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
The leading U.S. banks reported a 10% y/y rise in average commercial and industrial (C&I) loans in 2Q15, based on an EMI analysis of the FFIEC call report data.
Interest income on C&I loans rose 5% y/y, indicating that downward pressure on commercial loan pricing persists. This is reflected in the following table, which shows consistent y/y declines in commercial loan yields. However, there are signs that yield are now stabilizing.
Most leading banks report that the commercial loan market is highly competitive. So, how are banks managing to grow their C&I loan portfolios at double-digit rates?
Banks are targeting specialty segments. Many leading banks reported that targeted vertical segments drove overall commercial loan growth in the second quarter. Comerica’s average technology and life sciences loans rose 20% y/y, compared to only 3% for total Comerica middle market loans. And while KeyBank grew its commercial, financial and agricultural loans by 12%, loans to the transportation sector grew by a hefty 42%. A bank’s selection of target segments depends on a number of factors, including segment size and growth, concentration of specific segments in their footprint; and the bank’s heritage in serving this segment. To more effectively build a presence in specific vertical markets, many banks are now creating dedicated teams that include industry experts. In addition, a number of banks are developing segment-specific content, which both establishes bank credibility and creates opportunities for prospect engagement.
There are signs of growth in commercial loan utilization. As the economy and business optimism improves, companies are more inclined to invest to grow their businesses. A number of banks are now reporting a slow-but-steady rise in commercial loan utilization. Regions reported a 97 basis point increase in line utilization during the quarter. Equally, Fifth Third’s commercial line utilization rose from 32% to 33% in the second quarter.
Banks are increasingly focused on optimizing commercial client lifetime value. As in consumer banking, banks are seeking to optimize relationships with commercial clients by taking a lifetime value approach and focusing not just on acquisition, but on all key stages of the relationship (including onboarding, retention and cross-sell). The effect of this approach for banks can be significant. Since the start of 2010, Huntington Bank has grown commercial relationships by 36%, but commercial relationship revenue by 72%. The percentage of Huntington’s commercial clients with 4+ services rose from 32.6% to 43.4% over the past three years. This long-term perspective may also help explain why yields on new commercial remain low. In discussing its quarterly financials, KeyBank claimed that “if we believe we have a client who wants a broad relationship and the credit metrics look good for us, we know that over time we can generate a profitable relationship, even if we are pressured a bit on the loan pricing.”
The quarterly reports of the leading U.S. banks revealed a number of important channel trends:
Mobile banking is continuing its strong growth. Three of the leading U.S. banks provided quarterly updates on active mobile banking users, and each reported double-digit y/y growth in 1Q15: Chase +22% to 20.0 million; Bank of America +13% to 16.9 million; and Wells Fargo +19% to 14.9 million. According to eMarketer, more than half of adult mobile phone users are expected to use mobile banking in 2015.
Consumers are transitioning to self-service channels for a growing range of transactions. PNC reported that 50% of its consumer customers used non-branch channels for a majority of their banking transactions in the first quarter of 2015, up 7 percentage points y/y. PNC also reported that the non-branch (ATM and mobile) channel share of deposit transactions doubled from 20% in 1Q13 to 40% in 1Q15.
Many banks are slowly shrinking their branch networks. Leading banks who reported significant branch reductions in the most recent quarter include: Citibank (down 61 during the quarter, as its pursued its strategy of consolidating its presence in 7 U.S. markets), PNC (-37 branches), Regions (-33) and Chase (-31 ). Although Bank of America has closed more than 800 branches over the past three years, the net branch decline fell to 20 in the first quarter of 2015.
Some banks are growing branch numbers…and in-branch sales staff. In spite of the general perception that the branch channel is in the process of terminal decline, some banks are in fact acquiring or opening branches in order to capture growth opportunities. Huntington Bank reported the addition of 43 new in-store branches in Michigan. And even though Bank of America reduced branch numbers by 260 over the past year, it grew sales specialists by 5%.
Banks remain committed to the branch network as consumers use multiple banking channels. While electronic self-service channels have a dominant share of everyday banking transactions, branches still play a key role in areas like new account generation, customer relationship management (including cross-sell), and branding. Wells Fargo claims that its most loyal customers are not those who have the most products, but rather those who use the most channels most often. It reported that mobile banking sessions rose 38% in 2014, while branch visits remained steady.