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5 Key Digital Banking Trends in 3Q21

As consumers turn to digital banking channels for everyday banking – and for an increasing range of more complex banking interactions – the battle between digital challengers looking to enter and grab a share of the market and traditional banks seeking to optimize customer retention and engagement has intensified. With this in mind, the following are five key trends that emerged in the digital banking space during the 3rd quarter:

  1. Existing digital challengers are expanding their product portfolios and raising funding for further growth.
    • Established digital banks are continuing to report strong customer growth. They are looking to enhance existing customer relationships by introducing new products.
    • New product launches during the quarter included Acorns Early Smart Deposit; the Albert Cash checking account; a checking account and mobile app from Atmos Financial; the Douugh Wealth robo-advisor; as well as an instant payments feature from gohenry.
    • Digital banks who raised funding in 3Q21 included Revolut and Varo (raised $510 million, valuing the company at $2.5 billion).
  2. New digital challengers are emerging. With relatively low barriers to entry, new digital banks continue to emerge, with many targeting specific market niches, such as the recent launch of Nerve, a challenger bank for musicians.
  3. Traditional banks are investing to build strong digital engagement. Banks have responded to the challenge posed by digital challengers by directing increased resources to develop features and tools that enhance the digital experience. To show progress on this, many banks are now publishing metrics not only on (digital/mobile) usage, but also on growing digital engagement:
    • Bank of America reported Zelle P2P payment users rose 24% y/y to 15.1 million in 3Q21 and Zelle payment volume jumped by 54% to $60 billion.
    • U.S. Bank reported that digital transactions accounted for 80% of total transactions in 3Q21, up from 67% in 3Q19.
    • Huntington Bank reported that digitally-assisted mortgage applications accounted for 96% of total mortgage applications in 3Q21, up from just 9% in 3Q20.
  4. Traditional banks are developing their own digital banks. While many traditional banks are competing with digital challengers by enhancing their digital banking functionality, some are going further by
    • Launching standalone digital banks: Cambridge Bank launched Ivy Bank, a digital-only division.
    • Adding products to the digital bank’s offering: Citizens Access, Citizens’ national digital bank, is planning to introduce mortgage lending and student refinance by the end of 2021, as well as checking, home equity, credit card and wealth in 2022.
  5. Traditional banks remain committed to the digital-human channel model. Many banks have realized that the broad transition to digital channels for everyday banking transactions means that they can continue to serve a market with a less dense branch presence, so are cutting branches in existing markets. However, their continued reliance on branches is seen is the fact that many are opening branches in de novo markets (JPMorgan Chase is halfway through a plan to open 400 new branches by the end of 2022). Banks are also redesigning branches in existing markets to reposition them to take on new roles (e.g., advisory centers, brand beacons, community hubs, locations to showcase new innovations).

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

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.