Author Archives: mronan

How Can Banks Maintain Commercial Lending Momentum?

Second quarter 2013 financials for leading U.S. banks reveal continued strong growth in their commercial loan portfolios. The chart below shows that 11 of 16 banks studied reported double-digit growth rates, with an average increase of 11%.  And most of the banks reported very strong commercial pipelines in the second quarter.

Some of this growth can be attributed to improved confidence among U.S. firms. In addition, banks are generating strong growth rates by targeting specific vertical industries that have high-growth potential and/or have been traditionally underserved by banks.  These large U.S. banks can assign dedicated teams and create customized campaigns for different industries, which creates a competitive advantage over smaller banks who lack the necessary scale to justify this incremental sales and marketing investment.

However, increased competition in the commercial lending market (particularly in the general middle market sector) is contributing to declines in yields; each of the leading banks in the chart above who included commercial loan yield data in their 2Q13 financials, reports a significant y/y decline. On the other hand, commercial loan net charge-off rates are both lower than consumer loan charge-off rates and in many cases have fallen significantly over the past year.

In this high-potential, but increasingly competitive, commercial lending and banking environment, banks need to effectively direct their sales and marketing budgets to initiatives that can both continue to drive customer acquisition as well as optimize existing customer relationships. Initiatives include:

  • Targeting: identify industry segments or geographic markets with strong commercial loan potential.  Allocate sales and marketing resources based on market opportunity, competitive intensity, as well as the bank’s own strengths in these markets.
  • Customer relationship optimization: leverage the full power of the bank by working with other units to generate customer referral and cross-sell streams.
  • Performance benchmarking: assess commercial banking performance throughout the bank’s footprint.  Diagnose reasons for the over- or under-performance of particular groups.  Apply these insights to develop programs to raise overall performance.
  • Loan usage stimulation: develop messaging to drive commercial loan utilization rates, which are currently low by historical standards.
  • Content development: develop and deliver content that provides answers to customers’ financial needs and position the bank as a trusted financial advisor. Ensure the content addresses the different business and financial challenges of various targeted segments.  Distribute the content through multiple delivery channels to reflect changes in how content is now consumed.
  • Sales tool creation: Invest in sales force automation, sales support tools and training to ensure that commercial prospects are moved seamlessly through the sales funnel and generate a strong conversion rate.
  • Customer outreach: develop customer communications to support ensure that relationship managers proactively engage with customers on a regular basis, but in particular at critical stages of the customer life cycle (for example, during the first 90 days)
  • Inbound communications capture: provide a range of options for customers to contact the bank, and direct these customer queries to the most appropriate bank unit or individual.

How Banks Can Prepare for a Mobile Wallet Future

With the proliferation and increased power of smartphones—a recent Pew Research Center survey finding that 56% of adults now own a smartphone—many more consumers use their mobile phones for a wide range of activities, including mobile banking.  The Federal Reserve Board found that 28% of mobile phone users banked with their device in April 2013, up from 21% a year earlier.

Now banks are looking to move beyond basic mobile banking to enable consumers to conduct a much wider array of banking and payments transactions over their mobile phones.  And the banks plan to package this enhanced functionality into a mobile wallet.  According to a recent survey published by Clear2Pay, 43% have plans to deploy a mobile wallet offering in the next 6-12 months. The mobile wallet would provide important customer retention, engagement, cross-sell and ultimately revenue generation benefits.  However, there are significant hurdles to overcome, including technology issues, competitive pressures, and consumer resistance.

With this in mind, the following are some key steps for banks to take to prepare for a mobile wallet future:

  1. Develop a dedicated group. Banks should create a dedicated group to develop and implement a mobile wallet strategy.  This group would include representatives from various bank departments, such as retail banking, payments, channel, marketing, and IT.  This group would also champion mobile wallets to key stakeholders—including senior management—within the bank organization.
  2. Continue to grow mobile banking subscribers.  Today’s mobile banking customers are the most likely segment to embrace mobile wallets, so banks should continue to encourage their customers to try out and continue to use mobile banking services.  Some of the leading U.S. banks have already built up impressive mobile banking user numbers, including Chase (14.0 million active mobile banking subscribers in 2Q13, +32% y/y), Bank of America (13.2 million, +28%) and Wells Fargo (10.7 million, +29%).
  3. Introduce more advanced mobile banking functionality.  As consumers have become comfortable with using mobile banking for basic banking activities (such as checking balances), banks are starting to incorporate additional functionality, such as mobile check deposit and mobile bill pay.  USAA recently introduced voice technology to its mobile banking app.  Consumers’ gradual adoption of more advanced functionality makes the jump to mobile payments less daunting.
  4. Conduct consumer and merchant research.  To get some direction on how to position and market mobile wallets, banks should conduct research into
    1. Attitudes to, and interest in using, mobile wallets
    2. Reasons for using/not using mobile wallets
    3. Preferred mobile wallet components
    4. Most trusted providers
    5. Types and levels of incentives that would drive usage
  5. Distinguish mobile wallets from mobile payments.  For many consumers–and even industry commentators—mobile wallets and mobile payments are the same thing.  However, mobile wallets encompass a wider array of services, including mobile offers and loyalty programs.  For consumers already using mobile banking services, transitioning to mobile wallets may be more seamless than switching to standalone mobile payments.
  6. Promote banks’ perception as trusted providers of mobile wallets.  A 2011 Fiserv research study found that banks constituted the most trusted provider of mobile wallets, far ahead of credit card companies and mobile phone providers.  Banks should leverage this high trust level to position themselves against alternative providers.
  7. Leverage partnerships.  Payments networks like Visa are already leading the way in the development of digital wallets.  Over the past 12 months, Visa has entered in agreements with leading banks like TD Bank, Bank of America and U.S. Bank, to distribute its V.me by Visa digital wallet to their customers.  Entering into such partnerships early in the evolution of digital/mobile wallets enables these banks to get an early start in marketing such services.
  8. Develop mobile wallet offers.  Based on consumer research and competitive analysis, develop a series of offers to drive different mobile wallet behaviors, such as initial trial, continued usage, usage of new functionality, and referral.

Tentative Recovery in U.S. Credit Card Lending Continues in 1Q13

EMI’s analysis of recently-published U.S. bank data by the FDIC reveals that credit card outstandings rose 1.6% y/y to the end of 1Q13.  Outstandings have been recovering in recent quarters, following a protracted period of declines as a result of the 2008 financial crisis.  In addition, net credit card charge-offs continue to decline, falling 12% y/y in 1Q13.

Our analysis also finds that:

  • 1,238 U.S. banks (19% of the total) have card assets, with 6% of banks having more than $1 million in card assets.  55 banks have more than $100 million in outstandings, with just 23 banks holding more than $1 billion in credit card loans.
    • Of the 55% with more than $100 million in assets, 31(56%) reported increases in their credit card loan portfolios between end-1Q12 and end-1Q13
  • The three largest credit card issuers–Citibank, Chase and Bank of America–all continued to report credit card loan declines, as they continue to deleverage.  The cumulative decline for these three issuers was 5%.
  • The former “monolines”–American Express, Discover and Capital One–all increased outstandings.  Capital One reported a 44% increase, largely due to the acquisition of the HSBC card portfolio.  American Express grew credit card loans 6%, with Discover’s outstandings rising by 7%.
  • Many regional banks continued to increase credit card lending, albeit from significantly lower bases than their national bank counterparts.

These trends in credit card outstandings–slow overall growth, declines among the big three issuers, growth for monolines and regional banks–are consistent with industry predictions that EMI published in a blog earlier this year.