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This Month in Retail Banking | May 2021

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The buds of optimism that appeared last month now seem to be in full bloom. Vaccinated Americans are taking off their masks and many are finally starting to return to the office. Consumers are planning summer road trips and family reunions. Bank executives, meanwhile, are already looking ahead to 2022.

The May issue of This Month in Retail Banking explores assorted issues that are (or should be) top of mind in coming weeks.

First, we dive into critical items that bank executives need to consider as they start the planning process for 2022. The traditional method of using the past two years as a guide just isn’t going to work this time around, so we walk you through some key issues for this cycle.

Next, we remind you that Gen Z consumers are about to become your biggest customer group – and they are very different from Millennials. Not only are they tech savvy, but they are quite worried about their finances in a way that other generations aren’t. That translates into opportunities for banks.

This issue also encourages bankers to redesign the checking suite. Other banks have already made some big announcements and the old rules don’t apply in a digital world. You may be surprised by the impact of such changes.

Finally, we take our tried-and-true customer-level analyses and apply them to consumer movement patterns. This will be particularly important in coming weeks and months as Americans return to more of their normal activities.

Planning for 2022 After Two “Lost” Years

As we approach the midpoint of the year, many banks are beginning the annual planning process for 2022. The typical process starts by looking at the budget and plan from the past two years to better understand baseline and trends. But trying to plan for 2022 by looking at 2020 and 2021 isn’t so easy. With the last two years so heavily influenced by the pandemic and permanent shifts in the drivers of growth and efficiency for banks, this next planning cycle will require a more holistic reset.

Some of the major questions that banks ask each year focus on a few central topics:

Should I make material changes to my branch network – actions that would influence both operating expense and capital expenditures?

What should my product goals be and how do I manage the balance between digital and branch?

What should my marketing budget be? Is my limiting factor returns or expense?

Are there expectations around product revenue?

How much should I budget for digital investments?

The answers to these questions may be different this year, so the following is our view of considerations for this unusual planning cycle.

NETWORK: With interest rates near zero and expectations that fee revenue will stay depressed, many banks are looking for the next round of potential cost savings. They typically would want to pause branch reductions in 2022 after making big cuts in 2020-2021, but there may be no other areas where true cost savings can be achieved. Indeed, most banks still have more opportunity to reduce network costs – whether through branch consolidations or further reducing minimum staffing floors. The key will be to ensure that these additional cost savings don’t sacrifice revenue growth.

Any changes to network costs must also consider the fact that post-pandemic branch sales are different too. Many branches located in work centers haven’t yet seen a return to pre-pandemic sales, and the mix of branch versus digital sales has changed for many institutions. It is mission critical to base goals on opportunity and peer data versus expecting performance to be comparable to 2020 and 2021. While Novantas believes that many of the previous branch sales won’t return, the slow return of office workers bears watching.

MARKETING: Most banks are now acknowledging the importance of marketing for driving primary customer growth, especially as branches become less critical. On the other hand, marketing continues to be a current-period expense from an accounting perspective, meaning that it will be one of the first targets for budget reductions. Building out a zero-based budget is critical for managing an unusual budgeting season, but also for managing senior executive investment decisions. The zero-based approach helps to build out business unit-specific priorities. This becomes important because most banks could reduce consumer prospect marketing without having a meaningful impact on revenue until 2024. Marketers should take the opportunity for a full reset.

CHANNELS: Digital account opening continues to be a focus for banks, as it should be now that roughly a third of all accounts are opened digitally. Many institutions are beginning to set targets on the levels of digital account opening across channels. This typically wouldn’t be the case because banks haven’t yet achieved the same level of account quality in digital channels as they do in the branch. Focusing on funnel conversion, driving deeper relationships with customers who open accounts online and getting activation and engagement are all areas that should be goaled through a combination of product and marketing.

Gen Z: All Grown Up, But Different

Move over, Millennials.

As hard as it may be to believe, Gen Z is poised to soon become the largest generational group in the financial services arena – roughly 90 million strong. Many banks are marketing to this cohort as if they’re the same as Millennials, given their youth and tech-savvy orientation. But the latest Shopper research from Novantas indicates that is a mistake. In fact, this generation has a unique profile when it comes to financial anxieties and bank preferences.

The research shows that the Gen Z segment is the most anxious about current finances and the least optimistic about financial prospects. (See Figures 1 and 2.) Unlike other generations, these consumers have much lower confidence in their ability to manage their money well and worry about how to plan for big goals ahead. Their apprehension could be driven by age (they lack experience and know-how) or it could be related to living through not one, but two, great economic disruptions during their formative years.

Figure 1: Money Pains by Generation

Gen Z consumers are anxious about the state of their finances

General Population
Baby Boomers
Gen X
Gen Z
General Population
Baby Boomers
Gen X
Gen Z

Source: Novantas Value Proposition Survey, 2019 | Total N = 3416 | Total Baby Boomer = 1820 | Total Gen X = 684 | Total Millennials = 785 | Total Gen Z  = 127 | 1. Selected Strongly or Somewhat agree with Money Pain statements

Figure 2: Money Gains by Generation

They are also the least optimistic consumer segment when it comes to their financial futures

General Population
Baby Boomers
Gen X
Gen Z
General Population
Baby Boomers
Gen X
Gen Z

Source: Novantas Value Proposition Survey, 2019 | Total N = 3416 | Total Baby Boomer = 1820 | Total Gen X = 684 | Total Millennials = 785 | Total Gen Z  = 127 | 1. Selected Strongly or Somewhat agree with Money Gain statements

On a positive note, this young generation is actively looking to their banks and financial institutions to provide the advice and guidance they seek. These consumers exhibit strong interest in budget optimizers and bundled checking and savings offerings. While top-notch apps and tech are a must, this generation is surprisingly more branch-centric then Millennials. National and regional banks, which deliver on both fronts, are winning over Gen Z so far. But savvy fintech players are making inroads with a combination of media targeting and personalized financial education content.

Bottom line: regional banks need to up their game in order to win these customers. Financial providers that help alleviate this generation’s anxiety will have an advantage.

Spring Cleaning for Fee Strategy

Like the flowers of spring, a growing number of new fee strategies are popping up across the country.

Heightened competitive and regulatory pressure, combined with dragging fee revenue, are driving banks to take creative action in adjusting fees and access to liquidity. Bombshell announcements like PNC’s Low Cash Mode and Frost Bank’s new plan to reduce overdraft charges have accelerated the need for others to also focus on renovating current fee and feature strategy. Additionally, as consumers increasingly open accounts via digital channels, the typical checking suite of five-to-six products becomes too complicated to effectively communicate the right product proposition for the customer. Hence, this is the prime time to clean up the checking suite design by simplifying the customer journey and kickstarting product innovation.

A redesign of the checking suite means striking the optimal benefit exchange, balancing the right level of customer benefits with the level of relationship value to the bank. Achieving this balance means designing the right fees, features and functions across the tiers to drive meaningful differentiation for the customer and to incentivize deeper relationships.

Novantas has found that this “short and sweet” exercise can yield roughly 30% lift in average relationship balances and roughly 17% lift in account profitability – including incremental losses from attrition due to product migration. It is a valuable reminder to banks that there’s more to profitability than just incremental acquisition.


“Customer Level” as the New Standard

The acceleration of data availability and the means to efficiently process “big data” has supported the transition of customer-level analytics into new domains across all industries. At Novantas, we have been working with our clients to deliver customer-level deposit pricing treatments for years and have recently introduced customer-level deposit scores, which improve the performance of traditional credit models.

Those strategies have now worked their way into network planning.

Using anonymized mobile geo-location data, we now understand the movement patterns of consumers throughout a market and how those travel patterns intersect with the bank’s network. This data help us to better understand a number of elements that affect network planning.

First, we can now understand the marketing or “billboard” value for each location in the network. We see the “interdependency” of the network by understanding how many and which branches are within a consumer’s view based on their live-work-play patterns. Additionally, we can quantify the “dependency” of each branch, or how many customers only visit near that branch and not others. Finally, we can appreciate the “relative convenience” of your network as compared with other banks in the market. (See Figure 3.)

Figure 3: Customer-level branch access drives purchase, providing a nuanced understanding of the impact of multiple closures

Customer-Level Purchase Model


Old World

Our understanding of lost sales was rooted in current branch sales and cross-branch proximity.

New World

Our understanding of lost sales is rooted in the extent to which a branch influences purchase rates at the customer level:

  • Each branch impacts each customer differently, depending on where the customer falls on the purchase curve
  • As a result, we are able to ensure branch closures are complementary. That leaves the bank with optimal network composition given individual movement patterns

Source: Novantas Analysis
*Relative branch convenience is based on customer-level access to Bank A’s branches versus competitor branches

These new analytical capabilities allow us to estimate the potential sales impact of changes to the network, including both additions (de novo) and subtractions (consolidation).

In a world where sales are migrating to digital channels, the value of the branch network is increasingly focused on driving awareness and consideration. Mobile geo-location data enables the bank to better understand the frequency and reach that bank branches contribute to customer acquisition.


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