As the number of new COVID-19 cases remains elevated, we have reached the 19th straight week of jobless claims greater than 1 million and civil unrest continues. Despite that, people seem to have reached some level of normalization in the new environment; even sales of checking accounts have returned to nearly pre-pandemic levels.
In examining the trends over time, a few things are clear:
While the industry is clearly being transformed due to COVID-19, the urgency surrounding the pandemic’s impact on banking seems to have slowed. As such, Novantas is shifting this weekly report to a monthly format. That said, we will continue to aggressively monitor acquisition trends, transaction data, mobile phone/transit pattern data and digital account quality. We will also publish individual articles about these topics as circumstances warrant it. For CDA participants, our weekly CDA report will continue to be provided to participating members.
Agenda for This Week
SALES SHOW MORE PRONOUNCED “BOUNCE BACK” THAN SERVICE
Bankers have theorized for years that “everyday” transactions would move from the branch to digital channels, leaving the branch as critical for sales and expert advice. The pandemic prompted many banks to direct customers to drive-throughs and lobby appointments. Customers, in turn, changed their behavior; teller transactions declined by more than 40% and branch-based sales declined by more than 50%.
Teller Transaction Trends
Source: Novantas’ SalesScape
While some customers adopted new technology for the first time, much of the change has come from multi-channel customers who just shifted more of their behavior to digital channels from the branch. As banks re-open their branches, they are finding that ‘branch traditionalists’ are quick to return to the branch, but other customer segments are continuing to use digital capabilities. Novantas believes this change in behavior means that branch transactions per customer will continue to decline at 5-7% annually, although there may also be a one-time shock that causes transactions to drop from 15-30%.
As discussed in the July 18 edition, acquisition trends have been very telling. Digital acquisition spiked in April and early May, but then declined through June and July (though still remaining above pre-COVID levels). The recent digital decline has been accompanied by an increase in branch-based sales as certain regions eased lockdown restrictions. Since account opening is an infrequent activity, we anticipate a larger sales bounce when branches fully re-open. Further down the road, however, we anticipate a continued shift to digital acquisition as more commerce takes place in digital channels.
CLOSING THE GAP ON DIGITAL QUALITY
The industry continues to struggle with attracting quality relationships through the digital channel. Some people view this as a question of nature versus nurture: are customers in the digital channel of a lower quality by nature or does the digital experience just fall far short of the breadth and attention that customers receive in a branch? Novantas believes that the gap is driven by both, but that banks can improve the “nurture” side by optimizing the account opening/funding process and putting in place outbound efforts to nudge customers through the digital activation and onboarding journey.
Banks can improve the “nurture” side by optimizing the account opening/funding process and putting in place outbound efforts to nudge customers through the digital activation and onboarding journey.
THE ROLE OF THE BRANCH
The continued decline of branch transactions and sales in the years ahead will keep pressure on a branch ecosystem that is already challenged. For most banks, customers historically have chosen them over a competitor or a direct bank because the institution has branches nearby in that market. More recently, other factors like distinctiveness have become important. That will likely only intensify as banks close branches. A recent SalesScape survey of more than 40 banks found that most expect to accelerate branch consolidations over the next two years as a result of COVID-19.
When banks close branches, they lose many of the new-to-bank sales that were originated at the branch, creating a challenge as they seek to grow. In analyzing recent consolidations, we have found that about 75% of the lost revenue over five years comes from lost sales, with only 25% coming from incremental attrition. As banks consider branch consolidations, this illustrates the need to reinvest savings into other growth levers like marketing, sales force or even new branches.
In analyzing Novantas’ Acquisition IQ, our marketing benchmarking of spend and efficiency, we find that banks have very different efficiency curves. That means some banks could invest the next $100,000 in marketing and get 500 accounts (marginal cost per account of $200), while others could get only 100 accounts (marginal CPA of $1,000). This suggests that the willingness to close branches also must consider the ability to efficiently invest in other growth levers like marketing or sales force. Banks that can invest efficiently will have more comfort in closing branches.
The next round of branch reductions is likely to be concentrated in the dense urban areas where the bank can close branches with higher operating expense and minimal runoff. Many of these will take place in areas that have been disrupted by the pandemic. As they close branches, banks will need to re-think operating and staffing models. This crisis has demonstrated that customers are adaptable, giving banks the flexibility to move away from the same standard opening hours at all branches and direct customers to drive-up teller service and appointment-only lobby access.
U.S. Consumer Traffic Trends
Activity Across Markets
Source: Novantas Analysis, NovaLocation, PlaceIQ
Activity by Market Type
Source: Novantas Analysis, NovaLocation, PlaceIQ
Market Type Definitions (click + to expand)
- Feeder – Markets with very few businesses and daytime population (residential) is much larger than nighttime population (working)
- Hybrid – Markets that have a combination of workers and residential population within the market
- Work Center – Markets where more people work than live
The crisis has also demonstrated that team members can work in different locations. Moving from single branch assignments to staffing across branch “clusters” can reduce trapped excess capacity and provide operating efficiency improvements.
Inside the branch, meanwhile, banks can provide customers with access to financial experts who are able to help customers navigate the ever-increasing complexity of managing their money and planning for the future. With the increasing migration of simple teller transactions and account openings to the digital channel, banks that want to win must focus on and develop their front-line employees into being trusted financial partners.
A final lesson from the crisis is the value of proactive customer outreach. Many banks supercharged their customer outreach during this period, leveraging excess capacity in the branches. Staff members who were accustomed to face-to-face interactions were challenged to learn effective outbound calling techniques. Now that associates have developed this skill, it is something that banks can continue to leverage for improved onboarding, financial health checks and campaign efforts.
Now that the world has changed, it would be a shame if banks didn’t take this opportunity to permanently transform the branch operating model and make it more efficient for this new world.
BALANCES FALL AFTER TAX DEADLINE, BUT LESS THAN USUAL
Account balances continue to decline as a result of carryover from the July 15 tax deadline. With the settlement of all ACH payments and many physical checks now complete, outflows are now very closely aligned to typical levels seen in April.
Novantas is closely monitoring balance flows, with end-of-month inflows potentially offset by the expiration of CARES unemployment benefits and rent moratoriums. Absent legislative response, we may see lower-tier customer balances begin to erode.
As we move forward, we will track the impact of a further downturn in consumer spending and potential additional rounds of stimulus spending.
A full weekly deposit tracker is available to CDA clients. Contact Adam Stockton at firstname.lastname@example.org for details.
Industry Consumer HH Production*
INDUSTRY CHECKING ACCOUNT PRODUCTION*
NEWS OF THE WEEK
Varo became the first fintech challenger bank to receive a national bank charter, ending a three-year effort.
Google said it would let employees work remotely until July of next year, extending its previous deadline by another six months.
The OCC said banks can provide cryptocurrency custody services, including holding unique cryptographic keys, saying that the practice is a “modern form of traditional bank activities.”
Enova International, which specializes in non-prime loans to consumers and small businesses, agreed to buy OnDeck for $90 million. OnDeck is an online lender to small businesses.
Roughly one-third of businesses plan to reduce their cash holdings in the coming quarter, according to a survey released by the Association for Financial Professionals. Just over one-quarter of the companies that have reported decreasing cash balances did so to reduce debt, the survey found.
ZenBusiness, a platform for micro-business startups, acquired Joust, a fintech business-banking platform for freelancers, contractors and other self-employed workers.
Fintech startup Dave said hackers gained access to customer data, including names, passwords and email addresses, as the result of a breach at one of its third-party providers. The company said the breach didn’t involve account numbers or credit-card numbers. Dave launched in 2017 with a focus on providing $100 of interest-free overdraft protection.
Tailored Brands, the parent of Men’s Wearhouse, said in a regulatory filing that it may file for bankruptcy in the third quarter. The retailer has temporarily closed all of its stores in the U.S. and Canada and furloughed its employees.