the full issue

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the full issue

VOL. 7 NO. 2 | 2016
RISING COMPETITION
FOR CORE DEPOSITS
Growing requirements for core deposit funding are forcing a shakeup
in balance sheet management. Can core intermediation be revived?
Branch Billboard Value:
Network Consolidation Key
Role Chaos in Branch Staffing:
Looking Beyond Universal Bankers
In Search of Distinctiveness:
Brand Drivers of Checking Growth
Managing Capacity Constraints via
Precision Mortgage Pricing
CONTENTS
VOL. 7 NO. 2 | 2016
4 Core Deposits: Key Battleground
for Profitable Intermediation
Banks that can successfully defend or capture lower cost funding will better weather
current industry pressures – outperforming and even thriving in a tough environment.
Lee Kyriacou, Gordon Goetzmann and Andrew Frisbie
Visibility and Checking
Breaking Out of the Sea of
10 Branch
14
Acquisition: The Role of Billboard Value
Sameness: The Role of Distinctive
Brand Attributes
Facing conflicting pressures to reduce network expenses
while maintaining reassuring local presence, banks will
need to emphasize branch visibility, or “billboard value.”
Novantas research shows that distinctive brand attributes
are a significant driver of checking purchase rates, now
that immediate branch proximity is falling in importance.
Chris Musto, Brandon Larson and Alex Lee
Paul Kadin
Business Sales Challenge: 18 Small
Re-engaging Customers as the
Role Chaos:
23 Branch
Call to Action on Staffing
Branch Foundation Erodes
In the emerging customer engagement model, the
emphasis is on streamlined and effective multi-channel
interaction, guided by market and customer analytics.
Retail banks must start preparing now for local branch
sales in a digitally-eroded environment, which will require
new standards for staffing analytics and planning.
Robert Griff in
Darryl Demos and Dale Johnson
Millennials Challenge for Regional Banks: Profitable Acquisition and Cross-Sell
26
Mortgage Headwinds: Improving Returns in the Face of Multiple Capacity Constraints
29
Crisis in Promotional Deposit Pricing
32
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LETTER FROM THE EDITOR
EDITORIAL
Editor-in-Chief
Lee Kyriacou
Managing Editor
Steve Klinkerman
Anchor Principle — Nurture Core Funding
As the U.S. banking industry continues to wrestle with below-hurdle profitability, lackluster
revenue growth and digital disruption, executive management is confronting fundamental
questions about growth strategy and balance sheet management. With so many strong headwinds, what are the anchor principles that will guide decision-making across the bank?
DESIGN
Design and Production
Brigid Barrett
CONTRIBUTORS
Darryl Demos
Andrew Frisbie
Gordon Goetzmann
Karen Graham
One clear answer is nurturing core deposit funding and relationships. As detailed in our
cover story, “Core Deposits: Key Battleground for Profitable Intermediation,” core deposits
have emerged as an industry lifeline. In corporate planning and balance sheet management
going forward, incremental returns from loan expansion must be balanced against the incremental cost and availability of core funding, with deposit growth serving as governor for loan
growth. A much deeper understanding of customer deposit behavior is essential to secure and
defend lower-cost stable funding.
Robert Griffin
Hank Israel
Dale Johnson
Paul Kadin
Lee Kyriacou
Brandon Larson
Alex Lee
Chris Musto
Elsewhere in this issue we examine two growing influences on checking account acquisition:
branch network visibility, or “billboard value,” and distinctive brand attributes. Billboard
value is essential in demonstrating local physical presence (still required for sales success)
while facilitating network consolidation. And while true corporate-level distinctiveness is still
a rarity in banking, our research shows that clusters of distinctive attributes have a significant
bearing on local checking acquisition.
Zach Wise
MARKETING
Marketing Communications
Manager
Katharine Davis
212-419-2562
We also take a two-part look at the evolution of sales, both for small business banking overall
and with branch staffing. As discussed in “Small Business Sales Challenge: Re-engaging
Customers as the Branch Foundation Erodes,” banks must transition to a new framework for
small business sales based on streamlined and effective multi-channel interaction, guided by
market and customer analytics.
[email protected]
PR & Events Coordinator
Amelisa Dzulovic
NOVANTAS, INC.
Co-CEOs and Managing
In “Branch Role Chaos: Call to Action on Staffing,” we discuss how banks can respond in a
not-so-distant future scenario where branch sales are cut in half by online account origination.
Most banks will be fighting for segment, geographic or product niches, often using multiple
strategies within a network. The use of specialists will become critical in tapping high-value
opportunities for customer acquisition and cross-sell.
Directors
Dave Kaytes
Rick Spitler
Corporate Headquarters
485 Lexington Avenue
New York, NY 10017
Rounding out the issue are articles on the role of precision mortgage pricing in managing
capacity constraints; acquiring profitable relationships with Millennials; and a recap of challenges with promotional deposit pricing.
LKyriacou
Lee Kyriacou
Editor-in-Chief
Phone: 212-953-4444
Fax: 212-972-4602
[email protected]
SUBSCRIPTIONS
[email protected]
212-953-2712
July 2016
3
COVER STORY
Core Deposits: Key Battleground
for Profitable Intermediation
Banks that can successfully defend or capture lower cost funding will better weather current
industry pressures – outperforming and even thriving in a tough environment.
BY LEE KYRIACOU, GORDON GOETZMANN AND ANDREW FRISBIE
Stable core deposits have always mattered to banks. Providing
durable, low cost funding and a gateway to loyal customers,
core deposits are prominent in the mix of performance levers
that includes loans, fees, margins and efficiency.
Coupled with new liquidity regulation, the stagnant environment for revenues and profits has further boosted the
importance of sticky deposits — so much so that for traditional bank intermediation, this precious commodity has
become the single greatest determinant of profitable growth.
The deposit business — if it can successfully hold or acquire
the right deposits — is a lifeline at a time when institutions
are suffering margin compression, losing fee income and
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liquidity options to regulation, and traversing a distribution
minefield as digital migration accelerates.
In turn, core funding has become a battleground. Forced
by regulators to implement LCR requirements early on, the
four largest U.S. banking companies have dramatically
regrouped around core deposits following the financial
crisis. Looking at their loan to core deposit ratio (loans
strictly compared with transaction, MMDA and savings balances), the big four went from 119% in 2011 to just 97% in
2015, both by growing core deposits and trimming undesirable lending. With their vast branch networks and marketing clout, the nationals are excelling in retail customer
Core Deposits: Key Battleground for Profitable Intermediation
Deposit Interest Expense (basis points)
acquisition and consolidation of commercial core balances, longer-lived deposits are valued across the bank.
Business line management. Deposit-gathering businesses
and will continue to claw for core funding.
Meanwhile regional banks are worried about funding — consumer, small business and commercial — must rethink
for further loan growth. While they have grown core depos- strategies and tactics to emphasize stable core deposit fundits slightly faster than loans in recent years, regional bank ing. Analytic banks will develop customer-specific offers
holding companies are also beginning to turn to brokered that preserve/augment high-balance accounts, and refine
deposits, which collectively rose by 22% in 2014 and 31% deposit acquisition as well.
in 2015. Without a course correction, they are going to
run afoul of regulatory liquidity guidelines and veer into DIFFICULT OPTIONS
hollow loan growth, with incremental revenues increasingly Industry profitability has yet to return to pre-crisis norms —
chewed up by rising funding costs.
and will not any time soon (Sidebar: Industry Headwinds
The situation is forcing a shakeup in bank balance sheet — A Bigger Problem than Rates).
management. Traditionally, banks could set stretch goals for
Before the economic collapse at the end of 2007, the
loan growth and leave the deposit and treasury teams to fig- collective return on assets of FDIC-insured depository instituure out how to raise the necessary deposits or other funding. tions ranged from 120 to 140 basis points. Since then ROAs
In corporate planning and bank balance sheet management have hovered around 100 bp, breaking 110 bp only once
going forward, incremental returns from loan expansion must in 2012. Similarly, pre-crisis returns on equity were in the
be balanced against the incremental cost and availability of 12% to 15% range, but have not exceeded 10% post-crisis.
core funding, with the
latter often governing
the former. Getting there
Figure 1: Core Deposit Leverage vs. Deposit Interest Expense
will require:
Among the top 100 bank holding companies, higher lending beyond the core
Improved forecastdeposit base consistently led to a higher cost of total deposits in 2015.
ing. Today’s deposit
projections are based
80bp
on a loose blend of: 1)
R-Square = 74%
pressure from the lending side; 2) projections
based
on
historical
trends; and 3) modeling
60bp
of deposit promotional
yields and deposit stickiness by product category. The extra edge will
40bp
come from a comprehensive understanding
of potential formation
of long-lived balances,
based
on
customer
20bp
behaviors, profiles and
segment potential.
New metrics. Which
customers have deposits that are truly sticky,
and which do not?
50%
100%
150%
200%
250%
Segment-based metrics
Ratio of Loans to Core Deposits
on deposit retention and
Source: Novantas
potential have direct
implications for how
July 2016
5
Assets have grown by 23% to $16 trillion in the past eight
years, but revenues have dragged over most of that time.
Ominously, the lack of profitability reflects the ailing
state of core intermediation — the fundamental middleman
role of banks to gather deposits and turn them into loans.
Among FDIC institutions, our models indicate an ROE of
only 7% to 8% for the lending side in 2015, and 5% to
7% for the deposit-gathering side (deposits suffering relatively more from prolonged lower rates). Comparing these
low returns with equity hurdle rates, the industry does not
appear to covering its cost of capital.
In considering ways to revive core intermediation, most
banks face a set of difficult options — which will continue
until industry overcapacity rights itself through a substantial
reduction in the number of banks.
Lend beyond core funding. For a period of years prior
to the recession, the collective industry ratio of loans to core
deposits soared at stratospheric levels, 150% to 180% for
FDIC banks. Loan rates were high, as was economic confidence, regulation was far less onerous, and core deposits
were viewed as one of many funding sources. Paying more
for deposits and funding made sense and yielded better
returns — pre-crash.
It is unlikely that banks will outrace core funding like
that again. Regulation is one reason. The four national
banks already have gone through a wrenching transition,
and large regional banks are next in line for enforcement
of tougher liquidity standards prescribed under Basel III.
And the crisis-scarred regulatory community will be monitoring liquidity profiles and practices among all categories
of banks.
Second, higher loan-to-core-deposit ratios had a powerful influence on an institution’s cost of deposits in 2015
(Figure 1: Core Deposit Leverage vs. Deposit Interest
Expense). The depressed state of risk-adjusted loan yields
makes it difficult to pass along the extra costs of non-core
funding to borrowers. On the horizon, the use of non-core
funding is setting up aggressive banks for higher deposit
betas when market interest rates rise in earnest.
Price up for loan margin. Lending is heavily competed
— rate is primary focus of most loan shopping and purchasing — and lending spreads remain under intense pressure.
And rarely can a bank make a practice of charging higher
rates to an insulated lending base; borrowers know they
have options and will eventually pursue them.
Sacrifice credit quality for volume. There is continuing
evidence in Federal Reserve surveys on loosening credit
conditions. Yet going down the credit spectrum is often a
fool’s errand. It requires an ability to time the economy and
unload speculative credit (assuming that is even possible)
Industry Headwinds: A Bigger Problem than Rates
Banks are confronting a number of long-term structural factors, and only a portion of the profitability problem arises from
persistently low interest rates.
Overcapacity. Only in the United States, due to interstate
banking limitations, did an industry structure arise of more than
20,000 banking entities. The undoing of that multi-generational
industry structure (following regulatory reform in the ’80s) is only
half over. And during the remaining transition, the industry will
continue to suffer as too many banks chase the same customers.
Spread compression. Net interest margins have seen a longterm structural decline across economic cycles. Partly this reflects
excess capacity, and partly it is traceable to the long-term decline
in inflation. More importantly, spreads are subject to competitive
pressures as well. Web shopping has raised customer rate awareness, and direct banks are pushing down spreads through low-cost
online bidding for both deposits and loans.
Low entry barriers in lending. Commercial banks face lending
competition from two different directions. The capital markets
offer lower cost funds for larger corporate borrowers, where investment banks crowd out all but the largest commercial banks and
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some regionals focused on smaller corporates. At the lower end,
specialty lenders and non-banks have long lent in credit cards and
unsecured lending, and digital upstarts are working their way into
both consumer and small business lending.
Regulation. As a share of total industry revenue, fee revenue
has fallen from a high of almost 44% pre-crisis to averaging around
36%-38% today. Per dollar of assets, non-interest revenue has
fallen more than 20%. These revenue sources are not coming back.
Liquidity and capital rules have respectively pushed up holdings of
lower-yielding securities and equity, the former reducing spreads
and the latter reducing ROE. And of course compliance expenses
have risen substantially.
Rising rates — which will eventually come, but not back to
prior levels for some time — will improve profitability. But other
headwinds will continue. As a result, we estimate that industry
ROEs will rise by one to two percentage points on average, with
larger banks that are generally more asset sensitive benefiting more
than smaller ones.
— Lee Kyriacou
ahead of a downturn. How well did oil patch banks anticipate the collapse in gas prices? Presumably some investment banks are now playing the timing game in funding
unsecured lending start-ups, but these are measured investments from nimbler players.
Tighten the belt. Among the most profitable intermediators are those with low efficiency ratios — below 60% or
even below 55% — who have figured out how to gather
deposits and lend at relatively lower cost. Scale favors the
largest banks here. Keeping that advantage will require
them to stay ahead of the curve in cost reduction, including branch reduction and loan origination restructuring. For
those not there yet, there is a painful restructuring just to
catch up.
IMPROVING DEPOSIT COMPOSITION
This brings us to funding. For many banks, the one best
way to improve intermediation economics is to improve the
composition of the deposit base — strengthen the core.
Given rate pressure on the lending side, banks with
lower cost funding sources can lend at market rates and
still capture superior spreads, without being tempted to
degrade credit for loan yield. As a result, in regression
analysis on the profitability of traditional bank intermediation, we find that funding costs have a larger impact on
profitability than loan yields or non-interest revenue.
Notwithstanding the major changes in brick and mortar distribution and the rise of direct banks, core deposits
remain the stickiest part of intermediation. This is especially
true for deposits held for cash management purposes,
where the customer’s focus is on payments as opposed to
managing yields. Once opened and in active use, demand
deposit accounts remain quite cumbersome to pick up and
move — unlike loans, which when due are typically and
easily shopped.
Only a depository institution can hold deposits and
offer DDAs (though non-bank payment providers are trying
to wedge themselves between the DDA and the customer).
And critically, the payments account is still thought by customers to be the center of banking relationships.
Figure 2: Reorienting the Bank to Defensible Core Funding
To leverage the central role of core funding in profitable growth, many facets of bank management must
change, starting at the top and working down to the business lines.
FACTOR
TODAY
TOMORROW
Set target loan growth;
find deposits to match
Match loan growth to core deposit
growth
General measures of deposit
stickiness by type and vintage
Advanced measures of balance
retention by customer segment
Resource Allocation
Invest in asset origination
businesses
Invest in stable core funding
relationships
Lending Businesses
Maximize above-hurdle loan
growth
Grow loans only up to core deposit
growth rate
Deposit Businesses
Meet deposit growth targets
regardless of interest cost
Expand core relationships and deposits;
progress informs lending goals
Raise incremental deposits with
promotional campaigns
Wean the bank off of promotions;
grow core relationships and balances
Deposits valued equally within
each product category
Differentiate value by core relationship
and stickiness
Balance Sheet Management
Metrics
Deposit Promotions
METADATA
CATALOG
M&A
Source: Novantas
July 2016
7
“In setting expectations for loan growth, management needs to explicitly consider the underlying growth rate for stable core deposits. Venturing beyond the core for higher-cost funding has
consequences, especially as price promotions become harder to isolate from the attention of
current accountholders.”
To be sure, deposits are also competed, and this will
intensify as local market boundaries are steadily erased by
online DDA shopping and direct bank competitors. And the
regulator-specified liquidity coverage ratio has placed much
greater emphasis on core funding, explicitly valuing stable
operating deposits over more fleeting excess deposits.
LCR is already intensifying competitive dynamics for
core deposits ahead of market interest rate rises. This
re-doubles the emphasis that banks must place on securing
stable core funding. All the more reason for proactive banks
to move now to identify and retain more stable depositors
who are less likely to shop their DDAs, and to win more
customers like them.
TOP-TO-BOTTOM RETHINK
A true focus on growing core deposits will require a top-tobottom rethink of the bank (Figure 2: Reorienting the Bank
to Defensible Core Funding). In traditional budget planning, lending units are encouraged to put up stretch goals
for loan growth, and deposit gathering units are more or
less directed to find the funding — core or otherwise. With
fast-paced loan growth, inevitably there is a heavier pursuit
of price-sensitive, transitory deposit balances.
This orientation carries two major drawbacks. First, in the
next rising rate environment, it will lead to substantially higher
funding costs, especially if banks continue to rely on traditional broad-based promotions. Second, it can only go so far
before bumping up against new regulatory boundaries.
Instead, bank growth planning must be concurrent
across the deposit-gathering and lending domains. In setting expectations for loan growth, management needs to
explicitly consider the underlying growth rate for stable
core deposits. Venturing beyond the core for higher-cost
funding has consequences, especially as price promotions
become harder to isolate from the attention of current
accountholders.
Change of this nature needs to start at the top of the bank
and work its way down to the business lines, and not the
reverse. It starts with the long-term strategic planning process
and extends all the way to day-to-day asset-liability meetings.
Getting the metrics right is key — beginning with
understanding which customers have deposits that are
truly sticky and which do not. Currently, most banks
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measure deposit duration by product type and vintage.
But they are not taking full advantage of information on
hand. Most have sufficient account-level balance and
transaction information to identify deposit stickiness by
customer segment as well.
A sharpened understanding of likely balance retention
provides specific direction on which customers to target for
what purpose. Adding wallet modeling of consumer and
commercial segments will help paint a picture of customer
potential (large vs. small banking wallets within segments),
customer penetration and deposit stickiness.
Segment-based metrics of balance retention and expansion potential have direct implications for the valuation of
longer-lived deposits across the bank. Traditional funds
transfer pricing methodology looks at duration for indeterminate deposits by type and vintage. However, knowing
which MMDA customers in a vintage will have larger stable balances should shift FTP crediting in favor of the longer-lived deposit balances and away from the identical but
shorter-lived balances.
This level of specificity across the deposit base is as
fundamental as lenders knowing which borrowers have
higher FICO scores or lower prepayment propensity. Yet
the industry standard is to treat all depositors of the same
account type the same.
Providing different crediting rates to longer-lasting
deposits by customer segment will allow banks to offer better yields to preserve and expand target relationships. In
some cases it can even justify offering preferred rates for
targeted acquisition of new customers who can bring large
stable deposit balances.
Informed with better metrics, bank-wide balance sheet
management can then be reset to focus on measuring and
managing core funding growth. There will be a growing
emphasis on managing balance sheet economic profit, as
opposed to the raw pursuit of net income maximization.
Deposit promotions that bring in hot money with low
expected duration should see lower FTP credits, while true
relationship-driven deposit growth should be rewarded.
Lending growth in excess of core deposit funding growth
should be discouraged, once it is apparent that the marginal contribution, given high funding cost, may well not
cover the cost of capital.
MANAGEMENT IMPLICATIONS
Deposit gathering businesses — consumer, small business
and commercial — must rethink strategies and tactics in
light of the increased importance of stable core deposit
funding. This begins with segmentation analyses that inform
differing segment treatments.
Weaning the bank off of high-cost promotional deposit
campaigns is critical. In their place, analytic banks will
develop customer-specific offers that preserve or augment
high balance accounts, as well as new customer acquisition offers, appropriately targeted and priced based on
balances brought.
Products and pricing need to rethought and re-bundled. The focus is on bringing in most or all of a customer’s
deposits to the bank, and at a rate that reflects the stability
and value of those deposits.
Beyond that, products need
to change to meet the full
cash management needs
of consumers — payments,
deposit balances and shortterm lending.
On the commercial side,
it is about advancing bundled and relationship pricing for treasury management
customers. On the consumer
side, fundamental product
redesign is called for. This
will not only help to capture
a more complete share of customer deposit balances, but
payment-related lending as well — supporting even richer
pricing for consumers yet overall profitability for the bank.
Resource allocation can also take its cue from core funding needs. The jockeying we are seeing as larger banks
shed non-core commercial deposits and many banks pitch
for small business and high net worth consumer deposits
will only intensify.
The same applies to mergers and acquisitions. Knowing
which deposits are likely to stick — and more specifically
which customers have deposits that are likely to stick —
refines the valuation of deposit books at target banks. The
stronger the analytic knowledge about the stability of the
target’s funding sources, the better the bidding and the
greater the value for the acquiring entity.
rates to rise and bring back spreads and profitability. Get
over it. Low rates have masked an acceleration of fundamental changes which have permanently tightened intermediation spreads that no foreseeable interest rate rise will
fully restore.
Banks have tried to outrun the problem with balance
sheet growth, but only a few have had any success at
share gain, and with only limited profitability improvement. Most have turned to cost reduction, but at least in
the short term, the primary available expense pool has
been branch closures; this requires walking the fine line
between cost savings through closure and retention of
market share and position.
What only a few banks have been focusing on is, in
our view, far more important for healthy intermediation economics: growing defensible
low-cost core deposit funding.
Funding has become all the
more important with fundamental changes in liquidity and
capital regulation that value
stable core funding much more
than more fleeting deposit balances, and that are stoking an
arms race for core retail and
commercial deposits.
Understanding
customer
behaviors in these deposit portfolios will unlock the insights
for the smarter and better-positioned banks to secure relatively lower-cost and more stable
funding. It will also create an anchor for building deeper
consumer and commercial relationships.
The profitability of traditional financial intermediation
will neither improve overnight nor fully recover when market
interest rates rise in the coming quarters. Overcapacity and
stiff competition from the national banks will continue to pressure loan spreads and bid-up deposit rates. But the banks
that can successfully defend or capture lower cost funding
sources will better weather the competitive pressures — outperforming and even thriving in a tough environment.
“Fundamental changes in liquidity and capital
regulation have placed a much higher value
on core funding. Understanding customer
behaviors in deposit portfolios will unlock
the insights for the smarter and better-positioned banks to secure relatively lower-cost
and more stable funding. It will also create
an anchor for building deeper relationships.”
MOVING AHEAD
Far too many bankers continue to rue the low rate environment that is now approaching eight years — waiting for
Lee Kyriacou is Head of Banking Industry Research, Gordon
Goetzmann is an Executive Vice President, and Andrew Frisbie is a
Managing Director in the New York office of Novantas. They can be
reached at [email protected], [email protected],
and [email protected], respectively.
July 2016
9
FEATURE
Branch Visibility and
Checking Acquisition:
The Role of Billboard Value
Facing conflicting pressures to reduce network expenses while maintaining reassuring local
presence, banks will need to emphasize branch visibility, or “billboard value.”
BY CHRIS MUSTO, BRANDON LARSON AND ALEX LEE
Traditionally when consumers selected a bank for their primary checking account, the key decision factor was branch
proximity. Often it was a simple matter of street corner convenience: find the branch nearest to the home, workplace or
along the local commute.
Digital banking has steadily chipped away at this foundation and retail distribution has reached an important turning
point. In 2014, 30% of survey respondents selected “branches
near me” as the top convenience factor. This response rate fell
to only 18% in the recent 2015 survey, a 40% proportionate
decline in one year.
Stealing the convenience crown was “leading online/
mobile banking,” cited by 26% of respondents as the single
factor that would do the most to make a bank convenient.
This score has roughly tripled in Novantas surveys over the
past five years.
The situation has introduced a profound conflict in network planning, in that many shoppers still demand some
degree of local branch presence when considering where to
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open a new checking account. Although branch proximity is
no longer the leading convenience driver among shoppers,
62% of survey respondents state that they would not even
consider a bank that does not have any branches in the community (Figure 1: Branch Convenience Slips; “Safety Net”
Role Continues).
To rectify lingering customer preferences for branch presence with the pressing realities of accelerating network consolidation, banks will need to emphasize the visibility of the
network, or “billboard value.” Reflecting specific branch site
advantages such as a prominent location and general customer traffic density in the area, billboard value helps to sustain
local brand awareness and puts the best face on convenience.
Our research shows that today’s bank networks are
quite uneven in their concentrations of high-value site locations. Banks that do a better job of optimizing networks
around these locations will gain a growing advantage in
maximizing the consumer perception of local network scale.
Helpful both in scenarios of local network expansion and
Branch Visibility and Checking Acquisition: The Role of Billboard Value
consolidation, billboard value is also a pivotal attribute for
players seeking to enter new markets with selectively placed
thin branch networks.
DIGITAL VS. BRANCH INFLUENCES
It is important to keep sight of customer acquisition and sales
in an era when distribution is in flux. What is important to
consumers when they select a bank these days, and what
do those preferences mean for network consolidation and
multi-channel competitiveness?
Convenience is front and center in the discussion. So long
as convenience was tightly defined by physical proximity,
banks with dense branch networks could win an outsized
share of local market deposits, “punching above their weight
class,” while banks with only a few locations saw deposit
share lag branch share.
But as is evident from our consumer research, “convenience” is no longer strictly about having the nearest branch.
In fact a non-physical factor — online/mobile — now is the
top influence on how consumers perceive banking convenience. Nearby ATMs matter, including the fees for them, as
do hours of operation to a lesser degree. Branch proximity
and market density are still important to be sure, but not the
total picture.
Shopper purchase rates have been directly affected by
these evolving preferences.
In our shopper survey, we asked respondents to rank the
top three banks in their local market in terms of convenience.
We took these rankings, assigned weights for first/second/
third, and constructed a “perceived convenience” index for
each bank by market. Then to verify the relevance of the
index, we applied statistical tests that contrasted perceived
convenience with checking account purchase rates for each
bank in each market included in the study.
The upshot was that perceived convenience surpassed
raw branch share in explaining purchase rates for individual
banks in a given market. Compared with an 85% explanatory
power for perceived convenience, branch share explained
a lesser 52% of the variation in purchase rates — an even
wider skew than what has been seen in similar Novantas
studies over the past three years (Figure 2: Checking Purchase
Drivers — Branch Share vs. Perceived Convenience).
BILLBOARD VALUE
While customers may be using the branch less and less, it still
plays an important role in checking acquisition. Local visibility is a must.
Starting with an example drawn from general retailing,
consider the shopping/commuting patterns of a typical
community resident. Over
Figure 1: Branch Convenience Slips; “Safety Net” Role Continues
time as she drives back and
Checking shoppers now see “leading online/mobile” as the top convenience
forth between the places she
factor, yet most still want a nearby branch just in case.
visits most — grocery store,
gas station, dry cleaners,
90%
movies — she can likely
“I need to see at least some branch
name most major businesses
presence in order to choose a bank”
and their signage in each
of shopping plaza she frequents. These familiar stores
60%
then gain prime consider“My top convenience factor
ation when new shopping
is having nearby branches”
needs come up.
The same premise works
30%
for retail banking, both
“My top convenience factor
with branches and ATMs.
is leading online/mobile”
The more that installations
are situated in high-visibil0%
ity areas, the more aware2011
2012
2013
2014
2015
ness and consideration
they receive when people
have banking needs and
Source: Novantas U.S. Shopper Surveys, industry estimates and analysis
think about where to turn.
July 2016
11
Billboard value reinforces customer perceptions of convenience, even among people who have little need or desire to
visit a lobby. Plus it provides critical reassurance to online-oriented shoppers: “If I ever have a problem, at least I know
where I can go.”
For all of these reasons, it is dangerous to make network
cuts strictly on the basis of individual branch performance. Perhaps
a given branch is in the right area
but located on the wrong street
corner. Or it should be doing better, given its locale, but is dealing
with execution issues. Billboard
value is essential to the discussion.
Looking systematically across
each market, the bank should
identify the very best locations —
high community visibility; active
customer traffic — and then examine how its current array of local
installations compares with the optimal. This assessment of
billboard value typically reveals stark disparities in current
branch site placement, with real consequences today and
in the future.
In a national study, Novantas looked at branch placement strength within the top 150 U.S. bank networks,
ranging all the way from 5,000+ units down to roughly
50. Two conclusions emerged, with powerful implications
for future competitiveness:
1) All networks are affected to some degree. Based on a
minimum of having at least 60% of branches placed in topdecile locations, fully half of the top U.S. branch networks
have weak footprint billboard
value. Although there are
advantaged networks in each
size tier as well, every bank
has room for improvement
(Figure 3: Significant Variation
in Branch Billboard Value
Across Branch Networks).
2) Strong billboard value
is highly correlated with better
deposit performance. Looking
at average retail deposits for
all of the branches included
in the study, top-decile locations had an average of $75 million in retail deposits, compared with only a $45 million average for the rest.
Of course, top-decile locations will be located in the best
areas and it does cost more to procure those sites, often significantly affecting decision economics. But there is no denying
that sites with top-decile billboard value are the most likely to
“Looking systematically across each
market, the bank should identify the very
best locations — high community visibility; active customer traffic — and then
examine how its current array of local
installations compares with the optimal.
This assessment of billboard value typically reveals stark disparities.”
Figure 2: Checking Purchase Drivers — Branch Share vs. Perceived Convenience
While branch share remains important in determining checking account purchase rate, the combination
of factors that define convenience is more predictive.
52% Explanatory Power
82% Explanatory Power
Purchase Rate
45%
30%
15%
Includes branch presence, ATM presence,
marketing, digital capabilities, and
other factors that contribute to perceived
convenience.
0%
0%
15%
Branch Share
30%
0%
15%
30%
Perceived Convenience Index
Data points represent bank/market combination scores (20 banks, 21 markets), reflecting feedback from 1,350 surveyed
customers who recently switched checking accounts. Source: 2016 Omni-Channel Shopper Survey, Novantas
12
provide the growth the bank is looking for.
Looking ahead, billboard value is pivotal in addressing
two major network issues:
1) Network evaluation. Many factors are pushing banks
to reduce their networks to find expense savings, but it is not a
simple matter of cutting the weakest branches. Billboard value
provides context on how each installation supports the overall
local network, in some cases helping to justify preservation,
in other cases making a stronger case for consolidation. It
also provides a basis of comparison across local markets
within the network footprint, helping to prioritize investments
and guide network strategies.
2) Site decisions. In considering locales for expansion
and growth, a number of sites may have prime locations, but
how does the bank tell which ones will best contribute to local
network presence overall? Billboard value allows the bank to
systematically identify market coverage gaps and the upside
potential in plugging them.
some level of branch visibility and accessibility is still needed
to anchor customer acquisition and retention. Additionally,
branches are a key driver of unaided awareness, so there is
an important marketing value of the branch network.
There are a number of management implications:
• Fewer branches are needed, and increasingly the
billboard value of the network, rather than sheer utility,
will be the key driver of performance.
• Building and promoting digital capabilities will be critical
to gain consideration from customers and cement their
perception of convenience.
• New levels of agility in distribution planning will be required.
• Consumer attachment to the branch should be closely
monitored for further signs of erosion. If physical presence
collapses in consumer influence, even its anchor role as
a reassuring market presence, it could open the door for
aggressive direct players, provoking a potentially serious
tilt in local competition.
REASSURING PRESENCE
Billboard value plays directly to a continuing strong consumer
preference for a reassuring physical presence when choosing
a bank. The requirement is not as strict as before, given the
dramatically reduced need for on-site transaction services. But
Chris Musto, Brandon Larson and Alex Lee are Directors in
the New York off ice of Novantas. They can be reached at
[email protected], [email protected], and alee@
novantas.com, respectively.
Figure 3: Significant Variation in Billboard Value Across Branch Networks*
% of Network in Top Decile Locations
As banks consolidate branch networks, a key question is how to preserve maximum visibility for remaining
installations. Today many branches are stuck in low-impact locations, hindering network performance.
85%
70%
55%
40%
25%
10%
>2k
1–2k
500–999
200–499
150–199
100–149
Results for Individual Banks, Tiered by Network Branch Count
* Figures show the portion of branch network site locations that rank among the top 10% in local market visibility
and customer traffic. Source: Novantas Stratascape
July 2016
13
FEATURE
Breaking Out of the Sea of
Sameness: The Role of Distinctive
Brand Attributes
Novantas research shows that distinctive brand attributes are a significant driver of checking
purchase rates, now that immediate branch proximity is falling in importance.
BY PAUL KADIN
Distinctiveness has long been an elusive goal in retail banking,
but the stakes were lower in the pre-digital era. Banks could
get away with looking more alike than different because consumers and small businesses wanted and needed a far more
powerful differentiator — branch proximity.
Customers primarily selected their banks on the basis of
old-fashioned street corner convenience. As a result, banks
could win with local network density, largely relying on marketing for product promotions.
Not anymore. With the accelerating migration to digital
channels, the customer frame of reference no longer is confined
to physical presence. Convenience is slipping deeper into the
murky world of consumer perception — individual impressions
based on a range of influences, not only branch and ATM
presence, but also usage of PCs and mobile devices, and marketing messages conveyed via local media and online.
In the emerging battleground of “perceived convenience”
— that is, convenience beyond having the nearest branch —
the newly-dominant factor is “leading online/mobile banking.”
While 30% of survey respondents selected “branches near
me” as the top convenience factor in a 2014 Novantas survey, this score fell to only 18% in 2015, a 40% proportionate
decline in one year.
Clearly the marketing center of gravity has to change.
But is it merely about upping marketing spend? Shifting
branch-related marketing resources to support the arms race
in digital banking — ultimately driving toward a new type of
look-alike banking competition? Or is there hope that banks
can rise above the sea of sameness and win on the basis of
distinctive strengths?
To test this proposition, we asked checking shoppers to rate
14
the distinctive brand attributes of banks they were considering for purchase. These were basic factors, such as “makes
it easy to manage my finances,” and “can serve all my banking needs.” After compiling the rankings across a series of
attributes, we examined whether the composite attribute scores
had a bearing on checking purchase share relative to local
branch share, or “power ratio.”
What we found was that distinctive brand attributes have
a statistically significant influence. Stripping away convenience
factors and price, the higher the bank’s composite score on
distinctive attributes, the better it does in winning new checking
account purchases, relative to its branch share in a given market (Figure 1: Impact of Distinctiveness on Checking Purchase).
There are three major implications:
First, each major bank needs to carefully study current and
prospective customers to understand its own distinctive attributes — relative to consumer expectations, competitor standing, business results and the bank’s corporate strategy. Going
market-by-market to correct glaring deficiencies and leverage
current strengths is part of it, but the bigger picture is about
reorienting the management mindset of the bank.
Second, there is an immediate need to identify and leverage distinctive brand attributes in segment-based strategy.
What blend of attributes will best resonate with important target customer groups? Segment examples include small business proprietors with household financial needs, and the growing cohort of “thin-branch ready” customers who prefer digital
channels and mostly see branches as a backstop.
Third is the need for a changed organization focus: rallying around segment-focused, meaningful points of difference
to deliver a real-world customer experience that “proves” the
Breaking Out of the Sea of Sameness: The Role of Distinctive Brand Attributes
bank’s chosen distinctiveness is real in the eyes of the customer.
This is a shared responsibility across the enterprise. All of the
contributing functions — product, channel, marketing and
sales — must come together.
DISTINCTIVENESS INDEX
constructed a “power ratio,” which compares local checking
purchase share with local branch share. This metric was calculated for each bank in each market.
We then used statistical measures to assess how each bank’s
distinctiveness index score influenced its power ratio. Solid
findings emerged that distinctive brand attributes — defined as
exceptionally high scores for a bank on one or more attributes
— drive higher checking purchase rates for a bank relative to
its branch share. Overall, distinctive attributes explained 21%
of the variation, a statistically significant finding.
The causal impact of distinctive attributes is twofold: 1)
directly upon the purchase decision; and 2) indirectly on the
consideration stage (the likelihood that someone aware of a
bank actually considers opening an account with that bank).
Importantly, a bank’s competitive situation varies market to
market, and its standout attributes differ accordingly, as does its
purchase rate. Understanding local market competitive dynamics and planning accordingly to optimize the various levers on
purchase rate — including distinctive attributes — is critical.
Checking Purchase Share / Local Branch Share
Our analysis shows that distinctive brand attributes are a significant driver of checking purchase rates, now that immediate branch proximity is falling in importance among checking
account shoppers. These brand strengths do not supplant the
power of branch share and marketing spend. Rather, they
amplify the impact of those investments.
In the research project that led to this conclusion, we started
out looking for brand influences on the sales funnel at its three
stages — consumer awareness, consideration and purchase.
Via the Novantas U.S. Consumer Shopper Study, we collected
survey feedback and data on thousands of recent and prospective checking account purchasers across dozens of U.S. markets.
To isolate the influence of distinctive brand attributes, we
set aside survey findings
on the influence of conFigure 1: Impact of Distinctive Attributes on Checking Purchase
venience and price, and
strictly considered how
Now a clear driver of checking purchase, distinctiveness is associated with
respondents rated banks
superior sales performance relative to the size of a bank's local branch network.
on a set of fundamental
traits. These included:
Distinctiveness vs. Power Ratio (Purchase Share / Branch Share)
• “Makes it easy to
6X
manage my finances”
• “Can serve all my
banking needs”
• “A good value”
• “Friendly and helpful”
• “Looks
out
for
4X
customers”
• “Helps me plan for the
future”
We then compiled
these ratings into a dis2X
tinctiveness index that
showed each bank’s
standing in each of the
markets included in the
study. The question then
became: how do the composite rankings influence
0
10
20
30
40
50
business results?
Composite Consumer Survey Rating on Distinctive Attributes
To measure sales
(separate total score for each bank in each local market)
impact relative to a bank’s
Source: Novantas
market presence, we
July 2016
15
CREDIBILITY AT STAKE
level of differentiation that sways consumer perceptions and
bolsters purchase rates? Drawing on lessons from consumer
Presented with fresh research findings on the value of powerful
product companies, it first requires segment-focused initiatives
brand attributes, some executives may veer to the simple concluto determine meaningful and well-defined points of difference.
sion that their bank just needs to do a better job with promotion.
It then requires deep organizational commitment and align“We have a lot to offer and need to get the word out.”
ment — across all of the contributing product, channel, experiBut pure promotion is a trap. Still skeptical following the
ence, marketing and support functions — to bring those points
housing/banking collapse, and bombarded with advertising
of difference to life through real world customer experiences
messages everywhere they turn, consumers are turning a
(Figure 2: Steps to Achieving Strong Distinctiveness).
deaf ear when banks proclaim vague but similar statements
A differentiating value proposition is never in the hands of
unsupported by actual organizational commitment and cusjust one group at a bank. It is in all hands; a shared responsitomer experience.
bility across the enterprise. Inherent in that sharing is a clear
If not viewed by consumers as correct and believable,
understanding of the differentiated strategy; how customers
statements like “We help you succeed,” or “People are our
and prospects should experience it; and the role of every indigreatest asset,” may well fall flat. But such positioning can
vidual in the bank to deliver on the promise.
resonate and succeed if clearly demonstrated to be accurate
and differentiated.
In the realm of communicaFigure 2: Steps to Achieving Strong Distinctiveness
tion, the situation presents two
challenges in promoting distincDistinctiveness requires a credible, customer-centered action plan that
tive strengths: 1) it is difficult to
involves the whole bank, is properly promoted, and makes business sense.
break through the media clutter;
and 2) it requires new creative
REQUIREMENT
KEY QUESTION
ACTIONS/OUTPUTS
means of dramatizing the proof
points as reasons to believe.
Who are we
Segmentation framework;
Focus
There is also a big credibility
targeting?
target segment priorities
risk if the message conflicts with
reality. In the right circumstances,
What is most
Customer segment profiles;
Customer
important?
needs, attitudes, behaviors
Resonance
going public with a new differentiating story has a twofold benefit,
not only providing a new opportunity to resonate with customers,
but also energizing the internal
call to action for business units
and individual staff.
But if the bugle is blown too
early, before the organization
has coalesced around the points
of difference and made them a
living reality, customers will be
disappointed, employees will be
frustrated, and credibility issues
will only deepen. As they say in
consumer packaged goods, you
can’t say you taste good until you
actually taste good.
ALIGNING THE ORGANIZATION
So how does a bank follow
through? How does it reach a
16
Competitive
Context
Exactly how will
we be different?
Positioning strategy for
meaningful differentiation
Choose Your
Weapons
Why should
consumers believe?
Organizational proof points:
determine and develop
Are we “all in”
on this?
Internal communications,
processes and incentives
Align to Deliver
Build the
METADATA
sense financially?
Business Case CATALOG
This makes good
Projected business impact
and return on investment
How to credibly
communicate?
Messaging strategy and
creative development
Measure the
Right Things
How to tell if we are
making progress?
Tracking brand health
and business metrics
Set the Right
Expectations
Are we prepared
for the long haul?
Long-term roadmap for
distinctiveness strategy
Tell the Market
(When it’s True)
Source: Novantas
Lessons from Other Industries
The banking industry would do well to learn from other industries
about ways to create a coherent, coordinated focus on achieving the
chosen areas of differentiation. Lessons from the consumer packaged goods (CPG) industry, for example, offer guidance on how
organizational design and processes can bring differentiated strategies to life.
There is no ambiguity at a CPG outfit about the central nature
of brand differentiation in competition. All of the organization takes
signals from the brand management group. Each business and operational unit is expected to do its part in a fully aligned effort for
product and brand differentiation that will win in the marketplace
– from R&D, to manufacturing, to sales, to information technology,
to marketing.
A brand manager is the hub of the wheel, not in the sense
of having direct authority over key functions, but rather setting
the overarching framework that informs various action plans and
ensures the synchronization of all.
Now contrast this scenario with the current reality in the typical
retail banking business. Product development, design and pricing
activities are usually conducted in separate silos. Off in another corner are the channels overseeing sales and the customer experience.
Elsewhere the marketing team wrestles with messaging and communication tactics. Where is does the synchronization and alignment come from in these complex bank organizational designs?
Banking customers will respond with loyalty and deeper relationships when a differentiating experience is found at every turn.
Internal communication of the brand purpose is but one
step. Each department will have specific projects and initiatives, mapped and tracked, that support the proof points and
get everyone involved.
Performance metrics, compensation plans, resource allocation — all must support the delivery of a differentiating
value proposition. Integrated scorecards and celebrating successes are among the best practices seen at companies with
true differentiation.
Finally, it is about communicating to the marketplace with
credible dramatization of the points of difference. Ultimately,
differentiation is only true when consumers say it is. To leverage organizational preparation, the bank will need to follow
through with effective marketing tactics that use rational messaging and create emotional resonance.
Customers touch their bank in many ways and with great
frequency. Getting the message across can be as simple as
logging on to a mobile banking app, using an ATM, or making a payment. It can be a moment of truth around resolving
an issue or getting advice on a mortgage.
At the corporate level, one of the clearer examples of differentiation is TD Bank and convenience. It is right in their
logo: “TD Bank — America’s Most Convenient Bank.” A U.S.
bank holding company owned by Canada’s Toronto-Dominion
Bank, TD cemented this point of differentiation across its U.S.
franchise when it integrated the former Commerce Bancorp
(New Jersey), which originally had the convenience tag line.
Convenience is made real and communicated in multiple
ways at TD: open longer hours and more days; denser branch
networks in select areas; naming its lead checking product
“TD Convenience;” expressing “convenience” in every ad
campaign; using convenience as the primary descriptor of its
mobile banking app, etc.
This is a rare example, and most of today’s banks first
need to concentrate on aligning clusters of distinctive attributes with priority customer segments. But it drives home the
point that distinctiveness has definite competitive impact when
clearly defined, thoroughly integrated into the customer experience, and compellingly communicated.
—Paul Kadin
IMPERATIVE TO ENGAGE
The U.S. banking industry suffers from a “trust deficit” that is
little improved since the recession. Consumers are switching
banks at historically low levels, many giving up hope of discovering actual differences among providers. Often it takes
cash offers to entice shoppers from consideration to purchase.
Novantas research confirms that it is possible to combat
these trends and makes the business case for doing so. The
evidence is clear that banks with distinctive attributes are winning in their markets.
It is no small matter for a bank to build consensus on its
focus for differentiation. It is at least as difficult to align the
organization to make the differentiation real. But given the
weak trajectory for retail banking in general, and the pressure
to energize organic growth, the imperative to engage in this
journey is unavoidable.
Paul Kadin is a Managing Director in the New York office of Novantas.
He can be reached at [email protected].
July 2016
17
FEATURE
Small Business Sales Challenge:
Re-engaging Customers as the
Branch Foundation Erodes
In the emerging customer engagement model, the emphasis is on streamlined and effective
multi-channel interaction, guided by market and customer analytics.
BY ROBERT GRIFFIN
As retail customers continue their migration to digital channels, banks are stepping up the pace of branch consolidation.
Across the industry, institutions are busy tightening location
count and staffing, anxious to cut expensive idle overhead
as more consumer activity shifts to online, mobile, ATM and
phone channels.
But as retail-dominated change sweeps through the branch
networks, the transition is posing challenges for an important
companion line of business — small business banking. While
many business customers embrace digital channels, the group
overall is migrating at a much slower pace and still heavily
depends on the branch.
Nearby branch presence remains the top influence in selecting a new provider, and many proprietors prefer to use the
branch channel to apply for a loan or open a new checking
or savings account. Compared with consumers, moreover, the
need for transaction services is much more intense among small
businesses. It is a tough balancing act. While many small business customers feel they are being “dragged into the future” of
multi-channel banking, that is the inevitable destination others
already embrace.
Sagging relationship profitability further complicates the
picture. Overall industry challenges — shrinking margins and
fee revenue, rising compliance costs and capital requirements
— have taken a toll on small business banking as well. It is
harder to justify the use of expensive banker talent to acquire
and manage small business relationships. Staff reduction is part
of the answer, but must be accompanied by strong productivity
gains among the ongoing team.
The situation highlights the need for a proactive and comprehensive small business banking strategy to meet three objectives: 1) preserving patronage and sales revenue growth in
a transition era; 2) overhauling the economics of the line of
18
business; and 3) repositioning the overall franchise for more
intense multi-channel competition.
Near term, the first order of business is to anchor the current sales and revenue stream while boosting productivity. This
requires a clear-eyed view of priority markets and segments
to inform the redistribution of sales staff and other resources
in line with opportunity. Sharper prospecting tools will help to
make the most productive use of sales resources. Meanwhile
branch-to-digital transition initiatives can be put in motion,
including a team of bankers for phone-based sales and shifts in
marketing spend and messages to build awareness and usage
of digital channels.
Looking to the longer term, preparations must begin for a
full-on multi-channel marketing and sales outreach to small business customers. Big data and advanced analytics will play a
major role in digital marketing and sales, as well as customer
engagement. Alternative arrangements to support sales and
service outside the branch will be fleshed out, supported by
promotions and incentives to win customers. And marketing will
play a much larger role than what is commonly seen today.
The big picture is that banks must transition to a new business
model for small business banking. Today’s relationship model
is all about high-touch sales and service, heavily anchored
by branch staff and relationship managers. In the emerging
customer engagement model, by contrast, the emphasis is on
streamlined and effective multi-channel interaction, guided by
market and customer analytics.
OPPORTUNITY AT RISK
Small business banking is at an unusual juncture. On the one
hand, the market is picking up steam and has good potential for
further growth in loans and deposits. On the other hand, digital
disruption is posing challenges on multiple fronts — distribution,
Small Business Sales Challenge: Re-engaging Customers as the Branch Foundation Erodes
marketing, and sales — including incursions by a new breed
of web-based marketplace lenders. In this transition era, banks
will have to work harder to retain and grow share.
Although the branch is losing relevance among all customer
categories, recent Novantas research underscores its ongoing
importance in small business banking. When asked about their
top reasons for doing business with their primary bank, 44%
of surveyed small business owners cited “branch near the company,” with proximity ranking as the dominant selection factor.
When consumers were asked the same question, only 20%
listed branch proximity as being among the top reasons for
their patronage.
Turning to sales, small businesses also have the strongest
preference to originate accounts at the branch — 61% — compared with 51% of consumer respondents. With service, 54%
of SmB respondents said they still prefer to use the branch to
deposit a check, versus a 24% preference among consumers.
Even funds transfers, an activity thoroughly absorbed into digital banking, still elicited a 23% branch preference, compared
with 11% of consumers.
This does not mean that small business customers will forever cling to branches. Rather, their pace of digital migration
will continue to lag the retail side, probably significantly. That
spells ongoing conflict with retail-driven branch consolidation (Figure 1: Small Business Growth on a Shrinking Branch
Foundation — Sustainable?).
While post-recession branch cutbacks to date have been
substantial, they cannot be called radical — a net reduction
of 7,000 units off a historic peak of 95,000 nationwide. But
the pace of consolidation could easily double or triple going
forward. The trend seems inevitable as retail branches lose further transaction volume to digital channels and begin to lose
account origination volume as well.
Small business relationship managers will play a huge role
in bridging the gap, not only dedicated bankers in the field, but
also competent central teams that will carry a prospecting and
sales workload over the phone. These highly efficient central
teams will take the lead in penetrating grass-roots community
businesses, which are difficult to profitably serve under a hightouch relationship model.
Today’s small business RMs generate roughly 25% of deposit
sales and 40% of loan sales. Five years from now, teams will be
expected to generate roughly 35% of deposit sales and 50%
of loan sales — and do so with a much lower total staff count.
Digital channels will have to step up as well. While strong
survey preferences for digital account origination vastly exceed
Figure 1: Small Business Growth on a Shrinking Branch Foundation — Sustainable?
After a long post-recession slump, banks are finally seeing small business loan growth. But new strategies
will be needed to keep the momentum going as branch networks lose ground to digital banking.
$1,600 Bil
+5%
+2%
$1,200 Bil
Deposits (left axis)
Yr-to-Yr Growth
+5%
$800 Bil
+2%
Loans (left axis)
Yr-to-Yr Decline
$400 Bil
-2%
-5%
120,000
80,000
Total U.S. Branches
(right axis)
$0 Bil
40,000
0
‘05
‘06
‘07
‘08
‘09
‘10
‘11
‘12
‘13
‘14
‘15
‘16E
‘17E
‘18E
‘19E
‘20E
Source: Federal Reserve Flow of Funds, Federal Deposit Insurance Corp., Novantas analysis
July 2016
19
the current reality, the customer appetite is there. Five years
from now, perhaps 10% of both SmB deposits and loans will
be booked online. But online growth has its own challenges,
including competition from a new breed of specialized marketplace lenders that offer quick-turnaround credit.
SALES STAFFING
In migrating the organization to a leaner customer engagement model, a key question is what to do about sales staffing.
Only a portion of the small business market — larger, highvalue clients — can be profitably served by dedicated small
business bankers who interact with customers in person. Leanbut-effective alternatives will be needed elsewhere (Figure 2:
The Future of Multi-Channel Small Business Sales).
Branch sales. Few local networks will house dedicated
small business bankers going forward. As these experts are
almost totally relocated to the field, cross-trained retail bankers
will anchor branch sales for specified segments of the market, focusing on smaller enterprises with less than $2 million
in annual revenues. The complication for these generalists is
trying to handle expanded per-person SmB coverage responsibilities while juggling a likely higher retail sales load as well.
This is one of several instances where analytics and technology
will make the difference, helping branch generalists to multiply
their effectiveness while still handling multiple priorities.
Remote phone-based sales. While an in-person sales outreach is less feasible for the overall customer base, it is futile
to assume that impersonal digital channels can take up all the
slack. The middle ground is the phone, a medium that supports
easy conversational interaction with clients at low cost.
Staffed by experienced small business bankers, a central
phone-based team can augment the SmB sales outreach in two
important ways:
1. Prospecting and cross-sell — Along with direct sales
to myriad smaller clients (which are harder for front-line
bankers to reach), the inside sales team can help with
relationship expansion and cross-sell within the current
customer base.
2. Contact/referral anchor — The inside sales team can
provide a single point of contact for small business
referrals that originate in the branch, backstopping
branch bankers and helping to assure a smooth
customer experience. They also can help to generate
qualified sales leads and get the ball rolling on prospect
Figure 2: The Future of Multi-Channel Small Business Sales
The branch will become a smaller, streamlined component in the emerging multi-channel SmB sales
outreach anchored by marketing, analytics and technology.
Alternative Channels
5-yr outlook: Aggressive
growth from today’s
small base
• Cross-trained retail
bankers, lobby sales
• Local proprietors and
their housholds
• High productivity w/
analytics, technology
Source: Novantas
20
Branch
Staff
Marketing
Analytics
Technology
5-yr outlook: dramatic
contraction in overall
sales contribution
• “Inside Sales” team of
phone-based bankers
• High productivity w/
analytics, technology
• Web-based product
marketing and sales
Roving
Specialists
5-yr outlook: Further
growth from today’s
strong base
• Skilled business bankers,
in-person sales
• Larger high-value clients,
complex needs
• Reps cover multi-branch
territories
appointments with live representatives.
Roving specialists. Dedicated small business bankers need
to concentrate on the market segment where their expertise
can make the biggest difference — larger clients, typically with
annual sales of at least $2 million. This is not walk-in branch
opportunity. Each SmB banker will typically provide in-person
coverage for a multi-branch trade area, building client entrée
and rapport to discover and fulfill high-value customer needs.
ANALYTICS AND TECHNOLOGY
New organizational strengths will be needed to support the
emerging framework for small business customer engagement.
Key activities — marketing, sales and service — will increasingly depend on digital tools and channels.
• Instead of supporting the occasional product campaign or
“by-the-calendar” promotional schedule, marketing needs
to become a multi-channel targeting engine, able to sort
through customer traits, behaviors and events to find the
best opportunities for customer acquisition, cross-sell and
continued engagement throughout the customer lifecycle.
• The sales process will depend on a steady stream of qualified
leads, coordinated among branch, phone and roving staff,
supported by customer and prospect information housed
in uniform systems for customer relationship management.
• Small business customer service, while not the main thrust
of this article, is in need of digital transformation as well.
More remote “self-service” options and applications will
be needed (and will require promotion). Clients need to be
encouraged to migrate more transaction volume to digital
channels (online, mobile, IVR), enhancing convenience
while reducing the cost to serve.
Customer analytics will play a central role in identifying
and sizing opportunities. This guidance allows the bank to
“right size” sales and support resources for profitable acquisition and relationship growth. Applications include:
• Understanding the best/rest of customers. By analyzing
which current small business customers provide full
relationship wallet and the bulk of revenues today, the
bank can develop “look alike” models to replicate for
new customers. Such modeling also provides a basis
for behavioral segmentation that will inform targeting,
coverage models, calling efforts and product development.
• Relationship expansion. Some of the best sales prospects
may be under-served customers, either current or newto-bank. Models that estimate “wallet share” and total
relationship potential help to identify which customers
offer the greatest opportunity. Examples include current
deposit-only customers who likely have significant loan
and treasury management needs, or current loan-only
customers who can be steered into checking/savings/
cash management.
• Prospecting. Wallet modeling and other customer analytics
help with the development of smart prospect lists for
relationship managers, based on the likely banking wallet
and relationship potential, likely offer receptivity, and the
potential to profitably serve.
• Product bundling/pricing. Customer analytics help with the
development of product bundles that specifically address
the needs of target customer segments (e.g., practice
loans and core cash management accounts for medical
practices). They also help in tailoring rates and fees and
ensuring they are aligned with current and future customer
relationship potential.
The appropriate platform technology is needed to bring
analytic applications to life in the everyday activities of small
business marketing and sales.
• Lead generation and sales dialogue. Integrated marketing
automation platforms (e.g., Marketo, Act-On, and
Adobe) can supply leads to lower-cost staff in the branch
or call-center. These staffers also need support from CRM
tools, both to track/manage prospects through the sales
funnel, and for information and prompts to support the
sales dialogue.
• Cross-sell action steps. Relationship expansion also
depends on integrated marketing automation and
CRM tools that can translate analytically-identified
opportunities into specific marketing and sales actions
for account origination.
• Customer profiles and touchpoint context. In a small
business sales setting where representatives will need to
handle a higher volume and also communicate effectively
over the phone, supplemental customer information can
help to build conversational context and rapport. Platform
tools can help in supplying not only customer and prospect
profiles, but also the timeline of touchpoints from prior
marketing and sales campaigns and responses.
• Reporting and analytics. Easy-to-use tools (e.g., Tableau
or QlikView) are needed to support non-technical users in
managing the marketing and sales funnel. Otherwise the
bank faces an overreliance on expensive analytic talent
for ongoing projects and planning — or risks seeing tools
only partly used.
MANAGEMENT PRIORITIES
While the transition in small business banking is complicated
overall, efforts can be organized around near-term and longterm priorities. These organizational agenda items fall into
three major domains — analytics, sales, and marketing (Figure
July 2016
21
Figure 3: Managing the Organizational Transition
In migrating the organization to a new framework for small business customer engagement, near- and
long-term goals must be established for analytics, sales channels and marketing.
ANALYTICS
SALES
MARKETING
NEAR TERM
LONGER TERM
• Prioritize markets and
customer segments for sales
• Leverage sales resources via
enterprise segmentation
• Big data; leverage customer
behavioral & external info
• New performance metrics
• Tailored local market strategy
• Reallocate staff in line with
local market opportunity
• Launch "inside sales" team
for banker phone sales
• Solid inside team for sales,
prospecting, qualified leads
• Local RMs  mobile teams
•  digital account origination
• Promote non-branch channels
• Build "perceived convenience"
• Promote digital for self-service;
lessen burden on sales staff
• Further strengthen brand and
perceived convenience
• Manage "customer journey"
across time and channels
Source: Novantas
3: Managing the Organizational Transition). Also there are
concurrent priorities with service.
Analytics — near term. Identify top-priority small business
markets and customer segments within the current network,
leveraging current available data on customers and prospects. Employ enterprise segmentation to better leverage sales
resources, including for prospect targeting, lead generation
and an improved close ratio.
Analytics — longer term. Capture additional behavioral
and off-us data; drive more of the analytical workload with
“big data” initiatives. Deploy sophisticated analytics to gauge
the impact of marketing and distribution tactics (e.g., market
share, share-of-voice, brand attributes) on small business sales
performance. Employ regionally-tailored marketing strategies
to drive awareness, independent of the branch network.
Sales Force — near term. Redistribute the current small
business sales force to ensure that coverage is aligned with
market-level opportunity. Leverage current call-center and/
or central sales resources to launch an inside-sales unit for
small business.
Sales Force — longer term. Build out a specialized small
business inside sales capability; strengthen mobile field sales
team to drive new account acquisition and cross-sales. The
inside sales team will support the mobile field team with lead
prospecting and qualification, plus drive direct sales via outbound calling and online support.
Marketing — near term. Shift marketing spend to nonbranch direct-response channels; create awareness and a
22
competitive level of “perceived convenience” for small business. Begin building awareness of alternative transaction
capabilities to reduce dependence on the branch channel,
especially for routine transactions, and to encourage self-service for speed and convenience.
Marketing — longer term. As an offset to a shrinking
physical network, furtherhttp://www.visitphilly.com/events/philad
strengthen efforts to drive brand
awareness and perceived convenience. Continue to promote
alternate transaction capabilities to reduce dependence on
the branch channel, especially for routine transactions, and
encourage self-service for speed and convenience. Develop
and implement full “lifecycle-management” capabilities that
react to key customer behaviors over time to fully (and automatically) engage with customers at critical junctures in their
journey with the bank.
Service — near and longer term. Continue to build new
digital capabilities for sales and service in alternate, nonbranch channels. Leverage marketing and service channels
to build awareness of these capabilities, especially for routine
service transactions, adding to the arsenal of self-service tools
available to customers. Explore the use of additional incentives to encourage the use of the digital channels and technologies (e.g., remote deposit capture), and to migrate substantial additional transaction volume away from the branch.
Robert Griffin is a Director in the Chicago office of Novantas. He can be
reached at [email protected].
COMMENTARY
Branch Role Chaos: Call to Action on Staffing
Retail banks must start preparing now for local branch sales in a digitally-eroded
environment, which will require new standards for staffing analytics and planning.
BY DARRYL DEMOS AND DALE JOHNSON
A
s consumer digital migration
drains ever more branch traffic,
banks have been working
through a delicate transition with
branch staffing.
Amid all the pressing questions
— sales, service, headcount, skills,
etc. — executives drew comfort from
the assumption that they at least had a
rough idea of how consumer branch
usage would shake out. Ultimately, it
has been thought, branch servicing
would decline but not disappear, and
branches primarily would become
sales centers, a place where the
majority of customers will continue to
go to originate checking and savings accounts and apply for loans.
Building on this assumption, it
seemed logical to reorganize branch
staffing around “universal bankers”
who both serve and sell. The goal
is to improve efficiency by reducing
the FTE commitment to teller activities
while preserving sales capacity.
Based on a recent Novantas study
of 12,000 U.S. branches, roughly
one of every eight units across the
industry now makes prominent use
of universal bankers. At least 50%
use some form of flexible staffing.
As seen in BAI Banking Strategies
But even as more banks (and
consultants) jump on the Universal
Banker train, it is increasingly at risk
of running off the tracks. For starters,
our analysis shows that universal
bankers mostly help with transaction
and low-end sales productivity. The
more important metric — overall
financial return on branch sales staff
— has continued to deteriorate. Today
roughly two-thirds of all branches fail
to generate sales returns sufficient to
cover their fully loaded staffing costs.
The problem goes from bad to
worse when considering the future
locus of sales: digital vs. branch. For
years it was thought that consumers
would never trust ATMs with deposits, let alone mobile phones. Now
digital deposits are the norm, both
ATM and mobile. What guarantee is
there that branch account origination
will stay the norm, simply because
90% of accounts open in branches
today? All the evidence points to the
obvious answer — nothing. Counting
on branches to remain the focal point
of simple sales is naïve at best.
In a not-so-distant future scenario,
branch sales volume may be cut in half
by online account origination, with the
greatest impact on simple sales. Most
banks will be fighting for segment, geographic or product niches, often using
multiple strategies within a network.
The use of specialists will become critical in tapping high-value opportunities
for customer acquisition and cross-sell.
The upshot is that the branch staffing challenge is much more profound
than many bankers realize. To meet
evolving customer preferences and
boost the critical metric of return on
sales force, banks will need a new
retail sales strategy and workforce.
For many, universal bankers are an
interim step on a longer path, but the
universal banker role as we know
it today — transaction service and
sample sales — is dead in the future.
Adroit use of local market analytics
will be essential in managing this chaotic transition. Each bank must be able
to delve within its network to understand the scope and shape of sales
potential in each locale. This knowledge becomes the foundation for a
potentially extensive suite of market-tailored sales staffing configurations.
WARNING SIGNS
In a post-recession era of slack
July 2016
23
sales conducted face-to-face. They
to staffing expense.
consumer demand and digital disrupwill have to gin up business across
Rather than trying to perfect what
tion, banks have had two main branch
broader territories encompassing
now appears to be an inherently
priorities. One is to deepen relationmultiple branches, with branch sales
limited arrangement, banks already
ships and sell more to each customer,
generalists becoming a backstop
employing the universal banker
supporting growth by capturing “share
for technology assistance, complex
model should view it as a transition
of wallet.” The other is to tightly
servicing and the remaining simple
step. Others still on the sidelines
economize distribution in tandem with
sales that slip through the digital net.
should probably skip it. Even bigger
declining transaction activity.
productivity challenges are in store
The universal banker concept never
and the time to prepare is now.
cleanly fit the bill. But it seemed like
ANALYTICALLY GUIDED TRANSFORMATION
Radical changes are coming in
a way forward for banks looking to
All retail banks have serious work to
account origination. Coping measures
preserve sales capability while aggresdo in preparing for a digitally-eroded
will not suffice. While 85% to 90%
sively reducing branch headcount.
environment for local branch sales. But
of retail products are sold on-site
Roughly five years into the trend,
many compound the difficulty by clingtoday, this ratio could be cut in half
adoption has been substantial, with
ing to traditional practices and metrics
over the next five to seven years,
even more in the offing. But there also
instead of looking ahead. Schedulingmatching the recent rate of decline in
is enough data to evaluate progress
led staffing tools are prevalent in the
teller transactions. In turn, the coming
so far (Figure 1: Impact of Universal
industry and still have a place, for
serious digital erosion of the branch
Bankers on Product Sales per FTE).
example, but are wholly inadequate to
sales foundation, especially simple
Warning signs have emerged,
the task of staffing transformation in a
sales such as checking and savings
as revealed by Novantas research:
chaotic setting.
accounts, will cannibalize the funda• When tellers assume additional reThe number one priority is to estabmental benefit of the universal banker.
sponsibilities with sales, they mostlish a market-led transition. Historical
This hollowing out of branch sales
ly succeed with low-value checking
performance, service benchmarks and
points to role chaos ahead. In the notand savings accounts. The needle
back office productivity metrics will
so-distant future, specialists may have
barely moves with business deposnot suffice (Figure 2: New Standards
to carry most of the load in high-value
its and loans, consumer loans and
for Staffing Analytics and Planning).
mortgages. Meanwhile
credit card origination, the low-hanging
Figure 1: Impact of Universal Bankers on Product Sales per FTE
fruit for tellers, visibly
While universal bankers improve product unit sales per FTE, most additional
declines amid all the
volume is of low value. Economic returns do not improve.
other distractions.
Overall there is little
Baseline with traditional branch = 9.0
product sales per FTE per month
or no improvement in
sales returns relative to
+0.75 units
CONSUMER CHECKING
Deposits — most
staffing expense.
CONSUMER SAVINGS & MMDA
+0.55 units
volume is low-value
• When experienced
CERTIFICATES OF DEPOSIT
–0.15 units
checking and savings
BUSINESS DEPOSITS
+0.2 units
branch sales staff is
asked to assume teller
BUSINESS LOANS
–0.2 units
responsibilities, the pros
Loans — most
CONSUMER
LOANS
+0.2 units
are distracted from
categories flat, credit
HOME MORTGAGE
–0.2 units
the critical priority of
card origination falls
CREDIT CARDS
–0.17 units
high-value customer
acquisition and relaNET
+0.98 units
tionship expansion.
Transaction productivity
New level of 9.98 sales per FTE
is improved, but again,
Source: Novantas study of 12,000 U.S. branches via SalesScape
not sales returns relative
24
Each local market plan should
start with a clean sheet of paper, with
the top entry being sales opportunity.
How much? What type? What is the
likely range of scenarios two years
from now, five years from now? What
sales staffing configuration (generalist,
specialist, etc.) will best capitalize on
this emerging opportunity, and what
is the organization’s migratory path?
There are important management implications in this transition:
• Staffing and performance management are not separate activities
and need to be interlinked. New
strategic staffing analytics consider
both opportunity-based goals and
local team performance in setting
optimal staffing targets. New data
sources and analytical tools will
be needed to reach this level of
detailed planning.
• Opportunity analytics need to be
driven from the bottom up. The
bank needs a statistical understanding of how 1) market characteristics; 2) network presence; and 3)
branch-specific format and customer composition contribute to sales of
specific products.
• Linkages are needed between the
analytics that drive network planning and those now needed for
staff planning. Too often they are
driven by people in different silos
and not connected. We are seeing
more of a trend in combining these
two teams, but that is not enough.
The bank needs a clear set of analytics that can be used across these
domains. While site selection and
staffing decisions will diverge at
points, the analytics should source
from the same fact base.
• Nothing is more valuable than
data on actual sales performance
in a market, by segment, to plan
the future transition. Old-school
benchmarks calculated at the bank
level do not help to pinpoint local
strengths and deficiencies, nor the
corresponding granular changes
needed to better manage this transition. The appropriate calibration of
targets will need to be understood
branch-by-branch.
Role chaos in the branches is just
starting and the universal banker role
is not the end game. A shift in mindset and investment — from efficiency
to effective customer interaction
and economic returns on the sales
force — will be required as banks
transition through evolving staffing
models over the next five years.
Darryl Demos and Dale Johnson are
Managing Directors in the New York office of
Novantas. They can be reached at ddemos@
novantas.com and [email protected],
respectively.
Figure 2: New Standards for Staffing Analytics and Planning
In setting staff capacity, configuration and goals, the top priority is to align resources with the emerging picture
of sales opportunity in each locale.
OLD STAFFING MODEL
NEW STAFFING MODEL
Service first — Focus on wait times
and session times as drivers of the
customer experience
Sales first — Zero-based staffing;
local market goals matched with
bank segment strategy
ACTIVITY
ANALYTICS
Internally focused — Detailed
tracking of investments and
operations; expense dynamics only
Customer facing — Optimize
roles, practices and activities to
support the sales agenda
PLANNING
Historical trends — Projections based
on “+/–” last year’s results used for
capacity plans and sales goals
Market “fair share” — Plans and
expectations based on local market
potential, competitive stance
Skills sometimes considered for
scheduling — Contact center
approach
Skills actively factored into sales
plans — Individual performance &
experience specifically considered
DECISION
LOGIC
INDIVIDUAL
SKILLS
Source: Novantas
July 2016
25
FEATURE
Millennials Challenge
for Regional Banks:
PROFITABLE ACQUISITION AND CROSS-SELL
By learning to tap priority millennial customer segments that generate incremental returns
today, a more solid footing is gained for further market inroads.
BY CHRIS MUSTO AND KAREN GRAHAM
Millennials have been portrayed as a monolithic tidal wave
getting ready to roll over the banking industry. Nearly 80 million strong, this generation was born in the ’80s and early
’90s and ranges from college students to young professionals,
age 18 to 35.
Raised in an era of proliferating information and “living online,” these young adults represent the frontier of
banking. But they are hardly uniform when it comes to
banking needs – or the levers and potential for profitable
relationship acquisition.
Students considering their first credit card, for example,
are worlds away from 30-something professionals who are
forming households. Digital vs. branch shopping and account
application patterns vary, as does the potential to switch
among institutions.
The stark reality is that less than half of millennials represent a solid near-term banking opportunity. Yet many regional
banks insist on treating millennials as largely similar, using
basic playbooks that follow a checklist of digital-themed initiatives designed for broad appeal.
That is a losing proposition, especially in competition
with the very largest national players. The performance consequences – low traction relative to resources expended, an
overhang of marginal accounts, loss of profitable market
share – already are on display and could grow if regionals
do not take action.
One way to cut through the clutter is to focus on profitable acquisition and cross-sell. Institutions must be pragmatic
about the segments they will target for growth, including their
financial needs and how to acquire and engage them. By
learning to tap millennial segments that generate incremental
26
returns today, a more solid footing is gained for further market
inroads. Two areas need attention at many regional banks:
Shopping and purchase. Among checking prospects,
there is significant untapped potential to build profitable
market share by capturing switchers, who tend to be more
affluent and more digitally confident with online research
and purchase.
Targeted cross-sell. The winning bank will use targeted
multi-channel campaigns to reach the millennial segments with
the most potential. Typically these are the older members of
the group who are building careers and households.
Though regional banks are accomplished in their own right,
they lack the brand strength and developmental resources of
the national banks, and so must pick their battles for profitable
share of the growing opportunity with millennials.
SHOPPING AND PURCHASE
As younger, less established consumers, millennials make up
a disproportionate share of new-to-bank checking prospects.
But based on our U.S. Shopper Study of recent and prospective purchasers of primary checking accounts, the three largest
retail banks – Bank of America, Chase and Wells Fargo –
are outpacing the next 17 largest retail banks all along the
purchase funnel, including awareness, consideration and
acquisition (Figure 1: Tug of War for Millennials – National
vs. Regional Banks).
Understandably, given their distribution presence and marketing power, national banks lead in shopper awareness. This
is reflected both in unaided awareness, or the ability of survey
respondents to cite specific banks active in their markets without any prompting, and in aided awareness, or the ability to
identify names from a list.
The further challenge for regionals is that they also receive
less purchase consideration. Fully 50% of recent millennial
purchasers who had awareness of a national bank in their
market also considered that institution in their purchase decision; the comparable figure for regional banks was only 32%.
In terms of a high value selective response, one avenue of
counterattack for regionals is to target switchers. Based on our
survey findings, nearly two-thirds of millennials who have their
primary checking at a national bank are open to switching
that relationship, compared with roughly only half of millennials at large regionals (Sidebar: Switch Factors).
Why is this a near-term opportunity? Older millennials
are well on their way to resembling the next age cohort in
terms of balances and products held. For example, our analysis of prospective switchers indicates that roughly two-thirds of
checking accountholders under 35 have household incomes
exceeding $50,000, a figure nearly as high as for older prospective switchers age 35 to 44. With successful retention
longer term, older millennials will become even more desirable banking relationships.
Three factors will help regional banks to improve their
odds for millennials acquisition versus national banks:
1) Shift investment from branch to brand. Relative to older
prospective switchers, millennials are more likely to value
strong brands over dense branch networks. This trend will
accelerate as perceptions of convenience are increasingly
driven by marketing and digital capabilities and experiences.
Brand building should emphasize distinctiveness; standing for
something beyond local physical presence.
2) Appeal to the locavore. Millennials feel less of a
connection with national players and appreciate banks with
community resonance and involvement. Where the regional
bank is the “local” brand, build on that reputation and incorporate it into the value proposition.
3) Gain permission to bid. In surveying online checking
shoppers via Novantas BankChoice Monitor, we have seen
numerous markets where millennial shoppers favorably consider a regional bank, yet it lags in purchase pull through.
Why? Millennials are not convinced that the regional bank
supports the convenience and product features they expect.
To turn this tide, regionals must invest in digital experiences
and other elements of the value proposition that speak to the
distinct needs of millennials.
TARGETED CROSS-SELL
The biggest near-term opportunity for millennial-related growth
lies within the current customer base. But as an age cohort,
millennials are especially varied in their life stages, current
income and personal financial trajectory. With one bank we
identified six millennials sub-segments, each with particular
needs and differing near-term and longer-term relationship
potential, further complicated by overlapping age ranges.
Core segmentation principles – demographics, needs,
profit potential – still are prominent in parsing the millennial
opportunity. But given their heavy orientation to digital channels and online social interaction, millennials are prime candidates for multi-channel behavioral analysis as well. Channel
behaviors and preferences can become swing factors in product design, marketing and sales. That is why a robust millennial segmentation goes well beyond branch usage to include
use of mobile and online banking applications, automated
teller machines, and even
social media behavior.
Figure 1: Tug of War for Millennials — National vs. Regional Banks
A team effort is
needed
to capitalize on
When purchasing, Millennials more so than other age groups prefer a national
the
findings.
Successful
bank; but they are also more likely to consider switching from a national bank.
targeted cross-sell hinges
RECENT PURCHASERS
PROSPECTIVE
on a variety of factors,
SWITCHERS
each touching multiple
Who did you
Who did you
Would you
Age
43%
consider?
choose?
areas of the organizaconsider switching?
tion. These include brand33%
Under 35
ing and awareness, prod21%
uct priorities and pricing,
20% 20%
19%
Over 35
19%
15%
and product tailoring
and bundling. Additional
5% 7%
6% 7%
factors are customer tagging, mobile/online funcNational Regional
National Regional
National Regional
tionality, digital adverSource: Novantas Shopper Survey
tising and multi-channel
July 2016
27
Switch Factors
Among millennials who are current banking customers, people
with the highest tendency to switch providers generally are older
and more confident. Already experienced in opening a checking
account and familiar with its monthly use, they are much more
self-directed. Digital research is the shopping method they cite
as most helpful, and they are more likely to report opening a
checking account online.
These prospective switchers also are especially likely to bank
at large national institutions. Their consideration and initial bigbank patronage is swayed by perceptions of convenience, driven
by marketing and digital capabilities and experiences. Yet switchers tend to be more receptive to competing value propositions
from regionals, reflecting ongoing affinity with institutions hav-
ing stronger community ties.
For regional banks attempting to peel these prospective
switchers away from the nationals, the task is to qualify themselves
in ways that resonate with digital sensibilities. Unless the bank
builds and promotes a winning digital banking customer experience and strong functionality, efforts to switch millennials from
the nationals are doomed.
On the bright side, enlightened regionals can go on offense
with digital banking. Our research shows that gaining recognition for “leading online/mobile banking” drives primary checking
acquisition, often at lower expense than branch expansion.
campaign management, and branch vs. digital fulfillment.
Much of the preparation that goes into targeted crosssell is also useful in targeted customer acquisition as well.
Propositions developed in the pursuit of incremental sales
with current customers become the basis for external product
campaigns and, for regionals, also help in the campaign to
capture millennials who may consider switching their primary
banking relationship away from a national player.
it. But for a bank unlikely to be perceived as convenient when
and if the student moves to a new market, student banking is
a tough business case to make.
In short, to catch a segment that will grow in attractiveness, banks must first re-imagine convenience as extending beyond their branch footprint. Such specifics help to
provide focal points to monetize the many investments and
organizational revisions that are required in the customer
digital migration.
With many other millennials, the potential to profitably
serve is low. The sheer fact that young persons are digitally
oriented confers no general banking advantage – unlike with
companies that provide mobile phones and telecommunications. For banks, the foundation is still high-value customer
needs, with the new twist being digital’s growing role in
unlocking the opportunity.
With the right selective strategies, the millennial opportunity for regionals is real and potentially quite profitable. It
will require digital and other alternative channel investments,
plus a shift in resources from physical branches to marketing.
The goal is to build a distinctive brand, fully competent on the
digital side, yet locally oriented and invested in the community. Progress will further require looking within the millennial
cohort to target high-value sub-segments, both in acquisition
and cross-sell.
EXPANDING THE BASE
Outside of the priority millennial segments that represent a
solid near-term opportunity, the bank will want to cultivate
emerging sub-segments on a selective basis, laying groundwork with tomorrow’s profitable customers. For example,
entry-level professionals may be worth acquiring even if they
have only minimal near-term checking and credit needs, given
their longer-term potential for loans, savings and investments.
An ongoing outreach among the college student population is needed as well, presenting its own challenges. Less
familiar with checking, students respond to physical presence
on campus. And of course they are cost conscious, often without the direct deposit that others use to obtain a waiver on the
monthly account fee.
Given the effort and expense of initial acquisition, student banking accounts are profit-reducing in the early going,
yet they can pay off if graduates stay with the bank. The
question then becomes: Will they?
Increasingly, national players are able to hold onto students not only on the strength of their physical presence in
major markets around the country, but also by virtue of their
investment in digital banking, and in training customers to use
28
— Chris Musto
Chris Musto and Karen Graham are Directors at Novantas, respectively
in the New York and Chicago offices. They can be reached at cmusto@
novantas.com and [email protected], respectively.
COMMENTARY
Mortgage Headwinds: Improving Returns in the Face of
Multiple Capacity Constraints
Facing structural limits on origination capacity, lenders often pull the price lever, but with
blunt results; better pricing analytics and technology can improve spreads.
BY ZACH WISE AND ANDREW FRISBIE
M
ortgage lenders are losing
operational flexibility. They
face constraints as never
before: the impact of new regulation, balance sheet evolution, fickle
investor demand and a less nimble
processing capability. As a result,
lenders’ ability to “turn on a dime”
and profitably originate the product
de jour has diminished.
While seasoned mortgage
bankers can pull out a tried-and-true
toolkit to manage higher volumes,
there are drawbacks with each
tactic in today’s environment.
Enlarging the processing staff
could solve periodic problems with
under-capacity, for example, but
this surge capacity is too expensive
to hold when volumes recede.
Some lenders have considered
outsourcing fulfillment to reduce costs,
but fear the operational risk given the
quality required to issue QM-compliant
loans. And while tightening underwriting may improve risk-adjusted returns,
it can handicap the sales staff and
lower consideration from brokers.
Inevitably, most lenders settle on
pricing as the throttle to control origination volumes. But to outperform competitors, a growing number of progressive
players are bringing new analytics and
technology into the pricing process.
To reap the available incremental
spread on capped origination volume,
successful analytic mortgage pricing
requires three fundamental changes.
First, analytically-driven originators
need to price against market-by-market
competitive pricing benchmarks for
each product. Second, these measures of relative competitive position
rely on a robust technology platform
that can provide daily updates on
optimal pricing position. And third,
to assure cohesive execution in the
field, close coordination with the
sales team is needed, especially
to manage exception pricing.
Based on Novantas research
and client work, advanced mortgage
pricing can typically provide a nearterm origination margin lift of 10 to
20 basis points. And the long-term
potential — as the industry moves into
a different rate environment and the
July 2016
29
organization hones analytic margin/
volume tradeoffs — will be higher.
PERVASIVE CHALLENGES
fied by Dodd-Frank for systematically
important financial institutions), major
banks see far less profit motivation to
carry mortgage assets on the balance
sheet. The situation has degraded to
the point where in some instances,
using balance sheet funding to deliver
specialized mortgage products to a
high-value customer group is becoming more of a “loss-leader” program
to cement relationships and open the
door for other kinds of cross-sell.
Dodd-Frank’s rules on qualified
mortgages have further complicated
balance sheet decisions. Exposed
to higher legal risk and regulatory
pressure when extending credit
into higher risk tiers, banks now
must ration non-QM production.
Tranches of this type of origination
must be carefully selected in order
to ensure an adequate return, but
high selectivity is difficult to achieve
in a retail channel environment.
Slowed origination. Processing
capacity has been slashed as the
massive post-recession refinancing
wave has subsided. Meanwhile
new regulatory requirements have
increased the complexity of required
documentation. While lenders can
“slow-walk” their origination times,
they face undermining their competitive edge with customers.
Transformational digitization
is on the drawing board for many
major originators. But for now,
traditional, manually-intensive
processing dominates. Many originators still must manually touch
each loan in the pipeline, slowing
turnaround times on applications.
The limitations on management
flexibility in the mortgage industry are
legion. While each originator faces
a unique combination of issues that
inhibits the ability to simply push for
maximum volume, several challenges
are pervasive:
Limited capacity for non-conforming jumbo loans. For originators
willing to stretch, one option is to go
after high-dollar transactions involving upscale properties and affluent
borrowers. These credits are prized
for their returns, and bank originators see added value in the cross-sell
potential with an elite clientele.
CAPACITY MANAGEMENT TOOLKIT
The catch, however, is reduced
Savvy originators have faced confunding availability for this type
straints before and have a familiar
of asset. Balance sheet capacity
toolkit of tactical responses, everyis contracting for most banks. Risk
thing from extending lock periods, to
and liquidity standards are
tighter in the new regulatory
Figure 1: Drawbacks of Traditional Performance Levers
environment, and rising loanto-deposit ratios are forcing
Seeking manuevering room, mortgage originators have many conventional
more careful choices about
tools to consider, but none as effective as precision pricing.
the use of core funding.
The alternative — selling
Less competitive pricing; slows
to private investors — exposes
Extend Lock Period
turnaround on transactions
(customer
pays)
the bank to what has proven
to be fickle investor demand.
Lowers origination returns; slows
Extend Lock Period
While some originators have
turnaround on transactions
(originator pays)
found buyers for jumbos,
these investors have their own
Increases overhead and reduces flexibility;
constraints and changing
Add fulfillment staff
cost overhang when volume slumps
preferences, which means this
funding source can readily
Invites potential quality issues; increases
Outsource fulfillment
dry up on little notice. This
operational and compliance risk
leaves originators uncertain
on whether to focus on volume
More uncertainty on approvals; can strain
Tighten underwriting
relations with sales staff and brokers
or price at any given point.
General balance sheet
Reduces volume, but with potential
constraints for major players.
Broad price hike
competitive impacts; short-term fix at best
With the introduction of Basel
III and other regulations (such
Source: Novantas
as the leverage ratio speci-
30
expanding origination staff, to outsource fulfillment, to tightening underwriting. But each has its drawbacks
(Figure 1: Drawbacks of Traditional
Performance Levers).
The fallback tactic is to pull the
price lever, often seen as the “one
sure way” to reduce volume without
the drawbacks identified in Figure 1.
Unfortunately, money is frequently left
on the table by blunt-force decisions,
for example, bumping up rates by an
eighth of a point across the board.
Originators typically lack the analytics to know, for example, “should I
• Proper handling of marginal players in the calculation.
2) Revenue optimization framework. Having developed a competitive
position metric, the next step is to build
demand elasticity curves that correlate
local market position and conditions
with RCP. A full understanding of
demand elasticity allows the pricing
manager to execute tailored strategies
for different markets, products and
borrowing purposes. Margins can
be optimized without putting volume
targets at risk, and vice versa.
3) Robust technology platform. The
tion may put off the sales force when
reps see customers walk to the bank
across the street. This is why proper
communication is need on pricing positions and rationale. Avoiding pipeline
overload ensures that closing times will
be met and the customer experience is
maintained, which in turn has a high
correlation with pull-through rates and,
ultimately, sales force commissions.
UPSIDE POTENTIAL
Mortgage lender flexibility is constrained as never before, given the
impact of new regulation, issues with
“While seasoned mortgage bankers have a conventional toolkit of coping tactics, each option
has its drawbacks in the current environment. Inevitably management pulls the price
lever to shift origination volume and mix, but not nearly effectively as can be done with
advanced pricing analytics and technology.”
increase price by 1/2 point across the
footprint? Or maybe 1/8th in New
York and 3/8ths in Saint Louis?” These
players lack both the science to pinpoint optimal price variations and the
metrics to show what is gained or lost.
Unlocking this benefit
requires four key elements:
1) Relative Competitive Position
(RCP). For a robust view of demand
side impacts, originators need a solid
grasp of each product’s price position
against the market. The important first
step is to establish a robust benchmark
metric for each major market. Our
work with U.S. originators shows that
a variety of elements must be combined on a daily basis, including:
• Daily rates posted by competitors;
• Customer points vs. rate selections
relative to par;
• Regional variations given each
competitor’s unique cost structure,
perceived loan values and estimated volume targets; and
lender must meld high-end calculation
capabilities (which tax even large
server farms) with nimble delivery so
that the right prices are provided each
morning. Multiple intraday updates
are needed in dynamic market environments, for example, following a
Fed announcement or a Treasury rally.
It is a formidable exercise to calculate
the RCP for each region, generate
optimal pricing matrices given each
product’s volume constraints, and distribute this information for instant use.
4) Coordination with the field.
Normally, most lenders provide leeway to the sales team for “competitive
price match,” or on-the-spot rate concessions to close business at the point
of sale. While such pricing discretion
can help to maintain sound front line
relations and competitiveness, it can
also defeat pricing strategies intended
to temper a temporary volume surge
that overwhelms production capacity.
Suspending frontline pricing discre-
balance sheet and investor funding,
and the burden of newly complex documentation requirements on shrinking
origination processing teams. While
seasoned mortgage bankers have a
conventional toolkit of coping tactics,
each option has its drawbacks in the
current environment.
Inevitably management pulls the
price lever to shift origination volume
and mix, but not nearly effectively
as can be done with advanced
pricing analytics and technology. In
volume-challenged environments, the
upside from this added precision can
translate into $1 million to $2 million
of increased profit margin per $1
billion of mortgage originations.
Zach Wise is a Principal and Andrew
Frisbie is a Managing Director at Novantas,
respectively in the Charlotte and New York
offices. They can be reached at zwise@
novantas.com and [email protected].
July 2016
31
COMMENTARY
Banks need to clarify their deposit needs over the next few years and overhaul the
metrics, skills and strategies used to drive deposit gathering.
BY HANK ISRAEL AND ANDREW FRISBIE
C
ommercial banking units continue to be a source of strength
for their parent companies, but
recent results paint a picture of tightening profit dynamics. While evocative of
other recovery-era waves that quickly
subsided, the current trend still points
to the inevitable — a new performance
climate in which raw balance growth
will no longer carry the day.
Price promotions long have been
an important tool for deposit-gathering, both to meet long-term funding
goals and to quickly acquire balances in special situations. While the
deposit-rich environment of recent
years has muted much of the need for
deposit promotions, these campaigns
are set to proliferate as banks seek
funding to accelerate loan growth
and begin to cope with rising rates.
But even as deposit price promotions gain fresh industry attention,
32
their effectiveness is being undercut by
diminishing returns. Campaigns that
initially had strong success in prior
years are progressively losing energy.
In a vicious cycle, the bank is left in
a position of needing to launch more
promotions, yet each campaign is less
effective than the one that came before.
Why is this happening? One culprit
is web-enabled shopping, which has
diminished the punch of local promotions as consumers effortlessly monitor
rate trends and offers nation-wide.
Another is growing consumer price
sensitivity in expectation of rising
rates. Established account holders
are increasingly motivated to grab
promotional offers; which have the
counterproductive effect of raising the
interest carry on current balances.
It is a potentially serious situation
that will require improvement in the
metrics, skills and strategies used to
drive deposit-gathering — even among
the many banks that have made
significant progress in recent years.
The advent of promotional fatigue
has changed the basis of customer
decision-making, particularly key
assumptions about their behavior.
One priority is to do a far better
job of estimating balance retention
over time. Another is to revise the
financial calculus of price promotions
to account for the cannibalization of
lower-cost deposits already on the
books. New organizational strengths
will be needed as fresh approaches
will require tighter coordination
between organizational units.
OLD ASSUMPTIONS VS. NEW REALITIES
Many banks assume they can efficiently generate incremental balances
by limiting promotional offers by
geography and only for new deposit
likelihood that tailored promotions
will be more widely used and therefore less responsive. Sophistication
in systems, targeting and pricing
analytics is now seen among smaller
multi-market regional and community
banks, and the direct banks are piling
on as well. New expertise is needed
to stand out in the marketplace.
A core task is developing the
right measures of promotional cost
and effectiveness — a warning and
avoidance system that will help the
bank to steer away from ill-fated
promotions with diminishing returns.
Two key indicators are deposit
balance retention and the true marginal cost of promotional deposits.
Retention. Balance runoff can
be excessive for certain customer
segments, negating results from
promotional campaigns. By segmenting customers based on a sharpened
understanding of likely balance
retention rates, the bank can focus on
high-potential depositors
and clarify which offers
Figure 1: Changing Influences
to make to preserve and
grow stable balances.
The upcoming environment for promotional deposit pricing will differ
Propensities for “stickisignificantly from the last rising rate period (2004 to 2006).
ness” versus “runoff” have
profound implications on
Information Proliferation
Lower “Fences”
which deposits have longNear-unlimited rate info in the
Less geographic price fencing; risk that
term value and are worth
promos will attract bank’s own depositors
online/mobile environment
the promotional effort.
Marginal Cost.
Lower Switching Costs
More Exposure to Churn
Cannibalization occurs
Convenient online fulfillment,
Easier for core customers to relocate
when current depositors
electronic money movement
accounts; higher price elasticity
grab onto price promotions intended to win new
Mandate for Core Deposits
More Pressure on Promotions
business. All too frequently,
Regulatory push for core funding
More banks chasing core deposits,
campaigns invisibly sink
bidding up rates
over other deposits
underwater when this
outcome is omitted from
Analytics More Widely Used
Fewer Arbitrage Opportunities
deposit planning.
Proliferation of precision pricing skills,
Quest for new sources of analytic
The true marginal cost
tougher to stand out in the crowd
advantage
of promotional deposit
balances considers likely
Source: Novantas
subsequent runoff; the
funds, abilities that have provided
rich opportunities for targeted price
promotions in the past. But the levers of
deposit promotion have changed.
Information. The Internet has
radically changed access to information. Online ads bring deposit account
offers to consumers do not need to look
up at billboards, read local papers
or step into a branch — prompting
them to consider a specific bank. The
availability and aggregation of online
rate information makes rate comparison easier and more transparent.
And consumers are becoming more
willing to open new savings accounts
online, with non-local providers,
playing into the hands of direct
banks that show up in search engines
touting “the best rate” nationally.
Switching. Digital banking has
eliminated much of the friction that
limited deposit movement and account
churn. Aggregation sites provide
easy, anonymous, anywhere access to
As seen in BAI Banking Strategies
national rates. Online fulfillment makes
account opening immediate and convenient. “Me2Me” transfers allow electronic one- to three-day money movement, enabling consumers to open and
keep savings accounts separate from
payment accounts. Online account
management provides instant information for consumers to monitor balances and rates, and to optimize rate
returns across accounts and banks.
Regulation. With the implementation of Basel III, consumer and small
business deposits are treated more
favorably in calculating the liquidity
coverage ratio, increasing their value
compared with most alternatives.
This regulatory change now encourages existing retail players and new
entrants to compete more aggressively for retail deposits — including
the use of promotional rates.
Competition. Today the use of
enhanced deposit analytics is the
competitive norm, increasing the
July 2016
33
“A core task is developing the right measures of promotional cost and effectiveness —
a warning and avoidance system that will help the bank to steer away from ill-fated
promotions with diminishing returns. Two key indicators are deposit balance retention and
the true marginal cost of promotional deposits.”
estimated adoption by existing
accounts to the new higher rates; and
the overall retention of promotional
deposits. The big picture — made
clear by a granular, customer-level
analysis over time of promotional and
established balances — is that the
unwanted repricing of current balances is increasing at a rapid rate.
SETTING THE AGENDA
believe in “customer-of-one” targeting,
using specific price points that are not
broadcast to the broader customer
base. Others worry about customer and
front-line acceptance of these differentials and instead opt for transparent,
give-for-get logic — providing rate
incentives tied to the acquisition and
retention of specific balance amounts.
Third, the organization will need to
evolve its rhythms on how the product
and marketing teams interact with the
front-line in the preparation, delivery
and measurement of campaigns.
Old metrics need to be upgraded.
Marketing must become more nimble
to deliver a greater variety of targeted
offers, more frequently. The front line
will need the right proof points to
deliver the new reality with conviction.
Finally, whatever the tactical
agenda, analytic development should
be supported by an aggressive
test-and-learn program for new field
applications that leverage technology
and multichannel offer delivery to
maximize returns on these efforts.
For many banks, moving beyond a
simple adherence to traditional promotions will allow them to maintain structurally lower deposit costs while achieving required funding levels. For others,
such measures may not be sufficient,
calling into question whether shareholder value is better maximized with
analytically-derived deposit growth
serving as a governor on asset growth,
rather than the other way around.
34
High
Low
Deposit Growth Goals
Each bank needs to understand the
extent of its exposure to promotional
fatigue. This knowledge, combined
with the growth outlook, shapes the
deposit agenda. Drivers include the
funding growth needs of the individual
bank and the promotional challenges
Mr. Israel is a director and Mr. Frisbie a
facing the bank in each of its markets
managing director in the New York office of
and products.
Novantas. They can be reached at hisrael@
So, what are the common themes
novantas.com and [email protected],
across these agendas? First, banks
respectively.
will need to invest in the analytics and
technology to capture the
effectiveness of traditional
Figure 2: Setting the Agenda for Promotional Pricing
promotions and deploy more
advanced approaches to
Each bank must clearly understand its own likely promotional fatigue pattern,
improve them. In a dynamic
as well as its funding growth outlook, in order to optimize future promotions.
environment, customer
expectations and competitor
responses will continue to
Early start on test-and-learn
Radical overhaul of current
intensify, which will require
treatment development
practices and skills
more granular customer data,
including transaction-level
history and shopping
“Get off the treadmill”of
behavior, to better target
Use promotions sparingly
frequent promotion
pricing (this data also allows
for segment-level pricing for
those with the capability).
High
Low
Second, capabilities need
Exposure to Promotional Fatigue
to be aligned with promotional
Source: Novantas
philosophy. Some institutions
Novantas Review is published quarterly by Novantas, Inc., 485 Lexington Avenue, New York, NY 10017.
© 2016 Novantas, Inc. All rights reserved. “Novantas Review” and “Novantas” are trademarks of Novantas,
Inc. No reproduction is permitted in whole or part without written permission from Novantas, Inc.
ABOUT NOVANTAS
Novantas is the industry leader in analytic advisory services and technology solutions for
financial institutions around the world. We create superior value for retail and commercial
banks by delivering information, analyses, and automated solutions to improve revenue
generation across pricing, product development, treasury and risk management,
distribution, marketing, and sales management.
For more on these topics, view our
multimedia at: www.novantas.com
Banking’s Limited Recovery and the Challenges Ahead
While rising rates may provide a lift, urgent effort on multiple fronts is needed to rebuild or
replace longstanding pillars of the banking business model.
Rising Rates and NIM: Myths, Realities, Winners, Losers
Rising rates will bring new headwinds and increased competition, for both funding and
lending. Pricing and relationship strategies will be critical to uphold the net interest margin.
Promotional Deposit Pricing: Getting Ahead of
Diminishing Returns
Banks need to clarify their deposit needs over the next few years and overhaul the metrics,
skills and strategies used to drive deposit gathering.
Product Innovation in Small Dollar Liquidity:
Call to Action as Checking Overdraft Wanes
Looking beyond overdraft, the general direction of product development for small dollar
liquidity will center on new forms of unsecured credit. Are banks ready?
Customer Journey: Critical Context for Monetizing Big Data
To achieve real results that materially exceed the cost of implementing a big data platform,
banks need to set a specific agenda for developing high-value applications.

the full issue

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