Author Archives: mronan

Are Commercial & Industrial (C&I) Loans Actually Declining?

In its Quarterly Banking Profile, the Federal Deposit Insurance Corporation (FDIC) reported that commercial & industrial (C&I) loans fell 2.5% y/y to $2,395 billion at the end of 1Q22. However, further analysis provides a more nuanced perspective:

  • The rate of decline has been decelerating in recent quarters:
  • The C&I portfolio at the end of 1Q22 was 9% higher than at the end of 4Q19, the last quarter before the pandemic:
  • As the pandemic took hold in March 2020, businesses tapped into their credit lines, leading to a rise in C&I loans of almost half a trillion dollars by the end of June 2020. Over the next five quarters, this process was reversed, with a cumulative decline of more than $450 billion. However, growth returned over the past two quarters, with a net increase of more than $150 billion.
  • Finally C&I loan growth was boosted in 2020 and the first half of 2021 by Payment Protection Program (PPP) loans.

Key takeaway: Don’t judge a book by its cover; delve deeper to get a more complete understanding of industry trends.

Five Key Small Business Banking Trends in 4Q21

With the ending of SBA Payment Protection Program (PPP) loans, banks’ small business loan portfolios declined significantly in the second half of 2021. However, in line with the economic recovery, the outlook for small businesses appears positive entering 2022 (pandemic permitting). With this in mind, we observed the following trends in small business marketing, thought leadership and product development during 4Q21 as both traditional and challenger banks jockeyed for position in the small business market.

Financial providers continued to market to small businesses in a variety of ways, such as:

  • Developing campaigns and messaging around small business events, such as Women’s Small Business Month (in October) and Small Business Saturday (in November).
  • Promoting small business offers via email, on websites and in social media. KeyBank presents business offers on its website under the headings “Bank,” “Borrow” and “Manage.”
  • Publishing client success stories on websites and in social media. During the quarter, Regions highlighted a series of clients on its YouTube channel, under the heading “Good Company.”
  • Connecting with local communities. Wells Fargo introduced “Hope, USA,” an initiative to revitalize local business districts in a range of cities

Financial providers are pursuing a multi-faceted approach to small business thought leadership, including:

  • Coverage of a broad range of topics of interest to small business owners
  • Increase in content targeted at different business owner segments and industries
  • Multiple content formats, led by articles and blogs, but providers are also increasingly using other content types, such as newsletters, videos, infographics and podcast series. (Bank of the West launched the Means & Matters podcast focused on women business owners. Cadence Bank introduced Good Companies, its first podcast.)
  • Continued focus on portals to organize content. Regions extended its Next Step sub-brand with the launch of the Next Step for Business portal.

With a significant majority of small businesses embracing digital channels, banks are expanding digital functionality and using these channels for both service and sales.

  • According to Citizens’ second annual Banking Experience Survey, 86% of businesses use digital channels (up significantly from 70% in 2020).
  • KeyBank reported a 50% rise in digitally active small business clients post-pandemic.
  • In a November 2021 presentation, U.S. Bank reported that the digital channel’s share of small business sales rose 2.5 times over the previous year.
  • Huntington Bank reported that digital channels accounted for 16% of new business deposit accounts, up from 12% in 2Q21 (and 0% in 3Q20).

Traditional banks are facing competition from a diverse array of challengers that are launching new products, aggressive pricing and a focus on the digital experience.

  • American Express sought to take advantage of its leadership small business payments by launching Kabbage Funding and the Amex Business Checking app.
  • Intuit launched the Money by QuickBooks mobile app and QuickBooks Checking.

Leading issuers launched new small business cards to capture a share of the expected strong growth in small business card spending in 2022.

In 2022, we expect that most of these trends will continue as new entrants look to identify and exploit market gaps, and incumbents focus on protecting and growing their small business customer bases by refining their positioning, products, offers and customer experience.

5 Key Digital Banking Trends in 4Q21

As the banking ecosystem moves to a digital-first profile, we have identified the following five trends that shaped digital banking during the most recent quarter. Furthermore, we expect that these trends will persist into 2022.

Not only has digital banking achieved critical mass, recent surveys have found that it has become an indispensable tool in people’s lives.

Recent years have seen digital challengers engaged in a land grab in a market characterized by very strong growth and relatively low barriers to entry. Several digital banks have attained significant scale while others have established a strong presence within a specific market niche. However, we are now seeing signs of a shakeout in the digital bank sector in 4Q21 with pullbacks, market departures and consolidation.

  • Monzo and N26 both announced during the quarter that they were quitting the U.S. market.
  • MoneyLion announced the acquisition of Even Financial for $440 million.
  • Google dropped plans to offer bank accounts to its users.

Traditional banks are addressing the threat from digital banks by continuing to grow their digital user base, adding new digital functionality, improving the digital user experience (UX) and acquiring/partnering with fintechs.

  • Bank of America continues to lead the way in digital banking engagement among the main U.S. banks. In October, it reported that 5 million clients were using Life Plan, its personalized digital financial planning experience.
  • U.S. Bank is also a leader in driving digital banking penetration among its customer base; digital customers represented 70% of its total active customers at the end of 3Q21.
  • According to an Atos survey, 66% of bank leaders named transforming the digital experience as a top priority.

Younger demographic segments represent the key battleground between traditional and digital banks.

  • Traditional banks tend to have higher levels of trust and loyalty among older segments, a fact that is increasingly recognized by the banks themselves; a Bank Director survey found that 95% of financial executives believe that they have the tools in place to effectively serve baby boomers. However, only 43% believe that this is case for Millennials.
  • According to a Plaid survey, younger segments have the highest fintech adoption, led by Millennials at 95%, followed by Gen X at 89%, and Gen Z at 87%. (Boomers’ fintech adoption rate was 79%.)

While traditional banks migrate to a digital-first approach, they believe that clients will continue to value the branch channel.

Many banks are announcing branch reductions as they reduce branch density. Our analysis of FDIC SDI data on domestic U.S. branches shows that there has been a decline of almost 10,000 branches over the past five years, with some evidence in recent quarters that the rate of bank closures has accelerated (a decline of at least 1% of total branches in three of the past four quarters). However, it is important to note more than 82,000 branches remain in operation.

  • According to a Capital One survey, 42% of consumers reported that they missed being able to visit their bank branch during the pandemic.
  • Branches are also crucial to establishing a foothold in new markets. Citizens’ CEO Bruce van Saun claimed at a December 2021 conference that the bank could not target the New York City metro market without the branches it is acquiring from HSBC. JPMorgan Chase has similarly used flagship branches to gain a foothold in expansion markets.

We expect that many of these trends will continue and even intensify in 2022 as both established and emerging players adapt their product offerings, channel strategies and customer experiences to changing customer behaviors and preferences as well as an increasingly dynamic competitive environment.