There’s no question that retail banking is in the midst of a radical shift when it comes to customer acquisition. While two-thirds of new-to-bank primary relationships are still sold via bankers in branches today, more and more consumers are shifting to open accounts in digital channels – whether they’re sitting in the car awaiting a grocery pickup or plopped on the sofa at 2 a.m. And the process often takes five minutes or less.

To help banks better track the shift, Novantas has expanded its SalesScape benchmark to include a new module on digital acquisitions, including views of digital sales velocity, deposit quality, relationship depth and relationship length.

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As we looked back over the full year of COVID-19 disruption, one thing is clear: the period of April-May 2020 was a turning point. Our benchmark data showed a massive spike in the digital acquisition mix – digitally-originated accounts jumped from the high teens to nearly half of all originations. That level was fleeting, but the numbers still reset at a much higher rate than before – at roughly 35% – and has held steady since.

Importantly, however, branch acquisition also dropped significantly at the start of the pandemic and digital sales have yet to close that acquisition gap. (See Figure 1.) As the year drew to a close, the gap in omnichannel acquisition stands at about 20%. Further complicating the matter, Novantas benchmarks show a differential of 10X in the value of deposits that are brought to institutions from an account opened in a branch to those that come from digital channels.

We have said it before and we will say it again: banks must move fast to shore up their digital acquisition capabilities. At the same time, they must figure out how to engage digitally-acquired customers at every stage of the onboarding funnel to drive relationship value in a way that replicates what exists in human channels.

Figure 1: Customer Acquisition Trends Since 2019

Source: Novantas Analysis
Note: Performance indexed to average 2019 performance

The Future of Advice is Omnichannel

In the midst of COVID-19, many banks expanded their use of proactive calling to remain connected to their customers. Associates who were accustomed to face-to-face interactions had to burnish their skills in remote engagement and provision of advice. Little did bank teams know, but they were just catching up with the customer who no longer favors receiving advice in person.

Novantas research recently conducted in the U.S. and Canada shows, not surprisingly, that a vast majority of Branch Traditionalists still prefer to receive advice in the branch. (See Figures 2 and 3.) About half of the Innovation Seekers and Channel Mixers also prefer the branch. But all of those segments are shrinking with respect to the Thin-branch Ready segment, which now comprises more than half of all customers. This group clearly prefers digital and phone-based financial advice.

Figure 2: U.S. Channel Preference – Financial Advice by Channel Segment

Branch
Digital
Phone
ATM
Do not recall

% of Population by Channel Segment

Digital Ready
Innovation Seeker
Thin-branch Ready
Channel Mixer
Branch Traditionalist

Source: Novantas | 2020 U.S. Branch Centricity (N=1008)* weighted on age/income
Q: Today, which way do you do each of the following banking activities most often?

Figure 3: Canada Channel Preference – Financial Advice by Channel Segment

Branch
Digital
Phone
ATM
Do not recall

% of Population by Channel Segment

Digital Ready
Innovation Seeker
Thin-branch Ready
Channel Mixer
Branch Traditionalist

Source: Canadian Multi-Channel Study (2020), Novantas Analysis
Q: Today, which way do you do each of the following banking activities most often? – Get financial advice

The implications for this are twofold. First, banks need to improve their ability to provide advice digitally. Fintechs are leading the way in finding creative ways to support the everyday advice needs of clients and they especially target digitally-oriented segments. For branch-based banks with all of their advice experts distributed throughout the network, it is time to break down the barriers between channels and develop integrated solutions for inbound/outbound phone (and video) delivery of advice, both on-demand and through appointments.

Branch Hours as a Productivity Lever

Most banks have made at least temporary adjustments to branch hours to address staffing challenges and reduced customer traffic brought on by the pandemic. As the situation has normalized, however, most banks are snapping back to pre-pandemic hours of operation. Novantas believes the pandemic presents an opportunity to adjust customer expectations and take advantage of shorter branch hours to reduce cost and improve productivity.

Unfortunately, shorter branch hours don’t ensure higher levels of productivity. Novantas has profiled four banks from our SalesScape benchmark, each with a different mix of branch operating hours. (See Figure 4.)  As you see from the sales and service productivity levels of these banks, there is little correlation between banks with shorter hours and higher levels of productivity. This is because the productivity both within and across banks is highly variable.

Figure 4: Distribution of Branch Hours by Bank

0-36
36-40
40-44
44-48
48-52
52-56
56-60
60+
Bank A Bank E Bank J Bank K
Avg. Hours 39.0 42.0 43.6 43.6
Avg. Teller Prod. 1317 1496 1725 1134
Avg. Sales Prod. 17.5 22.9 18.1 21.1

Source: SalesScape 2019
Note: Traditional branches only

If we look closer, there is evidence that branches with shorter hours can achieve higher levels of productivity with the right focus on staff deployment. (See Figure 5.) In looking at the distribution of teller productivity for branches with between 48-52 and 52-56 hours per week, there is significant variability across branches, but the median productivity levels for branches with fewer hours is higher at all levels of branch transactions.

Customer expectations were shifting even before the onset of COVID-19. Now there is an opportunity to harvest some of the savings available to banks that are willing to make changes to the status quo.

Figure 5: Teller Productivity for Different Branch Hour Buckets

Source: SalesScape 2019

New Round of Stimulus Payments Flow to Swollen Bank Coffers

The third round of federal stimulus payments is flowing into the industry’s swollen deposit coffers as bankers continue to struggle to figure out how to put them to good use. Although initially considered as “surge” deposits, Novantas now believes that these funds are likely to remain in the banking system for some time.

This third round of payments, which are being direct-deposited into consumer bank accounts, may well impact the K-shaped economic recovery in coming months.

Consumer balance growth has been driven in recent months by customers in the highest tiers, according to analysis from the Novantas Weekly CDA Tracker. For example, while all customers who received stimulus funds experienced a balance increase in the first week of March, balances of top-tier customers rose by more than $200 while balances of bottom-tier customers increased by less than $50.

Portfolio and acquisition rates, meanwhile, hover at historic lows.

In the first week of March, balances of top-tier customers rose by more than $200 while balances of bottom-tier customers increased by less than $50.

If Overdraft Revenue Disappeared Tomorrow…

Overdraft fees are still a major pain point for consumers and are often one of the biggest drivers for attrition, but overdraft is also a service that meets the liquidity needs of certain customers. Novantas research about overdraft trends has shown that two-thirds of consumers who overdraft say it was a conscious decision because they knew that their account balance was low. Overdraft customers account for 20% of the customer base on average for traditional banks, but account for 70-80% of overdraft revenue.

These customers and the accompanying revenue they provide are at risk for incumbent banks. As neobanks continue to enter the market with fee-free propositions and overdraft innovations, more overdraft customers will continue to migrate to these cheap alternatives.

The U.S. banking industry collected $8.3 billion in overdraft revenue last year. If that revenue disappeared tomorrow, Novantas estimates that banks would need every customer to pay an additional $3.53 in monthly fees to make up the gap.

A mere $3.53. That’s it.

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This begs the question of how banks can rethink their pricing structure so that customers are willing to pay more for products and experiences. In particular with the era of subscription pricing upon us, banks should be encouraged to innovate fee structures and product features to drive demand – and to create a diversified source of fee revenue.

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