With the arrival of COVID-19, consumers have accelerated their transition to digital banking, which in turn has lowered barriers to entry into the consumer banking space.
New entrants comprise both fintechs as well as other financial firms (e.g., robo advisors, financing providers) who have not previously offered banking services. These firms typically cannot compete with the brand equity, product range and heritage of the established retail banks. However, in this new environment, by identifying an attractive and/or underserved segment and building a tailored digital banking experience, new entrants can establish a market presence, while differentiating themselves from both incumbent banks and other new entrants.
The following is a snapshot of recent segment-specific initiatives by new entrants to enter the retail banking market:
For similar companies looking to break into the banking space, once you have identified your desired segment, you will need to tackle the following questions to determine your go-to-market strategy:
- What is the size and growth potential of the desired segment? Is it concentrated in certain geographic markets?
- Do people in this segment tend to have unique financial needs?
- How loyal are they to their current financial provider(s)?
- What are their preferred banking channels for conducting day-to-day banking activities, and for signing up for new solutions?
- What are their most important factors (e.g., price, customer service, convenience, innovation, security, sustainability) in selecting a financial product or provider?
- What are their preferred media and information channels?
- Do other financial firms current target this segment? If so, who are the standout providers? Are any new entrants targeting the segment?
- Outside of financial, which sectors (or individual firms) are best in class in targeting the segment? What are they doing that makes them successful?
- What capabilities do you current have in-house to initiate a segment-based strategy? What additional resources do you need?
Finally, it is important to note that established retail banks are endeavoring to counter the threat from new entrants with broad initiatives (e.g., enhancing the omnichannel experience) and segment-specific programs. For example, KeyBank recently announced plans to launch a national digital bank, targeting medical professionals. Expect to see more of the same in 2021.
According to the FDIC’s Quarterly Banking Profile, U.S. commercial and industrial loans rose 4.8% y/y to $2,077 billion at the end of June 2018. This marks the third consecutive quarter of accelerating y/y growth since reaching a six-year low of 2% at the end of 3Q17. Evidence from leading banks’ quarterly financials and investor presentations is that this commercial loan growth is often driven by a focus on particular vertical industry sectors. For example, PNC reported commercial loan growth of 4.5% in the year to the end of 2Q18, driven by financial services (+9%) and retail/wholesale trade (+7%)
Vertical industry targeting provides a range of benefits for these banks:
- Drives stronger growth in loans to that sector—in particular if that sector has been underserved—which can help push up overall commercial loan growth rates.
- Provides a point of differentiation from competitors.
- Enables a bank to leverage synergies between traditional or current bank strengths (such as expertise in certain product or service categories, or proximity to industry clusters) and the financial needs of targeted companies.
- Creates an opportunity for a bank to expand beyond its traditional retail branch footprint into new geographic markets. Fifth Third recently launched a Financial Institutions Group in New York City.
We recently scanned the commercial banking sections of leading banks’ websites to identify targeted industry sectors, which we have summarized in the following table. Not surprisingly, most of the banks are targeting large sectors (e.g., healthcare, energy and government). However, a number of banks also appear to be targeting more niche sectors, such as aging services (SunTrust), the wine industry (Union Bank) and vacation ownership (Capital One).
We recognize that simply listing industries on their websites does not mean that these banks are fully engaged in targeting these sectors. But if your bank is looking to significant grow clients and assets in particular vertical industry sectors, the following are some key considerations:
- First step: size the market opportunity (e.g., how many companies from that industry meet your revenue/other target-size criteria and are located within your traditional retail footprint and nationally). It also important to identify industry clusters.
- Use primary and secondary research to identify company characteristics, financial needs and the decision-making process. A key source of primary research should be your front-line salespeople who may already be selling to these companies in your targeted sectors. You should then be able to asses the bank’s current ability—in terms of product suites, number and quality of dedicated personnel, as well as marketing and sales support assets—to effectively serve these segments.
- Conduct competitive intelligence to study other financial providers targeting the same segments. Identify you key strengths and limitations relative to these competitors.
- Create and deploy dedicated industry teams. If possible, locate your teams in markets where targeted companies are concentrated. Staff the teams with industry experts and support them with training, industry collateral and other sales support tools.
- Build awareness and engagement through targeted marketing investment, with a focus on particular in industry-specific marketing media and events.
- Further engagement with prospects through industry-specific thought leadership, using a mix of formats and media, such as articles (published in your own content portals or in vertical industry media), blog posts, social media channels, surveys, reports, and client success stories.
The growth rate in U.S. C&I loan portfolios has been decelerating in recent quarters (see EMI’s March 4th blog post). To buck this trend, banks are trying to identify and target vertical industries with significant growth potential and/or that have not been effectively targeted in the past.
The following charts show some industries where banks reported strong loan growth in 2013.
(The figures in parentheses show the index of industry-specific growth to overall commercial loan growth, with average growth = 100. For example, Fifth Third’s retail industry loan portfolio grew 26% between end-2012 and end-2013, which is almost five times higher than Fifth Third’s overall commercial loan growth of 5.4%.)
The following are some quick tips for banks to enhance their vertical industry targeting efforts:
- Size the overall market within the bank’s footprint; identify clusters
- Assess industry health and growth potential by analyzing key performance metrics (e.g., gross output, profitability, business formation and survival rates, international trade volume)
- Identify unique financial needs, usage profiles and decision-making processes through a combination of primary and secondary research
- Develop targeted marketing campaigns, to include tailored content as well as investments in industry-specific media (events, trade publications, online and social media sites)
- Create, train and support dedicated industry teams; concentrate team deployment around clusters