Author Archives: mronan

5 Business Banking Trends in 3Q21

Established and challenger banks responded to key changes in the small business landscape (ongoing economic recovery and the ending of PPP loans) in the third quarter of 2021 with new business banking solutions and thought leadership.

  1. Banks published surveys that gauged small business owner optimism and addressed current hot topics, such as inflation (PNC), supply chain disruptions (Umpqua Bank), access to funding (Goldman Sachs) and relationship with their financial service provider (Kabbage).
  2. FinTechs took on the established banks with new solutions. This effort was led by Square, which launched both Square Banking and Cash App Pay during the quarter. Other products from challengers during the quarter included the QuickBooks Card Reader, Credit Karma Money for small business employees and Brex Venture Debt.
  3. Leading small business credit card issuers launched new cards with high earn rates to capture a greater share of the increased card spend following the pandemic. Noteworthy examples include Capital One Spark Cash Plus (2% cash back on all purchases) and U.S. Bank Triple Cash Rewards Visa Business (3% cash back on four core categories). In addition, American Express launched a business-to-business marketing campaign (“Built for Business”) promoting its business cards.
  4. Financial firms continued to generate small business content, with new podcast services added to the suite of content options during the quarter (e.g., Regions Next Step for Business and Comerica’s Small Business Summer Series on LinkedIn).
  5. Banks rolled out initiatives for historically-underserved business segments, including black-owned business (Ally’s $30 million commitment to help grow black-owned businesses) and women-owned businesses (BMO Harris’s Women in Business Credit Program).

Key Takeaways from Credit Card Issuers’ 3Q21 Financials

We have come to the end of the financial reporting season for the main U.S. banks, and the following trends are showing up in four key credit card metrics:

  • Outstandings
  • Volume
  • Charge-off rates
  • New account production

Leading issuers report y/y growth in outstandings. In recent quarters, issuers have reported strong y/y declines in outstandings, due to low economy activity and high repayment rates. In the most recent quarter, however, many issuers are now reporting y/y loan growth, led by American Express (+6%) and Capital One (+4%). This growth should continue in the coming quarters as payment rates moderate (in part due to the ending of federal COVID support payments).

Strong growth in credit card volume continues. All of the leading issuers who include volume data in their quarterly financials reported y/y growth rates of at least 20%, driven by the increase in economic activity, recent account growth and the ongoing transition to electronic payments. Many issuers are reporting that spending levels are well above 2019 levels. In addition, issuers are now reporting strong growth in categories where spending plummeted in 2020 during the COVID-19 pandemic, particularly travel & entertainment (T&E). American Express reported a 124% y/y rise in T&E spending in 3Q21, although this was still 29% below the 3Q19 level. Discover reported that 3Q21 travel spending was 1% higher than the same period in 2019. American Express has also reported that spending growth is being driven by younger consumers: its Gen Z and Millennial customers generated y/y spending growth of 38% between 3Q19 and 3Q21, vs. a 6% decline for Baby Boomers.

Charge-off rates have fallen to historic lows but may be bottoming out. Net charge-off rates for most leading issuers are now less than 2%, due to high payment rates and bank supports for consumers in arrears during the pandemic. Some issuers – such as Capital One – reported modest quarterly increases in delinquency rates in recent months, an indication that the decline in charge-off rates should bottom out in the coming quarter.

Issuers have started to ramp up new credit card acquisition activity.Wells Fargo and Bank of America more than doubled new accounts between 3Q20 and 3Q21, as production returned to pre-pandemic levels. Moreover, issuers appear to be committed to investing marketing dollars to drive further acquisition and usage. Capital One has ramped up its marketing spend by 79% y/y in the first 9 months of 2021 and expects to continue this investment in the fourth quarter.

Traditional Banks Prepare for the New Digital Reality by Expanding Digital Functionality

Banking customers’ growing preference for digital (online and mobile) channels – as well as the huge number of digital challengers looking to gain a share of the market (read our December 2020 blog on segmentation among new entrants) – has led established retail banks to ramp up their investment in digital channels.

Growing digital banking users continues to be a prerequisite in establishing strong customer engagement. The onset of the COVID-19 pandemic in early 2020 was the catalyst for many reluctant consumers to use digital (online and mobile) banking channels for the first time. Many of these have continued to use digital channels even through branch banking has returned.

The top three retail banks – Chase, Bank of America and Wells Fargo – all report steady growth in active digital users. Bank of America claimed that 70% of its Consumer Banking households now use its digital channels.

Many U.S. banks also publish metrics illustrating that customers are using digital channels to carry out an range of banking activities, such as:

  • Conducting banking transactions:
    • The digital channel accounted for 68% of Region Bank’s total customer transactions
    • Interactions using Bank of America’s Erica virtual financial assistant rose 153% y/y to 94.2 million
    • 18% of UMB Bank’s consumer deposits were made using its mobile app
  • Making person-to-person (P2P) transfers:
    • Regions reported a 75% y/y rise in Zelle transactions
  • Acquiring new products and services:
    • Truist reported that 44% of new checking accounts were opened digitally
    • The digital channel accounted for 65% of U.S. Bank’s total loan sales
    • Citizens Bank’s digital sales volume rose 61% y/y
    • Huntington Bank reported that the digital channel accounted for 12% of new business deposit account production (a significant change from 0% in 3Q20)
  • Scheduling appointments:
    • Bank of America booked 871,000 digital appointments, up 31% y/y, and reported that these appointments accounted for 31% of its total financial center traffic

Obviously, banks will want to continue to enhance their digital functionality to meet consumer needs and differentiate themselves from competitors. Here are a few tips for doing so effectively:

  • Identify the bank departments, product lines or customer segments where digital channels have significant scope for growth
  • Carry out regular assessments of customer behaviors, needs and perceptions to inform digital investments
  • Conduct ongoing competitive intelligence to understand what digital functionality is now common among many banks, distill best practices, and identify competitive gaps
  • Prepare ways to counter internal barriers (e.g., organizational inertia, legacy processes) to speedy development and rollout of new digital solutions
  • Ensure that new functionality enhances the customers’ digital experience
  • Develop closer integration between digital and human service and sales channels
  • Develop plans to leverage marketing and customer communications channels to promote new digital functionality