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.

Banks Cut Marketing Spend in 2020, But Expect to Ramp Up Investment in 2021

A detailed analysis of FFIEC call reports revealed that leading banks significantly reduced their advertising and marketing expenditure in 2020. However, as the economy rebounds strongly from the economic downturn caused by the coronavirus pandemic and increased competition from new entrants, banks seem poised to ramp up their marketing spending in the second half of 2021 and beyond.

Change in Marketing Spending Between 2019 and 2020

EMI Strategic Marketing studied data from 28 leading banks and found a 17% decline in advertising and marketing budgets, to $451 billion. This decline follows increases of 7% in 2019 and 15% in 2018.

Although most banks cut their marketing budgets, some banks bucked this trend, actually increasing their 2020 marketing spending:

  • Most notable in this regard was American Express, which at nearly $3.5 billion already has the largest advertising and marketing budget among leading U.S. financial firms. It spent $1 billion in 4Q20 alone as it ramped up investments in new card acquisition. Furthermore, it plans to continue this investment and recently reported that it could spend up to $4.5 billion in marketing in 2021.
  • Direct bank Ally Bank launched a new online advertising campaign in September 2020, which contributed to an 8% y/y increase in its marketing spend, to $161 million.
  • Challenger bank Radius Bank increased its advertising and marketing budget by 45% to $1.9 million in 2020, although its marketing ratio fell from 2.6% to 1.7% as its revenues jumped by 127%. (Radius Bank was recently acquired by LendingClub.)

It is also worth noting that some banks cut marketing budgets in 2020 following a ramp up in spending the previous year. A good example is BBVA, which grew its marketing budget from $83 million in 2017 to $111 million in both 2018 and 2019 as it changed its brand name from BBVA Compass to BBVA. It then cut the budget back to $76 million in 2020.

With Wells Fargo cutting its budget by 45% to $600 million, it reduced the number of banks with billion-dollar marketing budgets to five (American Express, JPMorgan Chase, Capital One, Bank of America and Citi).

Trends in Bank Marketing Ratios

The average 2020 marketing ratio was 2.8%, down more than 40 basis points from 2019, and back at levels seen in 2017.

Only 3 of the 28 banks – American Express, Ally and Bank of the West – increased their marketing ratios in the past year.

American Express and Discover – which have national card franchises that account for a significant percentage of assets and do not have to support branch networks – have the highest marketing ratios. Capital One’s marketing ratio is a mix of its card unit (6.8%) and retail bank unit (3.1%). Regional banks tend to have marketing ratio of 1% to 3%.

It is interesting that digital banks like Ally Bank, Axos Bank, Radius Bank and CIBC U.S. – which like American Express and Discover do not have to support branch networks – have marketing ratios that are in line with their regional bank competitors. This can be attributed to a number of factors, including devoting significant time and resources into improving the digital experience rather than brand advertising.

Bank Marketing Spend Trends for 2021

Looking forward to 2021, we expect that bank marketing spend will recover as the economy gradually reopens following COVID-19 (The Congressional Budget Office expects real GDP to return to pre-pandemic levels by mid-2021). Many banks have signaled their intent to increase their marketing spending in 2021. JPMorgan Chase stated that it expects marketing spend to return to pre-COVID levels in 2021. And while Citi’s marketing spend fell by 20% in 2020, it actually grew spending 2% y/y in 4Q20.

Bank marketing budgets will be impacted by growing merger and acquisition activity in the industry. Mergers that are expected to be completed in 2021 include First Citizens and CIT, Huntington and TCF Financial, PNC and BBVA USA, and M&T Bank and People’s United. Merging banks typically highlight long-term cost savings, but there will be a critical short- to medium-term need for marketing investment as they create new branding, launch new advertising campaigns, update branch signage, and revamp digital and social media channels).

While overall bank marketing spend is likely to recover in 2021, the composition of marketing budgets should change, in particular due to banks investing more in digital and social media marketing channels to match customer preferences and behavior. In addition, banks will be developing new messaging to address post-pandemic financial challenges and to communicate an effective and consistent experience across all their service channels.