Category Archives: Retail Banking

The Chicken or the Egg? Interpreting Social Media Data and Business Results

Two recent studies purport to prove that social media has a strong, positive impact on business results.

  • A recent study by Bain & Company uses the Net Promoter Score satisfaction/loyalty research methodology to assert that those customers who engage with companies through social media channels are more loyal (have a higher NPS) and spend more with that company as compared to those customers who don’t engage with the company through social media.
  • A second study by Constant Contact and Chadwick Martin Bailey cites data from a survey of Twitter users to argue that Twitter users who follow a company/brand on Twitter are more likely to purchase products from that company.

There is, as I see it, one big problem with this “proof” of the impact of social media channel usage: Did the chicken come first or the egg? Isn’t the most likely scenario the fact that social media engagement AND buying more/loyalty/recommendations are simply both symptomatic of a pre-existing strong connection between the user/customer and the brand? In other words, there’s no proof that social media engagement caused the increase in purchases/loyalty, only that the engagement and the increase coexist in the same population.

The good news, however, is that my note of caution regarding the interpretation of the data touted by these studies doesn’t make that data useless. In fact, a better way to interpret the data would be to conclude that those who engage with a company on social media are self-identifying themselves as that company’s high value customers. With this in mind, the social media channel can then be leveraged to ensure that these customers are rewarded for their engagement: offered special deals, encouraged to spread the word, given opportunities to provide input to product development, etc. Whereas the previous interpretation of the data suggests that it would be a good marketing strategy to try to attract more users to engage via social media, this revised interpretation would lead a company instead to invest in harvesting already engaged users to drive additional revenue.

The moral: Companies must exercise caution when using survey data to drive strategy—not because primary research shouldn’t drive strategy (it should), but because misinterpretation can have significant, often negative, consequences.

Financial institution financials reveal differences in marketing spend intensity

A review of reported marketing/advertising expenditure by leading financial institutions revealed the following trends:

  • 2011 spend levels: Five FIs (JPMorgan Chase, American Express, Citigroup, Bank of America and Capital One) each spent more than $1 billion on marketing in 2011.
  • 2010-2011 trend: Of the 12 FIs included in the review, six increased marketing spend by double-digit percentages in 2011, led by Citigroup (+43%) and Capital One(+40%). Four FIs reduced marketing spend in 2011.
  • 2007-2011 trend: Taking a longer-term view, we see that although Citigroup and Capital One had very strong growth in 2011, spending was actually down relative to 2011, indicating that these banks’ recent strong growth is more of a return to historic norms. JPMorgan Chase, Wells Fargo and PNC all had strong growth between 2007 and 2011, but each of these FIs had made a big bank acquisition during this period.
  • Marketing as a percentage of revenues: To eliminate the effect of merger and acquisition activity, and get a gauge on marketing investment intensity, we also looked at marketing as a percentage of net revenuefor 2007 and 2011.
    • American Express has the highest level of marketing spend intensity, with its 2011 marketing expenditure representing 10% of net revenues in 2011, up 70 basis points from 2007
    • Other leading FIs for marketing investment intensity are Discover (no branch network, national credit card operation) and Capital One (regional branch network, national credit card operation)
    • Among the regional national banks, JPMorgan Chase has the highest level of marketing intensity (3.2%), ahead of Citigroup (3.0%). Chase, which has both an extensive branch network and a national credit card operation, actually increased marketing intensity by 33 bps from 2007 to 2011. Citigroup has a limited U.S. branch presence, but again has a national credit card franchise.
    • Bank of America’s market spend intensity fell from 3.5% in 2007 to 2.4% in 2011
    • Wells Fargo maintains significantly lower marketing spend levels than its national bank competitors, with a marketing spend intensity of 0.7% in 2011.  However, it was recent named as the leading U.S. bank in The Brand Finance Branding 500 rankings, indicating that topline marketing spend does not necessarily correlate to brand strength.  However, it should also be recognized that, unlike some of the other leading banks, Wells Fargo’s operations are mainly concentrated within its retail banking footprint.

 

In terms of setting optimal levels of marketing investment in 2012, financial institutions face competing forces. On the one hand, many FIs have established cost containment programs with defined targets, and this will put downward pressure on marketing spend. On the other hand, the above table shows that many FIs have reduced their marketing intensity levels in recent years. With signs of economic recovery now emerging, these FIs may need to increase their marketing investment to compete effectively in a growing market.

Larger banks gaining in small business lending

EMI recently carried out an analysis of current FDIC data on the C&I loan portfolios of U.S. banks.  This analysis revealed the following trends:

  • Large banks (with more than $10 billion in assets) had the strongest growth in their total C&I loan portfolios between 3Q10 and 3Q11.  This is consistent with recent financials from the largest banks, most of whom have reported strong growth in commercial lending in recent quarters

  • Looking at small business loan portfolios (defined as C&I loans of less than $1 million), at first glance the trend is more consistent: larger banks still outperform their smaller counterparts, but the gap is much narrower than for C&I loans.

  • However, when we drill further into small business loan portfolios, we see that the largest banks grew their portfolio of very small business loans (original amounts of less than $100,000) by 5%, while the other three bank segments experienced loan portfolio declines in this category (note that this loan category has a high concentration of small business credit card loans).

There are now some indications that small business lending will grow in 2012.  Will larger banks continue to outperform smaller banks in overall loan portfolio growth? And will loan growth continue to be concentrated on the smallest category of loans, or will it be extended to loans of $100,000 to $1 million?