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Thin Network Challengers: Barbarians at the Gate?

Via digital convenience and strong marketing, challengers are penetrating select local deposit markets with just a few branches. Are branch-heavy incumbents prepared?

For decades, branch networks formed a significant barrier to local market entry. With customer acquisition and day-to-day transaction services heavily dependent on street corner outlets, banks typically had to buy or build a network to crack a new market. And historically the challenges faced by startup branchless checking players appeared to confirm the central role of branches in primary household acquisition.

But recent Novantas research suggests that the walls are weakening. Capitalizing on a growing consumer preference for both digital banking and web-enabled shopping, challengers are making headway in new markets with hardly any branch presence at all.

Some are mega-banks and some are not, but they share a growing ability to expand in select new markets without all the expense of a significant branch presence. Their secret? Leveraging brand strength, aggressive marketing and a sprinkling of well-placed outlets to appear much larger than what local physical presence would suggest, and then doubling down on an appealing online/mobile customer experience.

Though the movement is in the early stages, it is quite real. In Novantas survey feedback from more than a thousand recent and prospective checking purchasers in select markets where these thin network strategists are active, challengers made a strong showing versus branch-heavy incumbents:

  • Parity with incumbents in aided awareness, or the ability of consumers to recognize a brand within the roster of competitors in the market
  • Much stronger advertising recall
  • Much stronger association with the “leading online/mobile banking”
  • A new account purchase rate more than six times local branch share

Such successes play into powerful industry trends that will motivate many more thin-network market entry plays. These include a thirst for stable deposits anchored by primary checking relationships; the rise of digital channels as a means to demonstrate convenience; and consumer use of digital shopping to locate a new checking provider.

The upshot is that thin-market strategists likely will be establishing beachheads in traditional banking markets around the U.S. in coming years. A number of institutions will be able to wield this new expansion strategy. And from a defensive perspective, nearly all banks will have to reckon with the arrival of these plays in their core markets.

Digital Center of Gravity
For some time now, consumers have been expressing greater comfort with a more digitally-centered banking relationship. With most daily banking activities now conducted via online and mobile, the branch increasingly is left as a reassuring backstop and occasional destination for high-value sales and service.

The trend has progressed to the point that the single largest segment of retail banking customers — 37% — is now composed of people who are “thin-branch ready.” As identified in Novantas U.S. Shopper Survey findings, these customers have a digital center of gravity — both in attitude and behavior — such that a lean branch network works just fine for their occasional on-site activities.

The rise of this segment has not gone unnoticed by progressive competitors. In particular, Novantas has identified several instances of thin network market incursions across the U.S., including select markets in the Northeast, Southeast and Upper Midwest. These challenger plays are characterized by a lack of long-standing physical presence in the market, no more than 3% branch share today, and a commitment to marketing.

To better measure and understand the success of thin network market entry strategies, we examined using the acid test of primary checking acquisition, drawing on Novantas U.S. Shopper Survey findings. Starting with survey responses from consumers who recently purchased their primary checking account, we compared each challenger’s primary checking acquisition share and brand attributes against the average performance of incumbents (each market’s six or seven largest banks, as measured by branch share).

While average branch share for incumbents outgunned challengers 8% to 1%, dominant physical presence did not confer the sales superiority expected in former times. In fact, the challengers tracked in our market study achieved success all along the purchase funnel:

Unaided awareness. Survey respondents were able to recall a particular challenger bank without prompting roughly 14% of the time on average. Unaided awareness for incumbent banks, despite the benefits of larger branch share and longer tenure in the market, was on average only 23% — not exactly a landslide victory.

Aided awareness. As reflected in the ability of recent checking account purchasers to pick out competitors from a full roster, aided awareness of bank challengers climbed to an impressive 64% — overtaking a 60% average for incumbents. Marketing drives aided awareness, and challengers’ significant marketing commitment is clearly paying off.

Consideration. Looking at the degree to which various competitors received consideration from survey participants prior to their recent purchases, challengers, with a 20% average consideration rate, pulled nearly even with incumbents’ 23% average rate.

Purchase. While incumbents are still capturing a much larger share of account turnover in the markets we studied — a 10% average vs. 5% for challengers — that 2:1 ratio compares poorly with their 8:1 branch share ratio. Converting these factors into a “power ratio,” or acquisition share divided by branch share, it is clear that the incumbents are punching well above their weight class in winning new accounts.

Success Drivers
How exactly are challengers achieving these impressive results? A lot of it has to do with marketing, brand positioning and awareness, and changing consumer perceptions of banking convenience that are tilting influence to digital at the expense of the branch. Looking at digital advertising — messages conveyed via online and mobile — nearly a quarter of recent purchasers said they recalled a digital ad from a challenger, roughly twice the digital ad recall rate for the average incumbent.

Challengers are also 50% more likely to be remembered for TV and radio ads, with two-thirds of recent purchasers recalling an ad from a challenger in one or more media. Challengers are using this advertising advantage to drive home brand attributes and ultimately distinctiveness in the market.

A critical development in the marketing battle is that challengers are pulling ahead in being associated with the attribute “leading online/mobile banking.” This advantage hinges both on a superior online customer experience, and on catchy promotions of the latest features, functions and applications. The payoff is large: success with online/mobile drives tangible results in checking acquisition.

Based on Novantas research, a local competitor typically gains one additional percentage point in share of primary checking acquisition for every 7 to 8 points of increased shopper association with the attribute of leading online/mobile banking. With 21% of recent purchasers associating the average challenger with this attribute, versus only 13% with the average incumbent, challengers are capturing a roughly one percentage point share of local market account turnover just on the strength of this attribute alone.

From a broader perspective, recognition in digital banking helps to drive “distinctiveness,” or the degree to which consumers associate a bank with something unique beyond branches. This umbrella attribute also drives checking acquisition, and here again, challengers outpace incumbents. Compared with an average 21% distinctiveness rating for local market incumbents, thin network challengers captured a 27% average rating from survey respondents (Figure 1: Thin Networks, Hefty Customer Recognition).


Adding insult to injury, challengers also pulled a healthy ranking from recent purchasers on “branches near me,” an attribute where incumbents should have an overwhelming lead. Associated with “branches near me” 21% of the time by surveyed purchasers, challengers pulled respectably close to the 34% average ranking for incumbents — and did so with an eighth of the physical branch share.

Wave of the Future
While the Novantas survey focused only on select markets where thin network challengers are active, we believe this strategy is destined to proliferate.

Through highly visible locations and signage, strategic use of ATMs, and constant reminders that the bank is in the community, challengers are capturing share by appearing much larger than their local footprint, eviscerating the competitive advantage associated with network dominance. In turn, banks cannot afford to sit still and be left to compete for the shrinking base of branch-dependent customers.

Winners must commit to a proactive, sustained strategy to position themselves as highly convenient and economical for consumers that: 1) want a bank with at least some branch presence, but who measure convenience in other ways; and 2) who will choose their bank based on ads, offers and self-directed digital shopping.

For national brands, including national banks entering new markets, the success of the thin-network acquisition model opens up new locales around the country. In a virtuous cycle, stronger returns are generated on national marketing campaigns, generating resources that can be invested in further thin network expansion.

A precaution for players eyeing new markets for thin network expansion: they would be wise to segment customers by branch attachment and dependence, and to localize their value proposition, points of presence and marketing accordingly. Demographics, age and income, the traditional targeting factors, are not strong predictors of interest in a thin-network proposition.

For those regional banks that have enjoyed strong retail deposit share in markets based on branch dominance, it is time to mobilize for the digital onslaught. We continue to see instances where institutions have crimped their marketing outlays in the name of cost control, lagged in repositioning brands, and struggled along with piecemeal improvements in online/mobile banking, as opposed to a silo-integrated strategy.

If these players allow thin-branch ready customers to be siphoned off, they will be left with even less traffic to support their extensive, expensive networks. Tough choices await, as the necessity to reduce branch expense will conflict with the central role of the branch in retaining their remaining customers.

For regionals that lack scale in a market, the thin-network dynamic represents a growth opportunity, albeit a daunting one. The thin-network play places heavy emphasis on brand marketing and digital capabilities, where these banks have tended to lag.

A smaller regional bank’s specific marketing opportunity may lay in differentiating the bank from national players as the local flavor and community supporter. Still, digital capabilities have to be strong enough across the board (potentially market-leading in targeted areas) and well-marketed, so as to win the bank credit for leading online/mobile banking.

New Calculus on Branch Density
The extreme threat to networks, oft-predicted, is the arrival of fully branchless checking. But the more real and immediate threat to current models comes from the new calculus on branch density — thin network checking — now being proven out around the country.

Banks that are ready and able to create market-leading digital convenience, invest in brand marketing, and supplement these initiatives with narrow and targeted investments in physical presence can satisfy the growing population of consumers who no longer need a branch right on their street corner.

Chris Musto is a Director in the New York office of Novantas Inc. He can be reached at

For more information, contact Novantas Marketing

+1 (212) 953-4444