RISING COMPETITION FOR CORE DEPOSITS

VOL. 7 NO. 2 | 2016

RISING COMPETITION FOR CORE DEPOSITSGrowing requirements for core deposit funding are forcing a shakeupin balance sheet management. Can core intermediation be revived?

Branch Billboard Value:Network Consolidation Key

In Search of Distinctiveness:Brand Drivers of Checking Growth

Role Chaos in Branch Staffing:Looking Beyond Universal Bankers

Managing Capacity Constraints viaPrecision Mortgage Pricing

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CONTENTS

10

4

14

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Branch Visibility and Checking Acquisition: The Role of Billboard Value

Small Business Sales Challenge: Re-engaging Customers as the Branch Foundation Erodes

Branch Role Chaos: Call to Action on Staffing

Breaking Out of the Sea of Sameness: The Role of Distinctive Brand Attributes

Facing conflicting pressures to reduce network expenses while maintaining reassuring local presence, banks will need to emphasize branch visibility, or “billboard value.”

In the emerging customer engagement model, the emphasis is on streamlined and effective multi-channel interaction, guided by market and customer analytics.

Retail banks must start preparing now for local branch sales in a digitally-eroded environment, which will require new standards for staffing analytics and planning.

Novantas research shows that distinctive brand attributes are a significant driver of checking purchase rates, now that immediate branch proximity is falling in importance.

Chris Musto, Brandon Larson and Alex Lee

Robert Griff in Darryl Demos and Dale Johnson

Paul Kadin

Lee Kyriacou, Gordon Goetzmann and Andrew Frisbie

VOL. 7 NO. 2 | 2016

Banks that can successfully defend or capture lower cost funding will better weather current industry pressures – outperforming and even thriving in a tough environment.

Core Deposits: Key Battleground for Profitable Intermediation

Millennials Challenge for Regional Banks: Profitable Acquisition and Cross-Sell

Mortgage Headwinds: Improving Returns in the Face of Multiple Capacity Constraints

Crisis in Promotional Deposit Pricing

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3July 2016

LETTER FROM THE EDITOR

As the U.S. banking industry continues to wrestle with below-hurdle profitability, lackluster revenue growth and digital disruption, executive management is confronting fundamental questions about growth strategy and balance sheet management. With so many strong head-winds, what are the anchor principles that will guide decision-making across the bank?

One clear answer is nurturing core deposit funding and relationships. As detailed in our cover story, “Core Deposits: Key Battleground for Profitable Intermediation,” core deposits have emerged as an industry lifeline. In corporate planning and balance sheet management going forward, incremental returns from loan expansion must be balanced against the incre-mental cost and availability of core funding, with deposit growth serving as governor for loan growth. A much deeper understanding of customer deposit behavior is essential to secure and defend lower-cost stable funding.

Elsewhere in this issue we examine two growing influences on checking account acquisition: branch network visibility, or “billboard value,” and distinctive brand attributes. Billboard value is essential in demonstrating local physical presence (still required for sales success) while facilitating network consolidation. And while true corporate-level distinctiveness is still a rarity in banking, our research shows that clusters of distinctive attributes have a significant bearing on local checking acquisition.

We also take a two-part look at the evolution of sales, both for small business banking overall and with branch staffing. As discussed in “Small Business Sales Challenge: Re-engaging Customers as the Branch Foundation Erodes,” banks must transition to a new framework for small business sales based on streamlined and effective multi-channel interaction, guided by market and customer analytics.

In “Branch Role Chaos: Call to Action on Staffing,” we discuss how banks can respond in a not-so-distant future scenario where branch sales are cut in half by online account origination. Most banks will be fighting for segment, geographic or product niches, often using multiple strategies within a network. The use of specialists will become critical in tapping high-value opportunities for customer acquisition and cross-sell.

Rounding out the issue are articles on the role of precision mortgage pricing in managing capacity constraints; acquiring profitable relationships with Millennials; and a recap of chal-lenges with promotional deposit pricing.

Lee Kyriacou Editor-in-Chief

EDITORIALEditor-in-Chief

Lee Kyriacou

Managing Editor

Steve Klinkerman

DESIGNDesign and Production

Brigid Barrett

CONTRIBUTORSDarryl Demos

Andrew Frisbie

Gordon Goetzmann

Karen Graham

Robert Griffin

Hank Israel

Dale Johnson

Paul Kadin

Lee Kyriacou

Brandon Larson

Alex Lee

Chris Musto

Zach Wise

MARKETINGMarketing Communications

Manager

Katharine Davis

212-419-2562

[email protected]

PR & Events Coordinator

Amelisa Dzulovic

NOVANTAS, INC.Co-CEOs and Managing

Directors

Dave Kaytes

Rick Spitler

Corporate Headquarters

485 Lexington Avenue

New York, NY 10017

Phone: 212-953-4444

Fax: 212-972-4602

[email protected]

SUBSCRIPTIONS [email protected]

212-953-2712

Anchor Principle — Nurture Core Funding

LKyriacou

4

Stable core deposits have always mattered to banks. Providing durable, low cost funding and a gateway to loyal customers, core deposits are prominent in the mix of performance levers that includes loans, fees, margins and efficiency.

Coupled with new liquidity regulation, the stagnant envi-ronment for revenues and profits has further boosted the importance of sticky deposits — so much so that for tra-ditional bank intermediation, this precious commodity has become the single greatest determinant of profitable growth. The deposit business — if it can successfully hold or acquire the right deposits — is a lifeline at a time when institutions are suffering margin compression, losing fee income and

liquidity options to regulation, and traversing a distribution minefield as digital migration accelerates.

In turn, core funding has become a battleground. Forced by regulators to implement LCR requirements early on, the four largest U.S. banking companies have dramatically regrouped around core deposits following the financial crisis. Looking at their loan to core deposit ratio (loans strictly compared with transaction, MMDA and savings bal-ances), the big four went from 119% in 2011 to just 97% in 2015, both by growing core deposits and trimming unde-sirable lending. With their vast branch networks and mar-keting clout, the nationals are excelling in retail customer

BY LEE KYRIACOU, GORDON GOETZMANN AND ANDREW FRISBIE

Banks that can successfully defend or capture lower cost funding will better weather current industry pressures – outperforming and even thriving in a tough environment.


COVER STORY

acquisition and consolidation of commercial core balances, and will continue to claw for core funding.

Meanwhile regional banks are worried about funding for further loan growth. While they have grown core depos-its slightly faster than loans in recent years, regional bank holding companies are also beginning to turn to brokered deposits, which collectively rose by 22% in 2014 and 31% in 2015. Without a course correction, they are going to run afoul of regulatory liquidity guidelines and veer into hollow loan growth, with incremental revenues increasingly chewed up by rising funding costs.

The situation is forcing a shakeup in bank balance sheet management. Traditionally, banks could set stretch goals for loan growth and leave the deposit and treasury teams to fig-ure out how to raise the necessary deposits or other funding. In corporate planning and bank balance sheet management going forward, incremental returns from loan expansion must be balanced against the incremental cost and availability of core funding, with the latter often governing the former. Getting there will require:

Improved forecast-ing. Today’s deposit projections are based on a loose blend of: 1) pressure from the lend-ing side; 2) projections based on historical trends; and 3) modeling of deposit promotional yields and deposit stick-iness by product cate-gory. The extra edge will come from a compre-hensive understanding of potential formation of long-lived balances, based on customer behaviors, profiles and segment potential.

New metrics. Which customers have depos-its that are truly sticky, and which do not? Segment-based metrics on deposit retention and potential have direct implications for how

longer-lived deposits are valued across the bank.Business line management. Deposit-gathering businesses

— consumer, small business and commercial — must rethink strategies and tactics to emphasize stable core deposit fund-ing. Analytic banks will develop customer-specific offers that preserve/augment high-balance accounts, and refine deposit acquisition as well.

DIFFICULT OPTIONSIndustry profitability has yet to return to pre-crisis norms — and will not any time soon (Sidebar: Industry Headwinds — A Bigger Problem than Rates).

Before the economic collapse at the end of 2007, the collective return on assets of FDIC-insured depository institu-tions ranged from 120 to 140 basis points. Since then ROAs have hovered around 100 bp, breaking 110 bp only once in 2012. Similarly, pre-crisis returns on equity were in the 12% to 15% range, but have not exceeded 10% post-crisis.


Figure 1: Core Deposit Leverage vs. Deposit Interest Expense

Among the top 100 bank holding companies, higher lending beyond the core deposit base consistently led to a higher cost of total deposits in 2015.

Dep

osit

Inte

rest

Exp

ense

(ba

sis

poin

ts)

50% 100% 150% 200% 250%

80bp

60bp

40bp

20bp

Source: Novantas

Ratio of Loans to Core Deposits

R-Square = 74%

5July 2016

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Assets have grown by 23% to $16 trillion in the past eight years, but revenues have dragged over most of that time.

Ominously, the lack of profitability reflects the ailing state of core intermediation — the fundamental middleman role of banks to gather deposits and turn them into loans. Among FDIC institutions, our models indicate an ROE of only 7% to 8% for the lending side in 2015, and 5% to 7% for the deposit-gathering side (deposits suffering rela-tively more from prolonged lower rates). Comparing these low returns with equity hurdle rates, the industry does not appear to covering its cost of capital.

In considering ways to revive core intermediation, most banks face a set of difficult options — which will continue until industry overcapacity rights itself through a substantial reduction in the number of banks.

Lend beyond core funding. For a period of years prior to the recession, the collective industry ratio of loans to core deposits soared at stratospheric levels, 150% to 180% for FDIC banks. Loan rates were high, as was economic confi-dence, regulation was far less onerous, and core deposits were viewed as one of many funding sources. Paying more for deposits and funding made sense and yielded better returns — pre-crash.

It is unlikely that banks will outrace core funding like that again. Regulation is one reason. The four national

banks already have gone through a wrenching transition, and large regional banks are next in line for enforcement of tougher liquidity standards prescribed under Basel III. And the crisis-scarred regulatory community will be moni-toring liquidity profiles and practices among all categories of banks.

Second, higher loan-to-core-deposit ratios had a pow-erful influence on an institution’s cost of deposits in 2015 (Figure 1: Core Deposit Leverage vs. Deposit Interest Expense). The depressed state of risk-adjusted loan yields makes it difficult to pass along the extra costs of non-core funding to borrowers. On the horizon, the use of non-core funding is setting up aggressive banks for higher deposit betas when market interest rates rise in earnest.

Price up for loan margin. Lending is heavily competed — rate is primary focus of most loan shopping and purchas-ing — and lending spreads remain under intense pressure. And rarely can a bank make a practice of charging higher rates to an insulated lending base; borrowers know they have options and will eventually pursue them.

Sacrifice credit quality for volume. There is continuing evidence in Federal Reserve surveys on loosening credit conditions. Yet going down the credit spectrum is often a fool’s errand. It requires an ability to time the economy and unload speculative credit (assuming that is even possible)


Banks are confronting a number of long-term structural fac-tors, and only a portion of the profitability problem arises from persistently low interest rates.

Overcapacity. Only in the United States, due to interstate banking limitations, did an industry structure arise of more than 20,000 banking entities. The undoing of that multi-generational industry structure (following regulatory reform in the ’80s) is only half over. And during the remaining transition, the industry will continue to suffer as too many banks chase the same customers.

Spread compression. Net interest margins have seen a long-term structural decline across economic cycles. Partly this reflects excess capacity, and partly it is traceable to the long-term decline in inflation. More importantly, spreads are subject to competitive pressures as well. Web shopping has raised customer rate aware-ness, and direct banks are pushing down spreads through low-cost online bidding for both deposits and loans.

Low entry barriers in lending. Commercial banks face lending competition from two different directions. The capital markets offer lower cost funds for larger corporate borrowers, where invest-ment banks crowd out all but the largest commercial banks and

some regionals focused on smaller corporates. At the lower end, specialty lenders and non-banks have long lent in credit cards and unsecured lending, and digital upstarts are working their way into both consumer and small business lending.

Regulation. As a share of total industry revenue, fee revenue has fallen from a high of almost 44% pre-crisis to averaging around 36%-38% today. Per dollar of assets, non-interest revenue has fallen more than 20%. These revenue sources are not coming back. Liquidity and capital rules have respectively pushed up holdings of lower-yielding securities and equity, the former reducing spreads and the latter reducing ROE. And of course compliance expenses have risen substantially.

Rising rates — which will eventually come, but not back to prior levels for some time — will improve profitability. But other headwinds will continue. As a result, we estimate that industry ROEs will rise by one to two percentage points on average, with larger banks that are generally more asset sensitive benefiting more than smaller ones.

— Lee Kyriacou

Industry Headwinds: A Bigger Problem than Rates

ahead of a downturn. How well did oil patch banks antic-ipate the collapse in gas prices? Presumably some invest-ment banks are now playing the timing game in funding unsecured lending start-ups, but these are measured invest-ments from nimbler players.

Tighten the belt. Among the most profitable intermedi-ators are those with low efficiency ratios — below 60% or even below 55% — who have figured out how to gather deposits and lend at relatively lower cost. Scale favors the largest banks here. Keeping that advantage will require them to stay ahead of the curve in cost reduction, includ-ing branch reduction and loan origination restructuring. For those not there yet, there is a painful restructuring just to catch up.

IMPROVING DEPOSIT COMPOSITIONThis brings us to funding. For many banks, the one best way to improve intermediation economics is to improve the composition of the deposit base — strengthen the core.

Given rate pressure on the lending side, banks with

lower cost funding sources can lend at market rates and still capture superior spreads, without being tempted to degrade credit for loan yield. As a result, in regression analysis on the profitability of traditional bank intermedi-ation, we find that funding costs have a larger impact on profitability than loan yields or non-interest revenue.

Notwithstanding the major changes in brick and mor-tar distribution and the rise of direct banks, core deposits remain the stickiest part of intermediation. This is especially true for deposits held for cash management purposes, where the customer’s focus is on payments as opposed to managing yields. Once opened and in active use, demand deposit accounts remain quite cumbersome to pick up and move — unlike loans, which when due are typically and easily shopped.

Only a depository institution can hold deposits and offer DDAs (though non-bank payment providers are trying to wedge themselves between the DDA and the customer). And critically, the payments account is still thought by cus-tomers to be the center of banking relationships.


METADATA CATALOG

Set target loan growth; find deposits to match

Match loan growth to core deposit growth

General measures of deposit stickiness by type and vintage

Advanced measures of balance retention by customer segment

Invest in asset origination businesses

Invest in stable core fundingrelationships

Maximize above-hurdle loan growth

Grow loans only up to core deposit growth rate

Meet deposit growth targets regardless of interest cost

Expand core relationships and deposits; progress informs lending goals

Raise incremental deposits withpromotional campaigns

Wean the bank off of promotions;grow core relationships and balances

Deposits valued equally within each product category

Differentiate value by core relationship and stickiness

Source: Novantas

Figure 2: Reorienting the Bank to Defensible Core Funding To leverage the central role of core funding in profitable growth, many facets of bank management must change, starting at the top and working down to the business lines.

FACTOR TODAY TOMORROW

Balance Sheet Management

Metrics

Resource Allocation

Lending Businesses

Deposit Businesses

Deposit Promotions

M&A

7July 2016

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To be sure, deposits are also competed, and this will intensify as local market boundaries are steadily erased by online DDA shopping and direct bank competitors. And the regulator-specified liquidity coverage ratio has placed much greater emphasis on core funding, explicitly valuing stable operating deposits over more fleeting excess deposits.

LCR is already intensifying competitive dynamics for core deposits ahead of market interest rate rises. This re-doubles the emphasis that banks must place on securing stable core funding. All the more reason for proactive banks to move now to identify and retain more stable depositors who are less likely to shop their DDAs, and to win more customers like them.

TOP-TO-BOTTOM RETHINKA true focus on growing core deposits will require a top-to-bottom rethink of the bank (Figure 2: Reorienting the Bank to Defensible Core Funding). In traditional budget plan-ning, lending units are encouraged to put up stretch goals for loan growth, and deposit gathering units are more or less directed to find the funding — core or otherwise. With fast-paced loan growth, inevitably there is a heavier pursuit of price-sensitive, transitory deposit balances.

This orientation carries two major drawbacks. First, in the next rising rate environment, it will lead to substantially higher funding costs, especially if banks continue to rely on tradi-tional broad-based promotions. Second, it can only go so far before bumping up against new regulatory boundaries.

Instead, bank growth planning must be concurrent across the deposit-gathering and lending domains. In set-ting expectations for loan growth, management needs to explicitly consider the underlying growth rate for stable core deposits. Venturing beyond the core for higher-cost funding has consequences, especially as price promotions become harder to isolate from the attention of current accountholders.

Change of this nature needs to start at the top of the bank and work its way down to the business lines, and not the reverse. It starts with the long-term strategic planning process and extends all the way to day-to-day asset-liability meetings.

Getting the metrics right is key — beginning with understanding which customers have deposits that are truly sticky and which do not. Currently, most banks

measure deposit duration by product type and vintage. But they are not taking full advantage of information on hand. Most have sufficient account-level balance and transaction information to identify deposit stickiness by customer segment as well.

A sharpened understanding of likely balance retention provides specific direction on which customers to target for what purpose. Adding wallet modeling of consumer and commercial segments will help paint a picture of customer potential (large vs. small banking wallets within segments), customer penetration and deposit stickiness.

Segment-based metrics of balance retention and expan-sion potential have direct implications for the valuation of longer-lived deposits across the bank. Traditional funds transfer pricing methodology looks at duration for indeter-minate deposits by type and vintage. However, knowing which MMDA customers in a vintage will have larger sta-ble balances should shift FTP crediting in favor of the lon-ger-lived deposit balances and away from the identical but shorter-lived balances.

This level of specificity across the deposit base is as fundamental as lenders knowing which borrowers have higher FICO scores or lower prepayment propensity. Yet the industry standard is to treat all depositors of the same account type the same.

Providing different crediting rates to longer-lasting deposits by customer segment will allow banks to offer bet-ter yields to preserve and expand target relationships. In some cases it can even justify offering preferred rates for targeted acquisition of new customers who can bring large stable deposit balances.

Informed with better metrics, bank-wide balance sheet management can then be reset to focus on measuring and managing core funding growth. There will be a growing emphasis on managing balance sheet economic profit, as opposed to the raw pursuit of net income maximization.

Deposit promotions that bring in hot money with low expected duration should see lower FTP credits, while true relationship-driven deposit growth should be rewarded. Lending growth in excess of core deposit funding growth should be discouraged, once it is apparent that the mar-ginal contribution, given high funding cost, may well not cover the cost of capital.


“In setting expectations for loan growth, management needs to explicitly consider the underly-ing growth rate for stable core deposits. Venturing beyond the core for higher-cost funding has consequences, especially as price promotions become harder to isolate from the attention of current accountholders.”

MANAGEMENT IMPLICATIONSDeposit gathering businesses — consumer, small business and commercial — must rethink strategies and tactics in light of the increased importance of stable core deposit funding. This begins with segmentation analyses that inform differing segment treatments.

Weaning the bank off of high-cost promotional deposit campaigns is critical. In their place, analytic banks will develop customer-specific offers that preserve or augment high balance accounts, as well as new customer acquisi-tion offers, appropriately targeted and priced based on balances brought.

Products and pricing need to rethought and re-bun-dled. The focus is on bringing in most or all of a customer’s deposits to the bank, and at a rate that reflects the stability and value of those deposits. Beyond that, products need to change to meet the full cash management needs of consumers — payments, deposit balances and short-term lending.

On the commercial side, it is about advancing bun-dled and relationship pric-ing for treasury management customers. On the consumer side, fundamental product redesign is called for. This will not only help to capture a more complete share of customer deposit balances, but payment-related lending as well — supporting even richer pricing for consumers yet overall profitability for the bank.

Resource allocation can also take its cue from core fund-ing needs. The jockeying we are seeing as larger banks shed non-core commercial deposits and many banks pitch for small business and high net worth consumer deposits will only intensify.

The same applies to mergers and acquisitions. Knowing which deposits are likely to stick — and more specifically which customers have deposits that are likely to stick — refines the valuation of deposit books at target banks. The stronger the analytic knowledge about the stability of the target’s funding sources, the better the bidding and the greater the value for the acquiring entity.

MOVING AHEAD Far too many bankers continue to rue the low rate environ-ment that is now approaching eight years — waiting for

rates to rise and bring back spreads and profitability. Get over it. Low rates have masked an acceleration of funda-mental changes which have permanently tightened interme-diation spreads that no foreseeable interest rate rise will fully restore.

Banks have tried to outrun the problem with balance sheet growth, but only a few have had any success at share gain, and with only limited profitability improve-ment. Most have turned to cost reduction, but at least in the short term, the primary available expense pool has been branch closures; this requires walking the fine line between cost savings through closure and retention of market share and position.

What only a few banks have been focusing on is, in our view, far more important for healthy intermediation eco-

nomics: growing defensible low-cost core deposit funding. Funding has become all the more important with funda-mental changes in liquidity and capital regulation that value stable core funding much more than more fleeting deposit bal-ances, and that are stoking an arms race for core retail and commercial deposits.

Understanding customer behaviors in these deposit port-folios will unlock the insights for the smarter and better-posi-

tioned banks to secure relatively lower-cost and more stable funding. It will also create an anchor for building deeper consumer and commercial relationships.

The profitability of traditional financial intermediation will neither improve overnight nor fully recover when market interest rates rise in the coming quarters. Overcapacity and stiff competition from the national banks will continue to pres-sure loan spreads and bid-up deposit rates. But the banks that can successfully defend or capture lower cost funding sources will better weather the competitive pressures — out-performing and even thriving in a tough environment.

Lee Kyriacou is Head of Banking Industry Research, Gordon Goetzmann is an Executive Vice President, and Andrew Frisbie is a Managing Director in the New York office of Novantas. They can be reached at [email protected], [email protected], and [email protected], respectively.


“Fundamental changes in liquidity and capital regulation have placed a much higher value on core funding. Understanding customer behaviors in deposit portfolios will unlock the insights for the smarter and better-posi-tioned banks to secure relatively lower-cost and more stable funding. It will also create an anchor for building deeper relationships.”

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Traditionally when consumers selected a bank for their pri-mary checking account, the key decision factor was branch proximity. Often it was a simple matter of street corner con-venience: find the branch nearest to the home, workplace or along the local commute.

Digital banking has steadily chipped away at this founda-tion and retail distribution has reached an important turning point. In 2014, 30% of survey respondents selected “branches near me” as the top convenience factor. This response rate fell to only 18% in the recent 2015 survey, a 40% proportionate decline in one year.

Stealing the convenience crown was “leading online/mobile banking,” cited by 26% of respondents as the single factor that would do the most to make a bank convenient. This score has roughly tripled in Novantas surveys over the past five years.

The situation has introduced a profound conflict in net-work planning, in that many shoppers still demand some degree of local branch presence when considering where to

open a new checking account. Although branch proximity is no longer the leading convenience driver among shoppers, 62% of survey respondents state that they would not even consider a bank that does not have any branches in the com-munity (Figure 1: Branch Convenience Slips; “Safety Net” Role Continues).

To rectify lingering customer preferences for branch pres-ence with the pressing realities of accelerating network con-solidation, banks will need to emphasize the visibility of the network, or “billboard value.” Reflecting specific branch site advantages such as a prominent location and general cus-tomer traffic density in the area, billboard value helps to sustain local brand awareness and puts the best face on convenience.

Our research shows that today’s bank networks are quite uneven in their concentrations of high-value site loca-tions. Banks that do a better job of optimizing networks around these locations will gain a growing advantage in maximizing the consumer perception of local network scale. Helpful both in scenarios of local network expansion and

BY CHRIS MUSTO, BRANDON LARSON AND ALEX LEE

Facing conflicting pressures to reduce network expenses while maintaining reassuring local presence, banks will need to emphasize branch visibility, or “billboard value.”

Branch Visibility andChecking Acquisition:The Role of Billboard Value

FEATURE

consolidation, billboard value is also a pivotal attribute for players seeking to enter new markets with selectively placed thin branch networks.

DIGITAL VS. BRANCH INFLUENCESIt is important to keep sight of customer acquisition and sales in an era when distribution is in flux. What is important to consumers when they select a bank these days, and what do those preferences mean for network consolidation and multi-channel competitiveness?

Convenience is front and center in the discussion. So long as convenience was tightly defined by physical proximity, banks with dense branch networks could win an outsized share of local market deposits, “punching above their weight class,” while banks with only a few locations saw deposit share lag branch share.

But as is evident from our consumer research, “conve-nience” is no longer strictly about having the nearest branch. In fact a non-physical factor — online/mobile — now is the top influence on how consumers perceive banking conve-nience. Nearby ATMs matter, including the fees for them, as do hours of operation to a lesser degree. Branch proximity and market density are still important to be sure, but not the total picture.

Shopper purchase rates have been directly affected by these evolving preferences.

In our shopper survey, we asked respondents to rank the top three banks in their local market in terms of convenience. We took these rankings, assigned weights for first/second/third, and constructed a “perceived convenience” index for each bank by market. Then to verify the relevance of the index, we applied statistical tests that contrasted perceived convenience with checking account purchase rates for each bank in each market included in the study.

The upshot was that perceived convenience surpassed raw branch share in explaining purchase rates for individual banks in a given market. Compared with an 85% explanatory power for perceived convenience, branch share explained a lesser 52% of the variation in purchase rates — an even wider skew than what has been seen in similar Novantas studies over the past three years (Figure 2: Checking Purchase Drivers — Branch Share vs. Perceived Convenience).

BILLBOARD VALUEWhile customers may be using the branch less and less, it still plays an important role in checking acquisition. Local visibil-ity is a must.

Starting with an example drawn from general retailing, consider the shopping/com-muting patterns of a typical community resident. Over time as she drives back and forth between the places she visits most — grocery store, gas station, dry cleaners, movies — she can likely name most major businesses and their signage in each of shopping plaza she fre-quents. These familiar stores then gain prime consider-ation when new shopping needs come up.

The same premise works for retail banking, both with branches and ATMs. The more that installations are situated in high-visibil-ity areas, the more aware-ness and consideration they receive when people have banking needs and think about where to turn.


Figure 1: Branch Convenience Slips; “Safety Net” Role Continues

Checking shoppers now see “leading online/mobile” as the top convenience factor, yet most still want a nearby branch just in case.

Source: Novantas U.S. Shopper Surveys, industry estimates and analysis

90%

0%2011 2012 2013 2014 2015

30%

60%

“I need to see at least some branch presence in order to choose a bank”

“My top convenience factoris having nearby branches”

“My top convenience factoris leading online/mobile”

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Billboard value reinforces customer perceptions of conve-nience, even among people who have little need or desire to visit a lobby. Plus it provides critical reassurance to online-ori-ented shoppers: “If I ever have a problem, at least I know where I can go.”

For all of these reasons, it is dangerous to make network cuts strictly on the basis of individ-ual branch performance. Perhaps a given branch is in the right area but located on the wrong street corner. Or it should be doing bet-ter, given its locale, but is dealing with execution issues. Billboard value is essential to the discussion.

Looking systematically across each market, the bank should identify the very best locations — high community visibility; active customer traffic — and then exam-ine how its current array of local installations compares with the optimal. This assessment of billboard value typically reveals stark disparities in current branch site placement, with real consequences today and in the future.

In a national study, Novantas looked at branch place-ment strength within the top 150 U.S. bank networks,

ranging all the way from 5,000+ units down to roughly 50. Two conclusions emerged, with powerful implications for future competitiveness:

1) All networks are affected to some degree. Based on a minimum of having at least 60% of branches placed in top-decile locations, fully half of the top U.S. branch networks

have weak footprint billboard value. Although there are advantaged networks in each size tier as well, every bank has room for improvement (Figure 3: Significant Variation in Branch Billboard Value Across Branch Networks).

2) Strong billboard value is highly correlated with better deposit performance. Looking at average retail deposits for all of the branches included in the study, top-decile loca-

tions had an average of $75 million in retail deposits, com-pared with only a $45 million average for the rest.

Of course, top-decile locations will be located in the best areas and it does cost more to procure those sites, often sig-nificantly affecting decision economics. But there is no denying that sites with top-decile billboard value are the most likely to


“Looking systematically across each market, the bank should identify the very best locations — high community visibil-ity; active customer traffic — and then examine how its current array of local installations compares with the optimal. This assessment of billboard value typical-ly reveals stark disparities.”

45%

0%30% 30%15% 15%0% 0%

15%

30%

Figure 2: Checking Purchase Drivers — Branch Share vs. Perceived Convenience

While branch share remains important in determining checking account purchase rate, the combination of factors that define convenience is more predictive.

Branch Share

52% Explanatory Power 82% Explanatory Power

Purc

hase

Rat

e

Perceived Convenience Index

Data points represent bank/market combination scores (20 banks, 21 markets), reflecting feedback from 1,350 surveyed customers who recently switched checking accounts. Source: 2016 Omni-Channel Shopper Survey, Novantas

Includes branch presence, ATM presence, marketing, digital capabilities, and other factors that contribute to perceived convenience.

provide the growth the bank is looking for.Looking ahead, billboard value is pivotal in addressing

two major network issues:1) Network evaluation. Many factors are pushing banks

to reduce their networks to find expense savings, but it is not a simple matter of cutting the weakest branches. Billboard value provides context on how each installation supports the overall local network, in some cases helping to justify preservation, in other cases making a stronger case for consolidation. It also provides a basis of comparison across local markets within the network footprint, helping to prioritize investments and guide network strategies.

2) Site decisions. In considering locales for expansion and growth, a number of sites may have prime locations, but how does the bank tell which ones will best contribute to local network presence overall? Billboard value allows the bank to systematically identify market coverage gaps and the upside potential in plugging them.

REASSURING PRESENCEBillboard value plays directly to a continuing strong consumer preference for a reassuring physical presence when choosing a bank. The requirement is not as strict as before, given the dramatically reduced need for on-site transaction services. But

some level of branch visibility and accessibility is still needed to anchor customer acquisition and retention. Additionally, branches are a key driver of unaided awareness, so there is an important marketing value of the branch network.

There are a number of management implications:• Fewer branches are needed, and increasingly the

billboard value of the network, rather than sheer utility, will be the key driver of performance.

• Building and promoting digital capabilities will be critical to gain consideration from customers and cement their perception of convenience.

• New levels of agility in distribution planning will be required.• Consumer attachment to the branch should be closely

monitored for further signs of erosion. If physical presence collapses in consumer influence, even its anchor role as a reassuring market presence, it could open the door for aggressive direct players, provoking a potentially serious tilt in local competition.

Chris Musto, Brandon Larson and Alex Lee are Directors in the New York off ice of Novantas. They can be reached at [email protected], [email protected], and [email protected], respectively.


85%

70%

55%

40%

25%

10%

>2k 1–2k 500–999 200–499 150–199 100–149

Figure 3: Significant Variation in Billboard Value Across Branch Networks*

As banks consolidate branch networks, a key question is how to preserve maximum visibility for remaining installations. Today many branches are stuck in low-impact locations, hindering network performance.

Results for Individual Banks, Tiered by Network Branch Count

% o

f Net

wor

k in

Top

Dec

ile L

ocat

ions

* Figures show the portion of branch network site locations that rank among the top 10% in local market visibility and customer traffic. Source: Novantas Stratascape

13July 2016

14

Distinctiveness has long been an elusive goal in retail banking, but the stakes were lower in the pre-digital era. Banks could get away with looking more alike than different because con-sumers and small businesses wanted and needed a far more powerful differentiator — branch proximity.

Customers primarily selected their banks on the basis of old-fashioned street corner convenience. As a result, banks could win with local network density, largely relying on market-ing for product promotions.

Not anymore. With the accelerating migration to digital channels, the customer frame of reference no longer is confined to physical presence. Convenience is slipping deeper into the murky world of consumer perception — individual impressions based on a range of influences, not only branch and ATM presence, but also usage of PCs and mobile devices, and mar-keting messages conveyed via local media and online.

In the emerging battleground of “perceived convenience” — that is, convenience beyond having the nearest branch — the newly-dominant factor is “leading online/mobile banking.” While 30% of survey respondents selected “branches near me” as the top convenience factor in a 2014 Novantas sur-vey, this score fell to only 18% in 2015, a 40% proportionate decline in one year.

Clearly the marketing center of gravity has to change. But is it merely about upping marketing spend? Shifting branch-related marketing resources to support the arms race in digital banking — ultimately driving toward a new type of look-alike banking competition? Or is there hope that banks can rise above the sea of sameness and win on the basis of distinctive strengths?

To test this proposition, we asked checking shoppers to rate

the distinctive brand attributes of banks they were consider-ing for purchase. These were basic factors, such as “makes it easy to manage my finances,” and “can serve all my bank-ing needs.” After compiling the rankings across a series of attributes, we examined whether the composite attribute scores had a bearing on checking purchase share relative to local branch share, or “power ratio.”

What we found was that distinctive brand attributes have a statistically significant influence. Stripping away convenience factors and price, the higher the bank’s composite score on distinctive attributes, the better it does in winning new checking account purchases, relative to its branch share in a given mar-ket (Figure 1: Impact of Distinctiveness on Checking Purchase). There are three major implications:

First, each major bank needs to carefully study current and prospective customers to understand its own distinctive attri-butes — relative to consumer expectations, competitor stand-ing, business results and the bank’s corporate strategy. Going market-by-market to correct glaring deficiencies and leverage current strengths is part of it, but the bigger picture is about reorienting the management mindset of the bank.

Second, there is an immediate need to identify and lever-age distinctive brand attributes in segment-based strategy. What blend of attributes will best resonate with important tar-get customer groups? Segment examples include small busi-ness proprietors with household financial needs, and the grow-ing cohort of “thin-branch ready” customers who prefer digital channels and mostly see branches as a backstop.

Third is the need for a changed organization focus: rally-ing around segment-focused, meaningful points of difference to deliver a real-world customer experience that “proves” the

BY PAUL KADIN

Novantas research shows that distinctive brand attributes are a significant driver of checking purchase rates, now that immediate branch proximity is falling in importance.


FEATURE

bank’s chosen distinctiveness is real in the eyes of the customer. This is a shared responsibility across the enterprise. All of the contributing functions — product, channel, marketing and sales — must come together.

DISTINCTIVENESS INDEXOur analysis shows that distinctive brand attributes are a sig-nificant driver of checking purchase rates, now that immedi-ate branch proximity is falling in importance among checking account shoppers. These brand strengths do not supplant the power of branch share and marketing spend. Rather, they amplify the impact of those investments.

In the research project that led to this conclusion, we started out looking for brand influences on the sales funnel at its three stages — consumer awareness, consideration and purchase. Via the Novantas U.S. Consumer Shopper Study, we collected survey feedback and data on thousands of recent and prospec-tive checking account purchasers across dozens of U.S. markets.

To isolate the influence of distinctive brand attributes, we set aside survey findings on the influence of con-venience and price, and strictly considered how respondents rated banks on a set of fundamental traits. These included:• “Makes it easy to

manage my finances”• “Can serve all my

banking needs”• “A good value”• “Friendly and helpful”• “Looks out for

customers”• “Helps me plan for the

future”We then compiled

these ratings into a dis-tinctiveness index that showed each bank’s standing in each of the markets included in the study. The question then became: how do the com-posite rankings influence business results?

To measure sales impact relative to a bank’s market presence, we

constructed a “power ratio,” which compares local checking purchase share with local branch share. This metric was calcu-lated for each bank in each market.

We then used statistical measures to assess how each bank’s distinctiveness index score influenced its power ratio. Solid findings emerged that distinctive brand attributes — defined as exceptionally high scores for a bank on one or more attributes — drive higher checking purchase rates for a bank relative to its branch share. Overall, distinctive attributes explained 21% of the variation, a statistically significant finding.

The causal impact of distinctive attributes is twofold: 1) directly upon the purchase decision; and 2) indirectly on the consideration stage (the likelihood that someone aware of a bank actually considers opening an account with that bank).

Importantly, a bank’s competitive situation varies market to market, and its standout attributes differ accordingly, as does its purchase rate. Understanding local market competitive dynam-ics and planning accordingly to optimize the various levers on purchase rate — including distinctive attributes — is critical.


Figure 1: Impact of Distinctive Attributes on Checking Purchase

Now a clear driver of checking purchase, distinctiveness is associated withsuperior sales performance relative to the size of a bank's local branch network.

Distinctiveness vs. Power Ratio (Purchase Share / Branch Share)

Che

ckin

g Pu

rcha

se S

hare

/ L

ocal

Bra

nch

Shar

e

Composite Consumer Survey Rating on Distinctive Attributes(separate total score for each bank in each local market)

0 10 20 30 40 50

2X

4X

6X

Source: Novantas

15July 2016

16

CREDIBILITY AT STAKEPresented with fresh research findings on the value of powerful brand attributes, some executives may veer to the simple conclu-sion that their bank just needs to do a better job with promotion. “We have a lot to offer and need to get the word out.”

But pure promotion is a trap. Still skeptical following the housing/banking collapse, and bombarded with advertising messages everywhere they turn, consumers are turning a deaf ear when banks proclaim vague but similar statements unsupported by actual organizational commitment and cus-tomer experience.

If not viewed by consumers as correct and believable, statements like “We help you succeed,” or “People are our greatest asset,” may well fall flat. But such positioning can resonate and succeed if clearly demonstrated to be accurate and differentiated.

In the realm of communica-tion, the situation presents two challenges in promoting distinc-tive strengths: 1) it is difficult to break through the media clutter; and 2) it requires new creative means of dramatizing the proof points as reasons to believe.

There is also a big credibility risk if the message conflicts with reality. In the right circumstances, going public with a new differen-tiating story has a twofold benefit, not only providing a new oppor-tunity to resonate with customers, but also energizing the internal call to action for business units and individual staff.

But if the bugle is blown too early, before the organization has coalesced around the points of difference and made them a living reality, customers will be disappointed, employees will be frustrated, and credibility issues will only deepen. As they say in consumer packaged goods, you can’t say you taste good until you actually taste good.

ALIGNING THE ORGANIZATIONSo how does a bank follow through? How does it reach a

level of differentiation that sways consumer perceptions and bolsters purchase rates? Drawing on lessons from consumer product companies, it first requires segment-focused initiatives to determine meaningful and well-defined points of difference. It then requires deep organizational commitment and align-ment — across all of the contributing product, channel, experi-ence, marketing and support functions — to bring those points of difference to life through real world customer experiences (Figure 2: Steps to Achieving Strong Distinctiveness).

A differentiating value proposition is never in the hands of just one group at a bank. It is in all hands; a shared responsi-bility across the enterprise. Inherent in that sharing is a clear understanding of the differentiated strategy; how customers and prospects should experience it; and the role of every indi-vidual in the bank to deliver on the promise.


METADATA CATALOG

Who are wetargeting?

Segmentation framework;target segment priorities

What is mostimportant?

Customer segment profiles;needs, attitudes, behaviors

Exactly how willwe be different?

Positioning strategy formeaningful differentiation

Why should consumers believe?

Organizational proof points: determine and develop

Are we “all in” on this?

Internal communications,processes and incentives

This makes goodsense financially?

Projected business impactand return on investment

How to crediblycommunicate?

Messaging strategy andcreative development

How to tell if we aremaking progress?

Tracking brand healthand business metrics

Are we preparedfor the long haul?

Long-term roadmap fordistinctiveness strategy

Source: Novantas

Figure 2: Steps to Achieving Strong Distinctiveness Distinctiveness requires a credible, customer-centered action plan that involves the whole bank, is properly promoted, and makes business sense.

REQUIREMENT KEY QUESTION ACTIONS/OUTPUTS

Focus

Customer Resonance

CompetitiveContext

Choose YourWeapons

Align to Deliver

Build the Business Case

Tell the Market(When it’s True)

Measure theRight Things

Set the RightExpectations

Internal communication of the brand purpose is but one step. Each department will have specific projects and initia-tives, mapped and tracked, that support the proof points and get everyone involved.

Performance metrics, compensation plans, resource allo-cation — all must support the delivery of a differentiating value proposition. Integrated scorecards and celebrating suc-cesses are among the best practices seen at companies with true differentiation.

Finally, it is about communicating to the marketplace with credible dramatization of the points of difference. Ultimately, differentiation is only true when consumers say it is. To lever-age organizational preparation, the bank will need to follow through with effective marketing tactics that use rational mes-saging and create emotional resonance.

Customers touch their bank in many ways and with great frequency. Getting the message across can be as simple as logging on to a mobile banking app, using an ATM, or mak-ing a payment. It can be a moment of truth around resolving an issue or getting advice on a mortgage.

At the corporate level, one of the clearer examples of dif-ferentiation is TD Bank and convenience. It is right in their logo: “TD Bank — America’s Most Convenient Bank.” A U.S. bank holding company owned by Canada’s Toronto-Dominion Bank, TD cemented this point of differentiation across its U.S. franchise when it integrated the former Commerce Bancorp (New Jersey), which originally had the convenience tag line.

Convenience is made real and communicated in multiple ways at TD: open longer hours and more days; denser branch networks in select areas; naming its lead checking product

“TD Convenience;” expressing “convenience” in every ad campaign; using convenience as the primary descriptor of its mobile banking app, etc.

This is a rare example, and most of today’s banks first need to concentrate on aligning clusters of distinctive attri-butes with priority customer segments. But it drives home the point that distinctiveness has definite competitive impact when clearly defined, thoroughly integrated into the customer expe-rience, and compellingly communicated.

IMPERATIVE TO ENGAGEThe U.S. banking industry suffers from a “trust deficit” that is little improved since the recession. Consumers are switching banks at historically low levels, many giving up hope of dis-covering actual differences among providers. Often it takes cash offers to entice shoppers from consideration to purchase.

Novantas research confirms that it is possible to combat these trends and makes the business case for doing so. The evidence is clear that banks with distinctive attributes are win-ning in their markets.

It is no small matter for a bank to build consensus on its focus for differentiation. It is at least as difficult to align the organization to make the differentiation real. But given the weak trajectory for retail banking in general, and the pressure to energize organic growth, the imperative to engage in this journey is unavoidable.

Paul Kadin is a Managing Director in the New York office of Novantas. He can be reached at [email protected].


The banking industry would do well to learn from other industries about ways to create a coherent, coordinated focus on achieving the chosen areas of differentiation. Lessons from the consumer pack-aged goods (CPG) industry, for example, offer guidance on how organizational design and processes can bring differentiated strat-egies to life.

There is no ambiguity at a CPG outfit about the central nature of brand differentiation in competition. All of the organization takes signals from the brand management group. Each business and oper-ational unit is expected to do its part in a fully aligned effort for product and brand differentiation that will win in the marketplace – from R&D, to manufacturing, to sales, to information technology, to marketing.

A brand manager is the hub of the wheel, not in the sense

of having direct authority over key functions, but rather setting the overarching framework that informs various action plans and ensures the synchronization of all.

Now contrast this scenario with the current reality in the typical retail banking business. Product development, design and pricing activities are usually conducted in separate silos. Off in another cor-ner are the channels overseeing sales and the customer experience. Elsewhere the marketing team wrestles with messaging and com-munication tactics. Where is does the synchronization and align-ment come from in these complex bank organizational designs?

Banking customers will respond with loyalty and deeper rela-tionships when a differentiating experience is found at every turn.

—Paul Kadin

Lessons from Other Industries

17July 2016

18

As retail customers continue their migration to digital chan-nels, banks are stepping up the pace of branch consolidation. Across the industry, institutions are busy tightening location count and staffing, anxious to cut expensive idle overhead as more consumer activity shifts to online, mobile, ATM and phone channels.

But as retail-dominated change sweeps through the branch networks, the transition is posing challenges for an important companion line of business — small business banking. While many business customers embrace digital channels, the group overall is migrating at a much slower pace and still heavily depends on the branch.

Nearby branch presence remains the top influence in select-ing a new provider, and many proprietors prefer to use the branch channel to apply for a loan or open a new checking or savings account. Compared with consumers, moreover, the need for transaction services is much more intense among small businesses. It is a tough balancing act. While many small busi-ness customers feel they are being “dragged into the future” of multi-channel banking, that is the inevitable destination others already embrace.

Sagging relationship profitability further complicates the picture. Overall industry challenges — shrinking margins and fee revenue, rising compliance costs and capital requirements — have taken a toll on small business banking as well. It is harder to justify the use of expensive banker talent to acquire and manage small business relationships. Staff reduction is part of the answer, but must be accompanied by strong productivity gains among the ongoing team.

The situation highlights the need for a proactive and com-prehensive small business banking strategy to meet three objec-tives: 1) preserving patronage and sales revenue growth in a transition era; 2) overhauling the economics of the line of

business; and 3) repositioning the overall franchise for more intense multi-channel competition.

Near term, the first order of business is to anchor the cur-rent sales and revenue stream while boosting productivity. This requires a clear-eyed view of priority markets and segments to inform the redistribution of sales staff and other resources in line with opportunity. Sharper prospecting tools will help to make the most productive use of sales resources. Meanwhile branch-to-digital transition initiatives can be put in motion, including a team of bankers for phone-based sales and shifts in marketing spend and messages to build awareness and usage of digital channels.

Looking to the longer term, preparations must begin for a full-on multi-channel marketing and sales outreach to small busi-ness customers. Big data and advanced analytics will play a major role in digital marketing and sales, as well as customer engagement. Alternative arrangements to support sales and service outside the branch will be fleshed out, supported by promotions and incentives to win customers. And marketing will play a much larger role than what is commonly seen today.

The big picture is that banks must transition to a new business model for small business banking. Today’s relationship model is all about high-touch sales and service, heavily anchored by branch staff and relationship managers. In the emerging customer engagement model, by contrast, the emphasis is on streamlined and effective multi-channel interaction, guided by market and customer analytics.

OPPORTUNITY AT RISKSmall business banking is at an unusual juncture. On the one hand, the market is picking up steam and has good potential for further growth in loans and deposits. On the other hand, digital disruption is posing challenges on multiple fronts — distribution,

BY ROBERT GRIFFIN

In the emerging customer engagement model, the emphasis is on streamlined and effective multi-channel interaction, guided by market and customer analytics.


FEATURE

marketing, and sales — including incursions by a new breed of web-based marketplace lenders. In this transition era, banks will have to work harder to retain and grow share.

Although the branch is losing relevance among all customer categories, recent Novantas research underscores its ongoing importance in small business banking. When asked about their top reasons for doing business with their primary bank, 44% of surveyed small business owners cited “branch near the com-pany,” with proximity ranking as the dominant selection factor. When consumers were asked the same question, only 20% listed branch proximity as being among the top reasons for their patronage.

Turning to sales, small businesses also have the strongest preference to originate accounts at the branch — 61% — com-pared with 51% of consumer respondents. With service, 54% of SmB respondents said they still prefer to use the branch to deposit a check, versus a 24% preference among consumers. Even funds transfers, an activity thoroughly absorbed into dig-ital banking, still elicited a 23% branch preference, compared with 11% of consumers.

This does not mean that small business customers will for-ever cling to branches. Rather, their pace of digital migration will continue to lag the retail side, probably significantly. That

spells ongoing conflict with retail-driven branch consolida-tion (Figure 1: Small Business Growth on a Shrinking Branch Foundation — Sustainable?).

While post-recession branch cutbacks to date have been substantial, they cannot be called radical — a net reduction of 7,000 units off a historic peak of 95,000 nationwide. But the pace of consolidation could easily double or triple going forward. The trend seems inevitable as retail branches lose fur-ther transaction volume to digital channels and begin to lose account origination volume as well.

Small business relationship managers will play a huge role in bridging the gap, not only dedicated bankers in the field, but also competent central teams that will carry a prospecting and sales workload over the phone. These highly efficient central teams will take the lead in penetrating grass-roots community businesses, which are difficult to profitably serve under a high-touch relationship model.

Today’s small business RMs generate roughly 25% of deposit sales and 40% of loan sales. Five years from now, teams will be expected to generate roughly 35% of deposit sales and 50% of loan sales — and do so with a much lower total staff count.

Digital channels will have to step up as well. While strong survey preferences for digital account origination vastly exceed


Source: Federal Reserve Flow of Funds, Federal Deposit Insurance Corp., Novantas analysis

$1,600 Bil

120,000

80,000

40,000

0

$1,200 Bil

$800 Bil

$400 Bil

$0 Bil

‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16E ‘17E ‘18E ‘19E ‘20E

Figure 1: Small Business Growth on a Shrinking Branch Foundation — Sustainable?After a long post-recession slump, banks are finally seeing small business loan growth. But new strategieswill be needed to keep the momentum going as branch networks lose ground to digital banking.

+5%

+2%

+5%

+2%

-2%

-5%

Deposits (left axis)

Loans (left axis)

Yr-to-Yr Growth

Yr-to-Yr Decline

Total U.S. Branches (right axis)

19July 2016

20

the current reality, the customer appetite is there. Five years from now, perhaps 10% of both SmB deposits and loans will be booked online. But online growth has its own challenges, including competition from a new breed of specialized market-place lenders that offer quick-turnaround credit.

SALES STAFFINGIn migrating the organization to a leaner customer engage-ment model, a key question is what to do about sales staffing. Only a portion of the small business market — larger, high-value clients — can be profitably served by dedicated small business bankers who interact with customers in person. Lean-but-effective alternatives will be needed elsewhere (Figure 2: The Future of Multi-Channel Small Business Sales).

Branch sales. Few local networks will house dedicated small business bankers going forward. As these experts are almost totally relocated to the field, cross-trained retail bankers will anchor branch sales for specified segments of the mar-ket, focusing on smaller enterprises with less than $2 million in annual revenues. The complication for these generalists is trying to handle expanded per-person SmB coverage respon-sibilities while juggling a likely higher retail sales load as well.

This is one of several instances where analytics and technology will make the difference, helping branch generalists to multiply their effectiveness while still handling multiple priorities.

Remote phone-based sales. While an in-person sales out-reach is less feasible for the overall customer base, it is futile to assume that impersonal digital channels can take up all the slack. The middle ground is the phone, a medium that supports easy conversational interaction with clients at low cost.

Staffed by experienced small business bankers, a central phone-based team can augment the SmB sales outreach in two important ways:1. Prospecting and cross-sell — Along with direct sales

to myriad smaller clients (which are harder for front-line bankers to reach), the inside sales team can help with relationship expansion and cross-sell within the current customer base.

2. Contact/referral anchor — The inside sales team can provide a single point of contact for small business referrals that originate in the branch, backstopping branch bankers and helping to assure a smooth customer experience. They also can help to generate qualified sales leads and get the ball rolling on prospect


Source: Novantas

Figure 2: The Future of Multi-Channel Small Business SalesThe branch will become a smaller, streamlined component in the emerging multi-channel SmB sales outreach anchored by marketing, analytics and technology.

Alternative Channels5-yr outlook: Aggressive

growth from today’s small base

MarketingAnalytics

TechnologyBranch Staff

5-yr outlook: dramatic contraction in overall

sales contribution

Roving Specialists

5-yr outlook: Further growth from today’s

strong base

• “Inside Sales” team of phone-based bankers

• High productivity w/ analytics, technology

• Web-based product marketing and sales

• Cross-trained retail bankers, lobby sales

• Local proprietors and their housholds

• High productivity w/ analytics, technology

• Skilled business bankers, in-person sales

• Larger high-value clients, complex needs

• Reps cover multi-branch territories

appointments with live representatives.Roving specialists. Dedicated small business bankers need

to concentrate on the market segment where their expertise can make the biggest difference — larger clients, typically with annual sales of at least $2 million. This is not walk-in branch opportunity. Each SmB banker will typically provide in-person coverage for a multi-branch trade area, building client entrée and rapport to discover and fulfill high-value customer needs.

ANALYTICS AND TECHNOLOGYNew organizational strengths will be needed to support the emerging framework for small business customer engagement. Key activities — marketing, sales and service — will increas-ingly depend on digital tools and channels. • Instead of supporting the occasional product campaign or

“by-the-calendar” promotional schedule, marketing needs to become a multi-channel targeting engine, able to sort through customer traits, behaviors and events to find the best opportunities for customer acquisition, cross-sell and continued engagement throughout the customer lifecycle.

• The sales process will depend on a steady stream of qualified leads, coordinated among branch, phone and roving staff, supported by customer and prospect information housed in uniform systems for customer relationship management.

• Small business customer service, while not the main thrust of this article, is in need of digital transformation as well. More remote “self-service” options and applications will be needed (and will require promotion). Clients need to be encouraged to migrate more transaction volume to digital channels (online, mobile, IVR), enhancing convenience while reducing the cost to serve.Customer analytics will play a central role in identifying

and sizing opportunities. This guidance allows the bank to “right size” sales and support resources for profitable acquisi-tion and relationship growth. Applications include:• Understanding the best/rest of customers. By analyzing

which current small business customers provide full relationship wallet and the bulk of revenues today, the bank can develop “look alike” models to replicate for new customers. Such modeling also provides a basis for behavioral segmentation that will inform targeting, coverage models, calling efforts and product development.

• Relationship expansion. Some of the best sales prospects may be under-served customers, either current or new-to-bank. Models that estimate “wallet share” and total relationship potential help to identify which customers offer the greatest opportunity. Examples include current deposit-only customers who likely have significant loan and treasury management needs, or current loan-only

customers who can be steered into checking/savings/cash management.

• Prospecting. Wallet modeling and other customer analytics help with the development of smart prospect lists for relationship managers, based on the likely banking wallet and relationship potential, likely offer receptivity, and the potential to profitably serve.

• Product bundling/pricing. Customer analytics help with the development of product bundles that specifically address the needs of target customer segments (e.g., practice loans and core cash management accounts for medical practices). They also help in tailoring rates and fees and ensuring they are aligned with current and future customer relationship potential.The appropriate platform technology is needed to bring

analytic applications to life in the everyday activities of small business marketing and sales.• Lead generation and sales dialogue. Integrated marketing

automation platforms (e.g., Marketo, Act-On, and Adobe) can supply leads to lower-cost staff in the branch or call-center. These staffers also need support from CRM tools, both to track/manage prospects through the sales funnel, and for information and prompts to support the sales dialogue.

• Cross-sell action steps. Relationship expansion also depends on integrated marketing automation and CRM tools that can translate analytically-identified opportunities into specific marketing and sales actions for account origination.

• Customer profiles and touchpoint context. In a small business sales setting where representatives will need to handle a higher volume and also communicate effectively over the phone, supplemental customer information can help to build conversational context and rapport. Platform tools can help in supplying not only customer and prospect profiles, but also the timeline of touchpoints from prior marketing and sales campaigns and responses.

• Reporting and analytics. Easy-to-use tools (e.g., Tableau or QlikView) are needed to support non-technical users in managing the marketing and sales funnel. Otherwise the bank faces an overreliance on expensive analytic talent for ongoing projects and planning — or risks seeing tools only partly used.

MANAGEMENT PRIORITIESWhile the transition in small business banking is complicated overall, efforts can be organized around near-term and long-term priorities. These organizational agenda items fall into three major domains — analytics, sales, and marketing (Figure


21July 2016

22

3: Managing the Organizational Transition). Also there are concurrent priorities with service.

Analytics — near term. Identify top-priority small business markets and customer segments within the current network, leveraging current available data on customers and pros-pects. Employ enterprise segmentation to better leverage sales resources, including for prospect targeting, lead generation and an improved close ratio.

Analytics — longer term. Capture additional behavioral and off-us data; drive more of the analytical workload with “big data” initiatives. Deploy sophisticated analytics to gauge the impact of marketing and distribution tactics (e.g., market share, share-of-voice, brand attributes) on small business sales performance. Employ regionally-tailored marketing strategies to drive awareness, independent of the branch network.

Sales Force — near term. Redistribute the current small business sales force to ensure that coverage is aligned with market-level opportunity. Leverage current call-center and/or central sales resources to launch an inside-sales unit for small business.

Sales Force — longer term. Build out a specialized small business inside sales capability; strengthen mobile field sales team to drive new account acquisition and cross-sales. The inside sales team will support the mobile field team with lead prospecting and qualification, plus drive direct sales via out-bound calling and online support.

Marketing — near term. Shift marketing spend to non-branch direct-response channels; create awareness and a

competitive level of “perceived convenience” for small busi-ness. Begin building awareness of alternative transaction capabilities to reduce dependence on the branch channel, especially for routine transactions, and to encourage self-ser-vice for speed and convenience.

Marketing — longer term. As an offset to a shrinking physical network, further strengthen efforts to drive brand awareness and perceived convenience. Continue to promote alternate transaction capabilities to reduce dependence on the branch channel, especially for routine transactions, and encourage self-service for speed and convenience. Develop and implement full “lifecycle-management” capabilities that react to key customer behaviors over time to fully (and auto-matically) engage with customers at critical junctures in their journey with the bank.

Service — near and longer term. Continue to build new digital capabilities for sales and service in alternate, non-branch channels. Leverage marketing and service channels to build awareness of these capabilities, especially for routine service transactions, adding to the arsenal of self-service tools available to customers. Explore the use of additional incen-tives to encourage the use of the digital channels and tech-nologies (e.g., remote deposit capture), and to migrate sub-stantial additional transaction volume away from the branch.

Robert Griffin is a Director in the Chicago office of Novantas. He can be reached at [email protected].


Source: Novantas

http://www.visitphilly.com/events/philadelphia/july-4th-festival-concert-and-�reworks

Figure 3: Managing the Organizational TransitionIn migrating the organization to a new framework for small business customer engagement, near- and long-term goals must be established for analytics, sales channels and marketing.

ANALYTICS

SALES

• Prioritize markets and customer segments for sales• Leverage sales resources via enterprise segmentation

NEAR TERM LONGER TERM

• Big data; leverage customer behavioral & external info• New performance metrics• Tailored local market strategy

• Reallocate staff in line with local market opportunity• Launch "inside sales" team for banker phone sales

• Solid inside team for sales, prospecting, qualified leads• Local RMs mobile teams• digital account origination

• Promote non-branch channels• Build "perceived convenience"• Promote digital for self-service; lessen burden on sales staff

• Further strengthen brand and perceived convenience• Manage "customer journey" across time and channels

MARKETING

As consumer digital migration drains ever more branch traffic, banks have been working

through a delicate transition with branch staffing.

Amid all the pressing questions — sales, service, headcount, skills, etc. — executives drew comfort from the assumption that they at least had a rough idea of how consumer branch usage would shake out. Ultimately, it has been thought, branch servicing would decline but not disappear, and branches primarily would become sales centers, a place where the majority of customers will continue to go to originate checking and sav-ings accounts and apply for loans.

Building on this assumption, it seemed logical to reorganize branch staffing around “universal bankers” who both serve and sell. The goal is to improve efficiency by reducing the FTE commitment to teller activities while preserving sales capacity.

Based on a recent Novantas study of 12,000 U.S. branches, roughly one of every eight units across the industry now makes prominent use of universal bankers. At least 50% use some form of flexible staffing.

But even as more banks (and consultants) jump on the Universal Banker train, it is increasingly at risk of running off the tracks. For starters, our analysis shows that universal bankers mostly help with transaction and low-end sales productivity. The more important metric — overall financial return on branch sales staff — has continued to deteriorate. Today roughly two-thirds of all branches fail to generate sales returns sufficient to cover their fully loaded staffing costs.

The problem goes from bad to worse when considering the future locus of sales: digital vs. branch. For years it was thought that consumers would never trust ATMs with depos-its, let alone mobile phones. Now digital deposits are the norm, both ATM and mobile. What guarantee is there that branch account origination will stay the norm, simply because 90% of accounts open in branches today? All the evidence points to the obvious answer — nothing. Counting on branches to remain the focal point of simple sales is naïve at best.

In a not-so-distant future scenario, branch sales volume may be cut in half by online account origination, with the

greatest impact on simple sales. Most banks will be fighting for segment, geo-graphic or product niches, often using multiple strategies within a network. The use of specialists will become criti-cal in tapping high-value opportunities for customer acquisition and cross-sell.

The upshot is that the branch staff-ing challenge is much more profound than many bankers realize. To meet evolving customer preferences and boost the critical metric of return on sales force, banks will need a new retail sales strategy and workforce. For many, universal bankers are an interim step on a longer path, but the universal banker role as we know it today — transaction service and sample sales — is dead in the future.

Adroit use of local market analytics will be essential in managing this cha-otic transition. Each bank must be able to delve within its network to under-stand the scope and shape of sales potential in each locale. This knowl-edge becomes the foundation for a potentially extensive suite of market-tai-lored sales staffing configurations.

WARNING SIGNSIn a post-recession era of slack

BY DARRYL DEMOS AND DALE JOHNSON

Retail banks must start preparing now for local branch sales in a digitally-eroded environment, which will require new standards for staffing analytics and planning.


COMMENTARY

23July 2016As seen in BAI Banking Strategies

24

consumer demand and digital disrup-tion, banks have had two main branch priorities. One is to deepen relation-ships and sell more to each customer, supporting growth by capturing “share of wallet.” The other is to tightly economize distribution in tandem with declining transaction activity.

The universal banker concept never cleanly fit the bill. But it seemed like a way forward for banks looking to preserve sales capability while aggres-sively reducing branch headcount. Roughly five years into the trend, adoption has been substantial, with even more in the offing. But there also is enough data to evaluate progress so far (Figure 1: Impact of Universal Bankers on Product Sales per FTE).

Warning signs have emerged, as revealed by Novantas research:• When tellers assume additional re-

sponsibilities with sales, they most-ly succeed with low-value checking and savings accounts. The needle barely moves with business depos-its and loans, consumer loans and mortgages. Meanwhile credit card origina-tion, the low-hanging fruit for tellers, visibly declines amid all the other distractions. Overall there is little or no improvement in sales returns relative to staffing expense.

• When experienced branch sales staff is asked to assume teller responsibilities, the pros are distracted from the critical priority of high-value customer acquisition and rela-tionship expansion. Transaction productivity is improved, but again, not sales returns relative

to staffing expense.Rather than trying to perfect what

now appears to be an inherently limited arrangement, banks already employing the universal banker model should view it as a transition step. Others still on the sidelines should probably skip it. Even bigger productivity challenges are in store and the time to prepare is now.

Radical changes are coming in account origination. Coping measures will not suffice. While 85% to 90% of retail products are sold on-site today, this ratio could be cut in half over the next five to seven years, matching the recent rate of decline in teller transactions. In turn, the coming serious digital erosion of the branch sales foundation, especially simple sales such as checking and savings accounts, will cannibalize the funda-mental benefit of the universal banker.

This hollowing out of branch sales points to role chaos ahead. In the not-so-distant future, specialists may have to carry most of the load in high-value

sales conducted face-to-face. They will have to gin up business across broader territories encompassing multiple branches, with branch sales generalists becoming a backstop for technology assistance, complex servicing and the remaining simple sales that slip through the digital net.

ANALYTICALLY GUIDED TRANSFORMATIONAll retail banks have serious work to do in preparing for a digitally-eroded environment for local branch sales. But many compound the difficulty by cling-ing to traditional practices and metrics instead of looking ahead. Scheduling-led staffing tools are prevalent in the industry and still have a place, for example, but are wholly inadequate to the task of staffing transformation in a chaotic setting.

The number one priority is to estab-lish a market-led transition. Historical performance, service benchmarks and back office productivity metrics will not suffice (Figure 2: New Standards for Staffing Analytics and Planning).


Figure 1: Impact of Universal Bankers on Product Sales per FTEWhile universal bankers improve product unit sales per FTE, most additional volume is of low value. Economic returns do not improve.

Source: Novantas study of 12,000 U.S. branches via SalesScape

CONSUMER CHECKING

CONSUMER SAVINGS & MMDA

CERTIFICATES OF DEPOSIT

BUSINESS DEPOSITS

BUSINESS LOANS

CONSUMER LOANS

HOME MORTGAGE

CREDIT CARDS

NET

+0.75 units

+0.55 units–0.15 units

+0.2 units

–0.2 units+0.2 units–0.2 units–0.17 units

+0.98 units

Baseline with traditional branch = 9.0product sales per FTE per month

New level of 9.98 sales per FTE

Loans — most categories flat, credit card origination falls

Deposits — mostvolume is low-value checking and savings

Each local market plan should start with a clean sheet of paper, with the top entry being sales opportunity. How much? What type? What is the likely range of scenarios two years from now, five years from now? What sales staffing configuration (generalist, specialist, etc.) will best capitalize on this emerging opportunity, and what is the organization’s migratory path?

There are important manage-ment implications in this transition:• Staffing and performance manage-

ment are not separate activities and need to be interlinked. New strategic staffing analytics consider both opportunity-based goals and local team performance in setting optimal staffing targets. New data sources and analytical tools will be needed to reach this level of detailed planning.

• Opportunity analytics need to be driven from the bottom up. The

bank needs a statistical understand-ing of how 1) market characteris-tics; 2) network presence; and 3) branch-specific format and custom-er composition contribute to sales of specific products.

• Linkages are needed between the analytics that drive network plan-ning and those now needed for staff planning. Too often they are driven by people in different silos and not connected. We are seeing more of a trend in combining these two teams, but that is not enough. The bank needs a clear set of ana-lytics that can be used across these domains. While site selection and staffing decisions will diverge at points, the analytics should source from the same fact base.

• Nothing is more valuable than data on actual sales performance in a market, by segment, to plan the future transition. Old-school

benchmarks calculated at the bank level do not help to pinpoint local strengths and deficiencies, nor the corresponding granular changes needed to better manage this transi-tion. The appropriate calibration of targets will need to be understood branch-by-branch.Role chaos in the branches is just

starting and the universal banker role is not the end game. A shift in mind-set and investment — from efficiency to effective customer interaction and economic returns on the sales force — will be required as banks transition through evolving staffing models over the next five years.

Darryl Demos and Dale Johnson are Managing Directors in the New York office of Novantas. They can be reached at [email protected] and [email protected], respectively.


Figure 2: New Standards for Staffing Analytics and Planning In setting staff capacity, configuration and goals, the top priority is to align resources with the emerging picture of sales opportunity in each locale.

OLD STAFFING MODEL NEW STAFFING MODEL

DECISION LOGIC

Service first — Focus on wait times and session times as drivers of the customer experience

Sales first — Zero-based staffing; local market goals matched with bank segment strategy

ACTIVITY ANALYTICS

Internally focused — Detailed tracking of investments and operations; expense dynamics only

Customer facing — Optimize roles, practices and activities to support the sales agenda

PLANNINGHistorical trends — Projections based on “+/–” last year’s results used for capacity plans and sales goals

Market “fair share” — Plans and expectations based on local market potential, competitive stance

INDIVIDUAL SKILLS

Skills sometimes considered for scheduling — Contact center approach

Skills actively factored into sales plans — Individual performance & experience specifically considered

Source: Novantas

25July 2016

26

Millennials have been portrayed as a monolithic tidal wave getting ready to roll over the banking industry. Nearly 80 mil-lion strong, this generation was born in the ’80s and early ’90s and ranges from college students to young professionals, age 18 to 35.

Raised in an era of proliferating information and “liv-ing online,” these young adults represent the frontier of banking. But they are hardly uniform when it comes to banking needs – or the levers and potential for profitable relationship acquisition.

Students considering their first credit card, for example, are worlds away from 30-something professionals who are forming households. Digital vs. branch shopping and account application patterns vary, as does the potential to switch among institutions.

The stark reality is that less than half of millennials repre-sent a solid near-term banking opportunity. Yet many regional banks insist on treating millennials as largely similar, using basic playbooks that follow a checklist of digital-themed initia-tives designed for broad appeal.

That is a losing proposition, especially in competition with the very largest national players. The performance con-sequences – low traction relative to resources expended, an overhang of marginal accounts, loss of profitable market share – already are on display and could grow if regionals do not take action.

One way to cut through the clutter is to focus on profit-able acquisition and cross-sell. Institutions must be pragmatic about the segments they will target for growth, including their financial needs and how to acquire and engage them. By learning to tap millennial segments that generate incremental

returns today, a more solid footing is gained for further market inroads. Two areas need attention at many regional banks:

Shopping and purchase. Among checking prospects, there is significant untapped potential to build profitable market share by capturing switchers, who tend to be more affluent and more digitally confident with online research and purchase.

Targeted cross-sell. The winning bank will use targeted multi-channel campaigns to reach the millennial segments with the most potential. Typically these are the older members of the group who are building careers and households.

Though regional banks are accomplished in their own right, they lack the brand strength and developmental resources of the national banks, and so must pick their battles for profitable share of the growing opportunity with millennials.

SHOPPING AND PURCHASEAs younger, less established consumers, millennials make up a disproportionate share of new-to-bank checking prospects. But based on our U.S. Shopper Study of recent and prospec-tive purchasers of primary checking accounts, the three largest retail banks – Bank of America, Chase and Wells Fargo – are outpacing the next 17 largest retail banks all along the purchase funnel, including awareness, consideration and acquisition (Figure 1: Tug of War for Millennials – National vs. Regional Banks).

Understandably, given their distribution presence and mar-keting power, national banks lead in shopper awareness. This is reflected both in unaided awareness, or the ability of survey respondents to cite specific banks active in their markets with-out any prompting, and in aided awareness, or the ability to

BY CHRIS MUSTO AND KAREN GRAHAM

By learning to tap priority millennial customer segments that generate incremental returns today, a more solid footing is gained for further market inroads.

Millennials Challenge for Regional Banks: PROFITABLE ACQUISITION AND CROSS-SELL

FEATURE

identify names from a list.The further challenge for regionals is that they also receive

less purchase consideration. Fully 50% of recent millennial purchasers who had awareness of a national bank in their market also considered that institution in their purchase deci-sion; the comparable figure for regional banks was only 32%.

In terms of a high value selective response, one avenue of counterattack for regionals is to target switchers. Based on our survey findings, nearly two-thirds of millennials who have their primary checking at a national bank are open to switching that relationship, compared with roughly only half of millenni-als at large regionals (Sidebar: Switch Factors).

Why is this a near-term opportunity? Older millennials are well on their way to resembling the next age cohort in terms of balances and products held. For example, our analy-sis of prospective switchers indicates that roughly two-thirds of checking accountholders under 35 have household incomes exceeding $50,000, a figure nearly as high as for older pro-spective switchers age 35 to 44. With successful retention longer term, older millennials will become even more desir-able banking relationships.

Three factors will help regional banks to improve their odds for millennials acquisition versus national banks:

1) Shift investment from branch to brand. Relative to older prospective switchers, millennials are more likely to value strong brands over dense branch networks. This trend will accelerate as perceptions of convenience are increasingly driven by marketing and digital capabilities and experiences. Brand building should emphasize distinctiveness; standing for something beyond local physical presence.

2) Appeal to the locavore. Millennials feel less of a

connection with national players and appreciate banks with community resonance and involvement. Where the regional bank is the “local” brand, build on that reputation and incor-porate it into the value proposition.

3) Gain permission to bid. In surveying online checking shoppers via Novantas BankChoice Monitor, we have seen numerous markets where millennial shoppers favorably con-sider a regional bank, yet it lags in purchase pull through. Why? Millennials are not convinced that the regional bank supports the convenience and product features they expect. To turn this tide, regionals must invest in digital experiences and other elements of the value proposition that speak to the distinct needs of millennials.

TARGETED CROSS-SELLThe biggest near-term opportunity for millennial-related growth lies within the current customer base. But as an age cohort, millennials are especially varied in their life stages, current income and personal financial trajectory. With one bank we identified six millennials sub-segments, each with particular needs and differing near-term and longer-term relationship potential, further complicated by overlapping age ranges.

Core segmentation principles – demographics, needs, profit potential – still are prominent in parsing the millennial opportunity. But given their heavy orientation to digital chan-nels and online social interaction, millennials are prime can-didates for multi-channel behavioral analysis as well. Channel behaviors and preferences can become swing factors in prod-uct design, marketing and sales. That is why a robust millen-nial segmentation goes well beyond branch usage to include use of mobile and online banking applications, automated

teller machines, and even social media behavior.

A team effort is needed to capitalize on the findings. Successful targeted cross-sell hinges on a variety of factors, each touching multiple areas of the organiza-tion. These include brand-ing and awareness, prod-uct priorities and pricing, and product tailoring and bundling. Additional factors are customer tag-ging, mobile/online func-tionality, digital adver-tising and multi-channel


Figure 1: Tug of War for Millennials — National vs. Regional Banks

When purchasing, Millennials more so than other age groups prefer a national bank; but they are also more likely to consider switching from a national bank.

Under 35

Over 35

43%

33%

20%20%

National Regional

19%15%

6% 7%

RECENT PURCHASERS

National Regional

7%

21% 19%

5%

PROSPECTIVE SWITCHERS

National RegionalSource: Novantas Shopper Survey

Who did you consider?

Who did you choose? Would you

consider switching?Age

27July 2016

28

campaign management, and branch vs. digital fulfillment. Much of the preparation that goes into targeted cross-

sell is also useful in targeted customer acquisition as well. Propositions developed in the pursuit of incremental sales with current customers become the basis for external product campaigns and, for regionals, also help in the campaign to capture millennials who may consider switching their primary banking relationship away from a national player.

EXPANDING THE BASE Outside of the priority millennial segments that represent a solid near-term opportunity, the bank will want to cultivate emerging sub-segments on a selective basis, laying ground-work with tomorrow’s profitable customers. For example, entry-level professionals may be worth acquiring even if they have only minimal near-term checking and credit needs, given their longer-term potential for loans, savings and investments.

An ongoing outreach among the college student popu-lation is needed as well, presenting its own challenges. Less familiar with checking, students respond to physical presence on campus. And of course they are cost conscious, often with-out the direct deposit that others use to obtain a waiver on the monthly account fee.

Given the effort and expense of initial acquisition, stu-dent banking accounts are profit-reducing in the early going, yet they can pay off if graduates stay with the bank. The question then becomes: Will they?

Increasingly, national players are able to hold onto stu-dents not only on the strength of their physical presence in major markets around the country, but also by virtue of their investment in digital banking, and in training customers to use

it. But for a bank unlikely to be perceived as convenient when and if the student moves to a new market, student banking is a tough business case to make.

In short, to catch a segment that will grow in attractive-ness, banks must first re-imagine convenience as extend-ing beyond their branch footprint. Such specifics help to provide focal points to monetize the many investments and organizational revisions that are required in the customer digital migration.

With many other millennials, the potential to profitably serve is low. The sheer fact that young persons are digitally oriented confers no general banking advantage – unlike with companies that provide mobile phones and telecommunica-tions. For banks, the foundation is still high-value customer needs, with the new twist being digital’s growing role in unlocking the opportunity.

With the right selective strategies, the millennial oppor-tunity for regionals is real and potentially quite profitable. It will require digital and other alternative channel investments, plus a shift in resources from physical branches to marketing. The goal is to build a distinctive brand, fully competent on the digital side, yet locally oriented and invested in the commu-nity. Progress will further require looking within the millennial cohort to target high-value sub-segments, both in acquisition and cross-sell.

Chris Musto and Karen Graham are Directors at Novantas, respectively in the New York and Chicago offices. They can be reached at [email protected] and [email protected], respectively.


Among millennials who are current banking customers, people with the highest tendency to switch providers generally are older and more confident. Already experienced in opening a checking account and familiar with its monthly use, they are much more self-directed. Digital research is the shopping method they cite as most helpful, and they are more likely to report opening a checking account online.

These prospective switchers also are especially likely to bank at large national institutions. Their consideration and initial big-bank patronage is swayed by perceptions of convenience, driven by marketing and digital capabilities and experiences. Yet switch-ers tend to be more receptive to competing value propositions from regionals, reflecting ongoing affinity with institutions hav-

ing stronger community ties. For regional banks attempting to peel these prospective

switchers away from the nationals, the task is to qualify themselves in ways that resonate with digital sensibilities. Unless the bank builds and promotes a winning digital banking customer experi-ence and strong functionality, efforts to switch millennials from the nationals are doomed.

On the bright side, enlightened regionals can go on offense with digital banking. Our research shows that gaining recogni-tion for “leading online/mobile banking” drives primary checking acquisition, often at lower expense than branch expansion.

— Chris Musto

Switch Factors

Mortgage lenders are losing operational flexibility. They face constraints as never

before: the impact of new regula-tion, balance sheet evolution, fickle investor demand and a less nimble processing capability. As a result, lenders’ ability to “turn on a dime” and profitably originate the product de jour has diminished.

While seasoned mortgage bankers can pull out a tried-and-true toolkit to manage higher volumes, there are drawbacks with each tactic in today’s environment.

Enlarging the processing staff could solve periodic problems with under-capacity, for example, but this surge capacity is too expensive

to hold when volumes recede.Some lenders have considered

outsourcing fulfillment to reduce costs, but fear the operational risk given the quality required to issue QM-compliant loans. And while tightening underwrit-ing may improve risk-adjusted returns, it can handicap the sales staff and lower consideration from brokers.

Inevitably, most lenders settle on pricing as the throttle to control origina-tion volumes. But to outperform compet-itors, a growing number of progressive players are bringing new analytics and technology into the pricing process.

To reap the available incremental spread on capped origination volume, successful analytic mortgage pricing requires three fundamental changes.

First, analytically-driven originators need to price against market-by-market competitive pricing benchmarks for each product. Second, these mea-sures of relative competitive position rely on a robust technology platform that can provide daily updates on optimal pricing position. And third, to assure cohesive execution in the field, close coordination with the sales team is needed, especially to manage exception pricing.

Based on Novantas research and client work, advanced mortgage pricing can typically provide a near-term origination margin lift of 10 to 20 basis points. And the long-term potential — as the industry moves into a different rate environment and the

BY ZACH WISE AND ANDREW FRISBIE

Facing structural limits on origination capacity, lenders often pull the price lever, but with blunt results; better pricing analytics and technology can improve spreads.


COMMENTARY

29July 2016

30

organization hones analytic margin/volume tradeoffs — will be higher.

PERVASIVE CHALLENGESThe limitations on management flexibility in the mortgage industry are legion. While each originator faces a unique combination of issues that inhibits the ability to simply push for maximum volume, several challenges are pervasive:

Limited capacity for non-con-forming jumbo loans. For originators willing to stretch, one option is to go after high-dollar transactions involv-ing upscale properties and affluent borrowers. These credits are prized for their returns, and bank origina-tors see added value in the cross-sell potential with an elite clientele.

The catch, however, is reduced funding availability for this type of asset. Balance sheet capacity is contracting for most banks. Risk and liquidity standards are tighter in the new regulatory environment, and rising loan-to-deposit ratios are forcing more careful choices about the use of core funding.

The alternative — selling to private investors — exposes the bank to what has proven to be fickle investor demand. While some originators have found buyers for jumbos, these investors have their own constraints and changing preferences, which means this funding source can readily dry up on little notice. This leaves originators uncertain on whether to focus on volume or price at any given point.

General balance sheet constraints for major players. With the introduction of Basel III and other regulations (such as the leverage ratio speci-

fied by Dodd-Frank for systematically important financial institutions), major banks see far less profit motivation to carry mortgage assets on the balance sheet. The situation has degraded to the point where in some instances, using balance sheet funding to deliver specialized mortgage products to a high-value customer group is becom-ing more of a “loss-leader” program to cement relationships and open the door for other kinds of cross-sell.

Dodd-Frank’s rules on qualified mortgages have further complicated balance sheet decisions. Exposed to higher legal risk and regulatory pressure when extending credit into higher risk tiers, banks now must ration non-QM production. Tranches of this type of origination must be carefully selected in order to ensure an adequate return, but high selectivity is difficult to achieve in a retail channel environment.

Slowed origination. Processing capacity has been slashed as the massive post-recession refinancing wave has subsided. Meanwhile new regulatory requirements have increased the complexity of required documentation. While lenders can “slow-walk” their origination times, they face undermining their com-petitive edge with customers.

Transformational digitization is on the drawing board for many major originators. But for now, traditional, manually-intensive processing dominates. Many orig-inators still must manually touch each loan in the pipeline, slowing turnaround times on applications.

CAPACITY MANAGEMENT TOOLKIT Savvy originators have faced con-straints before and have a familiar toolkit of tactical responses, every-thing from extending lock periods, to


Source: Novantas

Figure 1: Drawbacks of Traditional Performance LeversSeeking manuevering room, mortgage originators have many conventional tools to consider, but none as effective as precision pricing.

Extend Lock Period(customer pays)

Extend Lock Period(originator pays)

Add fulfillment staff

Outsource fulfillment

Tighten underwriting

Broad price hike

Less competitive pricing; slowsturnaround on transactions

Lowers origination returns; slowsturnaround on transactions

Increases overhead and reduces flexibility; cost overhang when volume slumps

Invites potential quality issues; increasesoperational and compliance risk

More uncertainty on approvals; can strain relations with sales staff and brokers

Reduces volume, but with potential competitive impacts; short-term fix at best

expanding origination staff, to out-source fulfillment, to tightening under-writing. But each has its drawbacks (Figure 1: Drawbacks of Traditional Performance Levers).

The fallback tactic is to pull the price lever, often seen as the “one sure way” to reduce volume without the drawbacks identified in Figure 1. Unfortunately, money is frequently left on the table by blunt-force decisions, for example, bumping up rates by an eighth of a point across the board. Originators typically lack the analyt-ics to know, for example, “should I

increase price by 1/2 point across the footprint? Or maybe 1/8th in New York and 3/8ths in Saint Louis?” These players lack both the science to pin-point optimal price variations and the metrics to show what is gained or lost.

Unlocking this benefit requires four key elements:

1) Relative Competitive Position (RCP). For a robust view of demand side impacts, originators need a solid grasp of each product’s price position against the market. The important first step is to establish a robust benchmark metric for each major market. Our work with U.S. originators shows that a variety of elements must be com-bined on a daily basis, including:• Daily rates posted by competitors;• Customer points vs. rate selections

relative to par;• Regional variations given each

competitor’s unique cost structure, perceived loan values and estimat-ed volume targets; and

• Proper handling of marginal play-ers in the calculation.2) Revenue optimization frame-

work. Having developed a competitive position metric, the next step is to build demand elasticity curves that correlate local market position and conditions with RCP. A full understanding of demand elasticity allows the pricing manager to execute tailored strategies for different markets, products and borrowing purposes. Margins can be optimized without putting volume targets at risk, and vice versa.

3) Robust technology platform. The

lender must meld high-end calculation capabilities (which tax even large server farms) with nimble delivery so that the right prices are provided each morning. Multiple intraday updates are needed in dynamic market envi-ronments, for example, following a Fed announcement or a Treasury rally. It is a formidable exercise to calculate the RCP for each region, generate optimal pricing matrices given each product’s volume constraints, and dis-tribute this information for instant use.

4) Coordination with the field. Normally, most lenders provide lee-way to the sales team for “competitive price match,” or on-the-spot rate con-cessions to close business at the point of sale. While such pricing discretion can help to maintain sound front line relations and competitiveness, it can also defeat pricing strategies intended to temper a temporary volume surge that overwhelms production capacity.

Suspending frontline pricing discre-

tion may put off the sales force when reps see customers walk to the bank across the street. This is why proper communication is need on pricing posi-tions and rationale. Avoiding pipeline overload ensures that closing times will be met and the customer experience is maintained, which in turn has a high correlation with pull-through rates and, ultimately, sales force commissions.

UPSIDE POTENTIALMortgage lender flexibility is con-strained as never before, given the impact of new regulation, issues with

balance sheet and investor funding, and the burden of newly complex doc-umentation requirements on shrinking origination processing teams. While seasoned mortgage bankers have a conventional toolkit of coping tactics, each option has its drawbacks in the current environment.

Inevitably management pulls the price lever to shift origination volume and mix, but not nearly effectively as can be done with advanced pricing analytics and technology. In volume-challenged environments, the upside from this added precision can translate into $1 million to $2 million of increased profit margin per $1 billion of mortgage originations.

Zach Wise is a Principal and Andrew Frisbie is a Managing Director at Novantas, respectively in the Charlotte and New York offices. They can be reached at [email protected] and [email protected].


“While seasoned mortgage bankers have a conventional toolkit of coping tactics, each option has its drawbacks in the current environment. Inevitably management pulls the price lever to shift origination volume and mix, but not nearly effectively as can be done with advanced pricing analytics and technology.”

31July 2016

32

Commercial banking units con-tinue to be a source of strength for their parent companies, but

recent results paint a picture of tighten-ing profit dynamics. While evocative of other recovery-era waves that quickly subsided, the current trend still points to the inevitable — a new performance climate in which raw balance growth will no longer carry the day.

Price promotions long have been an important tool for deposit-gather-ing, both to meet long-term funding goals and to quickly acquire bal-ances in special situations. While the deposit-rich environment of recent years has muted much of the need for deposit promotions, these campaigns are set to proliferate as banks seek funding to accelerate loan growth and begin to cope with rising rates.

But even as deposit price promo-tions gain fresh industry attention,

their effectiveness is being undercut by diminishing returns. Campaigns that initially had strong success in prior years are progressively losing energy. In a vicious cycle, the bank is left in a position of needing to launch more promotions, yet each campaign is less effective than the one that came before.

Why is this happening? One culprit is web-enabled shopping, which has diminished the punch of local promo-tions as consumers effortlessly monitor rate trends and offers nation-wide. Another is growing consumer price sensitivity in expectation of rising rates. Established account holders are increasingly motivated to grab promotional offers; which have the counterproductive effect of raising the interest carry on current balances.

It is a potentially serious situation that will require improvement in the metrics, skills and strategies used to

drive deposit-gathering — even among the many banks that have made significant progress in recent years. The advent of promotional fatigue has changed the basis of customer decision-making, particularly key assumptions about their behavior.

One priority is to do a far better job of estimating balance retention over time. Another is to revise the financial calculus of price promotions to account for the cannibalization of lower-cost deposits already on the books. New organizational strengths will be needed as fresh approaches will require tighter coordination between organizational units.

OLD ASSUMPTIONS VS. NEW REALITIESMany banks assume they can effi-ciently generate incremental balances by limiting promotional offers by geography and only for new deposit

BY HANK ISRAEL AND ANDREW FRISBIE

Banks need to clarify their deposit needs over the next few years and overhaul the metrics, skills and strategies used to drive deposit gathering.


COMMENTARY

funds, abilities that have provided rich opportunities for targeted price promotions in the past. But the levers of deposit promotion have changed.

Information. The Internet has radically changed access to informa-tion. Online ads bring deposit account offers to consumers do not need to look up at billboards, read local papers or step into a branch — prompting them to consider a specific bank. The availability and aggregation of online rate information makes rate compar-ison easier and more transparent. And consumers are becoming more willing to open new savings accounts online, with non-local providers, playing into the hands of direct banks that show up in search engines touting “the best rate” nationally.

Switching. Digital banking has eliminated much of the friction that limited deposit movement and account churn. Aggregation sites provide easy, anonymous, anywhere access to

national rates. Online fulfillment makes account opening immediate and con-venient. “Me2Me” transfers allow elec-tronic one- to three-day money move-ment, enabling consumers to open and keep savings accounts separate from payment accounts. Online account management provides instant informa-tion for consumers to monitor bal-ances and rates, and to optimize rate returns across accounts and banks.

Regulation. With the implementa-tion of Basel III, consumer and small business deposits are treated more favorably in calculating the liquidity coverage ratio, increasing their value compared with most alternatives. This regulatory change now encour-ages existing retail players and new entrants to compete more aggres-sively for retail deposits — including the use of promotional rates.

Competition. Today the use of enhanced deposit analytics is the competitive norm, increasing the

likelihood that tailored promotions will be more widely used and there-fore less responsive. Sophistication in systems, targeting and pricing analytics is now seen among smaller multi-market regional and community banks, and the direct banks are piling on as well. New expertise is needed to stand out in the marketplace.

A core task is developing the right measures of promotional cost and effectiveness — a warning and avoidance system that will help the bank to steer away from ill-fated promotions with diminishing returns. Two key indicators are deposit balance retention and the true mar-ginal cost of promotional deposits.

Retention. Balance runoff can be excessive for certain customer segments, negating results from promotional campaigns. By segment-ing customers based on a sharpened understanding of likely balance retention rates, the bank can focus on

high-potential depositors and clarify which offers to make to preserve and grow stable balances. Propensities for “sticki-ness” versus “runoff” have profound implications on which deposits have long-term value and are worth the promotional effort.

Marginal Cost. Cannibalization occurs when current depositors grab onto price promo-tions intended to win new business. All too frequently, campaigns invisibly sink underwater when this outcome is omitted from deposit planning.

The true marginal cost of promotional deposit balances considers likely subsequent runoff; the


Figure 1: Changing InfluencesThe upcoming environment for promotional deposit pricing will differ significantly from the last rising rate period (2004 to 2006).

Source: Novantas

Information ProliferationNear-unlimited rate info in theonline/mobile environment

Lower “Fences”Less geographic price fencing; risk that promos will attract bank’s own depositors

Lower Switching CostsConvenient online fulfillment, electronic money movement

More Exposure to ChurnEasier for core customers to relocate accounts; higher price elasticity

Mandate for Core DepositsRegulatory push for core fundingover other deposits

More Pressure on PromotionsMore banks chasing core deposits, bidding up rates

Analytics More Widely UsedProliferation of precision pricing skills, tougher to stand out in the crowd

Fewer Arbitrage OpportunitiesQuest for new sources of analytic advantage

33July 2016As seen in BAI Banking Strategies

34

estimated adoption by existing accounts to the new higher rates; and the overall retention of promotional deposits. The big picture — made clear by a granular, customer-level analysis over time of promotional and established balances — is that the unwanted repricing of current bal-ances is increasing at a rapid rate.

SETTING THE AGENDAEach bank needs to understand the extent of its exposure to promotional fatigue. This knowledge, combined with the growth outlook, shapes the deposit agenda. Drivers include the funding growth needs of the individual bank and the promotional challenges facing the bank in each of its markets and products.

So, what are the common themes across these agendas? First, banks will need to invest in the analytics and technology to capture the effectiveness of traditional promotions and deploy more advanced approaches to improve them. In a dynamic environment, customer expectations and competitor responses will continue to intensify, which will require more granular customer data, including transaction-level history and shopping behavior, to better target pricing (this data also allows for segment-level pricing for those with the capability).

Second, capabilities need to be aligned with promotional philosophy. Some institutions

believe in “customer-of-one” targeting, using specific price points that are not broadcast to the broader customer base. Others worry about customer and front-line acceptance of these differen-tials and instead opt for transparent, give-for-get logic — providing rate incentives tied to the acquisition and retention of specific balance amounts.

Third, the organization will need to evolve its rhythms on how the product and marketing teams interact with the front-line in the preparation, delivery and measurement of campaigns. Old metrics need to be upgraded. Marketing must become more nimble to deliver a greater variety of targeted offers, more frequently. The front line will need the right proof points to deliver the new reality with conviction.

Finally, whatever the tactical agenda, analytic development should be supported by an aggressive

test-and-learn program for new field applications that leverage technology and multichannel offer delivery to maximize returns on these efforts.

For many banks, moving beyond a simple adherence to traditional promo-tions will allow them to maintain struc-turally lower deposit costs while achiev-ing required funding levels. For others, such measures may not be sufficient, calling into question whether share-holder value is better maximized with analytically-derived deposit growth serving as a governor on asset growth, rather than the other way around.

Mr. Israel is a director and Mr. Frisbie a managing director in the New York office of Novantas. They can be reached at [email protected] and [email protected], respectively.


High

Figure 2: Setting the Agenda for Promotional PricingEach bank must clearly understand its own likely promotional fatigue pattern, as well as its funding growth outlook, in order to optimize future promotions.

Source: Novantas

Exposure to Promotional FatigueLow

Low

High

Depo

sit G

row

th G

oals Early start on test-and-learn

treatment developmentRadical overhaul of current

practices and skills

Use promotions sparingly “Get off the treadmill”of frequent promotion

“A core task is developing the right measures of promotional cost and effectiveness — a warning and avoidance system that will help the bank to steer away from ill-fated promotions with diminishing returns. Two key indicators are deposit balance retention and the true marginal cost of promotional deposits.”

Novantas Review is published quarterly by Novantas, Inc., 485 Lexington Avenue, New York, NY 10017.

© 2016 Novantas, Inc. All rights reserved. “Novantas Review” and “Novantas” are trademarks of Novantas,

Inc. No reproduction is permitted in whole or part without written permission from Novantas, Inc.

ABOUT NOVANTASNovantas is the industry leader in analytic advisory services and technology solutions for financial institutions around the world. We create superior value for retail and commercial banks by delivering information, analyses, and automated solutions to improve revenue generation across pricing, product development, treasury and risk management, distribution, marketing, and sales management.

For more on these topics, view our multimedia at: www.novantas.com

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RISING COMPETITION FOR CORE DEPOSITS

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