Monthly Archives: March 2011

Retirement and The Catchers in The Rye

Leaders of the retirement industry met this week at Morningstar Corporate Headquarters in Chicago to exchange thoughts on the future of retirement income solutions.  The more than 150 industry leaders who attended share a common vision: connecting the silos of the retirement industry to facilitate the delivery of more robust solutions for households transitioning into or in the retired life-stage.   Their interest is in part driven by the increasing attractiveness of the 50+ segment, which, for  example, controls more than 50% of 401k assets under management.   As these assets are converted to streams of retirement income, opportunities and risks will increasingly emerge.

There are many barriers  today that prevent the industry from delivering optimal retirement solutions to households – both in the workplace and outside the work  place.  Some of these are legal, some are economic, some are cultural, and some are behavioral.

Despite all of these challenges, the retirement ecosystem is evolving quickly.  This evolution  is  being driven by changes in consumer behavior and attitudes and the high indebtedness of all sectors of the US economy.  As a result, an  increasing number of intermediaries and distributors are modifying their approaches to serving  households, plan sponsors, and participants.  The pure AUM model is going to be challenged and product selling is  being replaced by more process-centric, solution oritened approaches.   An increaing number of channels hold insurance and securities licenses and therefore consider insurance and investment products to design a retirement income solution.

Manufacturers that want to preserve market share and sustain growth will need to adapt to these changes, particularly in the area of product development and relationship management with channels.

Those that adapt quickly and support this evolution will win the loyalty of their channels.  Adapting means speaking your channels evolving language, helping your channels understand how your products fit into their financial planning processes and for which client types your product is appropriate, giving the advisor comfort when presenting your products to end-clients, and becoming the “go to” retirement income expert.   Most advisors become comfortable with a limited number of providers, so time is of the essence as financial advisors modify their practice to serve the increasingly large transition and retired life-stage segment.  And selecting and investing in the right channels to work with is critical.

Now is the time for providers of retirement income products to “lock-in” their channel relationships.  This will require thoughful marketing and sales.  Distinguishing between early adopters, novices, and laggards is critical and allocating your investments in the right market segments is essential.

And for those who are curious about the title of this post and what rye has to do with retirement:

“Anyway, I keep picturing all these little kids playing some game in this big field of rye and all.  Thousands of little kids, and nobody’s around – nobody big, I mean – except me.  And I’m standing on the edge of some crazy cliff.  What I have to do, I have to catch everybody if they start to go over the cliff – I mean if they’re running and they don’t look where they’re going I have to come out from somewhere and catch them.  That’s all I do all day.  I’d just be the catcher in the rye and all.  I know it’s crazy, but that’s the only thing I’d really like to be.”  ~J.D. Salinger, The Catcher in the Rye, Chapter 22, spoken by the character Holden Caulfield

Banks offers students no-fee checking and other benefits in order to develop long-term relationships

In recent weeks, there has been a good deal of coverage in business media on how banks plan to make up for the loss of debit interchange income, assuming the Durbin Amendment is passed. Much of the discussion has centered on rolling back on debit rewards, eliminating free checking, and increasing ATM fees.

However, it appears that these changes will not apply to student checking accounts.  For example, TD Bank recently introduced a new range of six checking accounts, only one of which–TD Student Checking–does not carry a monthly fee.  A perusal of leading bank websites shows that most offer a dedicated student account with no monthly fee and no minimum balance requirement.   The checking account is the most important product in building a relationship with customers, so expect no-fee student checking to continue.

In addition, banks will seek to build on the checking account relationships with:

  • Student banking bundles
  • Student credit cards
  • Special offers and benefits, such as no fees for using other banks’ ATMs, discounts on fee-based products, higher rates on saving accounts, or lower APRs on lending products
  • Range of virtual service options (Internet banking, mobile banking, social media)
  • Financial advice and planning tools

The combination of these products and services is designed to ensure retention of the customer relationship during that crucial period when students graduate and move on to a new life stage.

Discover 1Q11 financials illustrate continued recovery for card issuers

Discover Financial typically reports quarterly financials one month before other leading U.S. credit card issuers. As such, its results are seen as provider leading indicators of the overall health of the credit card industry.

Discover reported 1Q11 financials on March 22. The following highlights from its results show that leading credit card issuers continue to recover following the crisis that impacted the industry in the second half of 2008. Note the following trends for some key credit quality metrics:

  • The net principal charge-off rate fell 304 bps y/y and 99 bps q/q to 5.96% (crucially, the charge-off rate is below 6% for the first time since the fourth quarter of 2008)
  • The 30+ day delinquency rate fell 180 bps y/y and 47 bps q/q to 3.59% (this is the lowest rate since the fourth quarter of 2007)

With credit quality now returning to more normalized levels, is Discover shifting its focus towards growth?  The 1Q11 results provide some contradictory evidence:

  • End-of-period credit card loans were down 3% year-over-year (y/y), with Discover attributing the decline to a higher payment rate on the part of cardholders.  However, the rate of credit card loan decline is slowing (y/y decline of 6% in 3Q10 and 5% in 4Q10).  And Discover’s CEO said that he expects credit card loans to growth in the second half of 2011
  • Discover card sales volume rose 7% y/y to $24.0 billion
  • Marketing and business development spending rose 60% year-over-year to $136 million in 1Q11 (due to seasonality in marketing spend patterns, quarterly trends are typically not very useful

So, there is evidence that Discover is investing for growth, but that it will continue to be conservative with regard to lending, and will aim to have a balance of spending and lending growth.