Author Archives: mronan

Are banks poised to boost marketing budgets?

In recent years, banks have been primarily focused on cost cutting.  However, as the U.S. economic recovery continues to gain momentum, banks are identifying opportunities for revenue growth.  As banks look to capture this, they will obviously be looking at the size and composition of their marketing budgets.

EMI’s analysis of the latest FDIC data for 20 leading retail banks found little evidence that banks are growing their marketing budgets.  In fact, marketing spending for these banks over the first 9 months of 2014 was 2% lower than the same period in 2013.  As seen in figure 1, 10 of the 20 banks reported growth in their marketing budgets, led by PNC and Capital One.

bank_marketing_spend_change

These 20 banks invested an average of 1.5% of their net revenues in marketing during the first 9 months of 2014.  Although this marketing-to-revenue ratio rose 2 bps y/y, it is well below the 2% average that existed prior to the financial crisis.  For banks looking to grow revenues, they will need to return marketing-to-revenue back to this 2% level.

Figure 2 shows that 14 of the 20 banks have marketing-to-revenue ratios of between 1% and 2%.  For Chase, Bank of America and Capital One, the ratios are for their retail bank charters; marketing-to-revenue ratios for these banks’ credit card charters are much higher (as seen in figure 3).

marketing_percent_of_revenues_YTD-3Q14

marketing_percent_of_revenues_card_charters_YTD-3Q14

Of course, banks looking to increase their marketing investment in order to grow revenues also need to ensure that these marketing budgets are effectively deployed, in order to optimize marketing ROI. The following are some considerations for banks as they prepare marketing budgets for 2015:

  1. Consumer perceptions of banks have changed.  In the aftermath of the financial crisis, banks suffered reputational damage as they were seen as key contributors to the crisis.  In recent years, banks have worked hard to change their business models in order to focus on their core competencies (and this has been recently seen in improved customer satisfaction ratings).  Marketing will play a key role in communicating banks’ key positioning as trusted providers of financial services and support.
  2. Consumer banking behavior has changed. Consumer adoption of self-service-channels (online, mobile, ATM) has now attained critical mass and these channels account for a majority of everyday banking transactions.    These channels create significant advertising and cross-selling opportunities (and challenges) for banks.
  3. Bank branches have untapped marketing potential. As everyday bank transactions move to self-service channels, banks are cutting branch numbers and reinventing various aspects of the branch (size, layout, staffing, integration with other channels).  Banks should also consider the fact that the branch is the key physical expression of the bank brand, and should allocate a portion of their marketing budgets to capturing branches’ marketing potential.
  4. Bank need to embrace non-traditional marketing channels.  Younger demographic segments (such as millennials) have very different media consumption patterns than their older peers, with significantly higher usage of online/mobile and social media.  However, banks’ innate conservatism has resulted in their failure to fully embrace new embrace new media.  Banks need to both significantly increase their investment in non-traditional marketing channels, but also find innovative ways to convey their core messages to a new audience.

Five Strategies to Adapt Bank Branches to The New Normal

There is a wealth of evidence that consumers are using online and mobile channels as the primary channels for their everyday banking needs:

  • Having reached critical mass in online banking penetration, the largest U.S. banks continue to report strong growth in active mobile banking customers (Chase +23% y/y to 17.2 million; Bank of America up 17% to 15.5 million; and Wells Fargo +22% to 13.1 million)
  • Regional bank customers are also growing their usage of non-branch channels.  45% of PNC customers use non-branch channels for a majority of banking transactions.  Fifth Third reports that ATM and mobile channels’ share of deposit volume rose from 12% to 31% over the past two years. KeyBank claims that online and mobile transactions are growing by 9% annually, while branch transactions are declining by 3%.

The rise of self-service channels for everyday banking transactions is leading banks to re-assess their investment in their branch networks.  For example, banks are changing traditional assumptions as to what constitutes optimal branch density within markets.  In a recent presentation, KeyBank claimed that branch density is now less relevant as long as a bank can pair branches with a good mobile offering. In addition, in a low-revenue-growth environment, banks are under pressure to cut costs in order to meet earnings expectations. As a result of these factors, banks are cutting branch numbers.

  • Bank of America is expected to cut branches to below 5,000 by the end of 2014, compared to more than 5,700 in the second quarter of 2011.  It recently announced the sale of branch clusters in North Carolina and Michigan.
  • Over the past six months Citibank sold all of its branches in Texas, as it focuses its energies on a select number of large metro markets.
  • KeyBank has closed or sold 8% of its branches over the past two years, and plans to cut its network further, by about 2-3% per year.

However, banks remain strongly committed to their branch networks.  This is largely due to the fact that consumers continue to value the branch channel, even if usage has declined.  A recent ABA survey found that 21% of consumers named the branch as their preferred banking channel, up from 18% in 2013. In addition, banks recognize the benefits in encouraging customers to use multiple channels.  Wells Fargo found that customers using its stores as well as online and mobile channels have a 70% higher purchase rate than customers who only use online and mobile. With in this mind, the following are five branch strategies that banks should follow, with examples of banks that have already implemented these approaches:

  1. Deploy new branch formats.  Given lower traffic and transaction volumes in branches, banks should launch branch prototypes with smaller footprints, so that they can maintain their physical presence, but at a lower cost.
    • PNC has converted 200 of its branches to a smaller format, with 100 more to follow by the end of 2014.
  2. Launch flagship branches in selected markets.  With changing ideas around branch density, bank can consolidate multiple branches into a large flagship store.  These flagship stores act as a brand beacon for the bank in specific markets, as well as providing space for the bank to showcase new innovations
  3. Reconfigure branch staff.  As branch activity is switching from transaction processing to sales and advice, and branches switch to smaller format, bank can reduce the average number of staff per branch, but should also change the functional balance, with fewer tellers and more sales specialists.
    • In the 18 months to June 2014, Fifth Third cut 22% of its branch service staff, but increased sales staff by 6%.
    • Over the past year, PNC has grown its number of investment professionals in branches by 4%.
  4. Incorporate technology into branches. As consumers become more accustomed with using technology for their everyday financial needs, banks should showcase customer-facing technology in branches.  This can enhance the user experience and capture sales opportunities
    • Regions is installing two-way video to enable customers communicate directly with bankers via an ATM.
  5. Open branches outside of footprint.  As having a critical mass of branches in a market is no longer a prerequisite for success, banks can open branches beyond their traditional retail footprint, to target specific consumer or business clusters.
    • City National has established branches in New York City, Atlanta and Nashville, dedicated to targeting entertainment firms that are clustered within these markets.

Time for U.S. Credit Card Issuers To Shift Focus to Lower FICOs?

One of the themes in leading credit card issuers’ 2Q14 financials was the expectation of a return to steady outstandings growth. Even those top issuers who continued to report y/y outstandings declines—such as Bank of America and Capital One—indicated that growth is on the way. In the aftermath of the financial crisis, issuers pulled back from the prime and sub-prime FICO segments and concentrated their business growth initiatives on the superprime segment. As issuers now look to generate outstandings growth, one of the strategies open to them is to target the lower FICO segments. However, EMI analysis shows that issuers continue to focus on the higher FICO categories. The chart below shows that, for most issuers, lower FICO segments’ share of total consumer credit card outstandings continues to decline.

issuer_FICO_share_2Q14

Even though issuers use different FICO categories, the chart enables us to compare the FICO composition of credit card portfolios between different issuers.

  • Consumers with credit scores of less than 680 accounted for 32% of Wells Fargo’s outstandings at the end of 2Q14, compared to only 18% of Bank of America’s outstandings. This may help explain why Wells Fargo’s average credit card outstandings rose 10% y/y in 2Q14, compared to a 2% decline for Bank of America.
  • Similarly, 17% of Discover’s outstandings are held by consumers with FICOs of <660, compared to just 5% of Chase outstandings. Discover reported 6% y/y growth in outstandings in 2Q14, compared to just 1% growth for Chase.

Looking over a longer period (2Q11-2Q14), we see a consistent pattern of the lower FICO segments losing share of consumer credit card outstandings. For Chase, consumers with FICOs of less than 660 accounted for 14% of outstandings at the end of 2Q14, compared to 20% at the end of 2Q11. However, for some issuers, the share decline in lower FICO segments has not been very dramatic.  For example, FICOs of <640 accounted for 17% of outstandings at the end of 2Q14, a share loss of just two percentage points since 2Q11.

issuer_FICO_share_2Q11-2Q14

As consumer confidence returns, issuers expect to grow outstandings in the coming quarters.  However, to achieve their goals, they will need to develop strategies for a broader FICO range.  In addition to continuing to target more affluent consumers, issuers will need to develop strategies, products, pricing and messaging to reconnect with prime, lower-prime and sub-prime consumer segments.