Leaders from the retail groups of two dozen American banks recently gathered in New York City to discuss the state of the deposits landscape. The format of the event led to uniquely in-depth discussions and many great takeaways.
The Environment Has Never Been More Competitive
Several speakers discussed the concurrent pressure exerted on banks’ margins by startups that are buying deposits with high rates, the large national players, and the looming specter of big techs entering banking.
Thanks to data from bankHometown’s Michelle Kile, we know that Chime reached $200M in revenue in 2019, four times higher than in 2018. Chime is planning on launching personal loans and investment services in the first half of 2020, mirroring the expansion patterns of other fintechs like SoFi, TransferWise, and Wealthsimple.
Whether these startups are attracting customers with high rates, low fees, and/or interesting perks like metal cards, it’s clear that their acquisition methods are effective. A key takeaway from this gathering, as I’ll discuss later in this piece, is how banks can fight back without using the same tactics.
On another front, there are the large nationals. In addition to massive technology budgets, these banks also typically benefit from having a very low cost of deposits. To give just one example from Betty Cowell’s presentation on day three, Bank of America has a cost of deposits of 0.4% and has managed to grow deposits at 5% of total assets (approximately $65B) in the US between 2018-19.
The advantage of the large nationals is that they don’t typically need to offer the highest rates because of their level of coverage and, increasingly, the competitiveness of their technology. According to Eric Calaman from Bank of America, “A strong value proposition is pricing’s best friend. A strong value prop isn’t one-size-fits-all, it’s having the capabilities to serve different customers differently.” By deploying services like Erica, an advanced AI financial assistant, Bank of America can offer a compelling alternative to startups while avoiding pricing wars.
Fundamentally disrupting traditional behavior patterns is what Big Tech does. Why use a card when you could use Apple Pay? Why sign-in online to send a friend money when you could ask Alexa to do it for you? In a time when consumers are putting the year-old fintech and the hundred-year-old bank on the same level, it’s not unrealistic to imagine younger people asking, “Why do you have a bank account?” Big Tech’s advantage was brilliantly summarized by James Morgan from Capital One: “Amazon has convinced you that it’s irrational to not be their customer.”
It’s in this context that we can discuss how banks are reasserting their own claim to consumers’ wallets.
It’s Rarely About just the Rate
Brian Milton from MUFG gave a compelling presentation on how rates fit into the overall customer relationship. According to Brian: “Rates are one thing our clients bank with us for, but not the only thing. How can we use personalization and primacy to decrease price sensitivity?” Brian believes primacy is especially important because, “Primary customers demand half the yield that non-primary customers do.” The challenge was concisely summarized by Tiffany Hannika from CFBank: “How do you put together a package that’s more than just banking for customers?”
There was a divergence in banks’ pricing strategies. Discover Financial and East West Bank offer a single rate regardless of channel, while other banks are broadly pursuing segment-based pricing.
Some banks used their digital arms as a means of automatically segmenting their customers. Purepoint Financial by MUFG is a direct bank that has driven $7B in deposits since 2017. By keeping MUFG and Purepoint separate, the bank can acquire rate-sensitive customers without having to re-price its back book.
Other banks focused on segmentation within their customer base. David Bolocan from BBVA emphasized the importance of customer segmentation and identifying the 20% of customers that drive 80% of value. For groups like this, Zhongcai Zhang from NYCB argued that “exception pricing was an important defensive tool” in a retention strategy. Melanie Jordan from Zions discussed the ideal of customer-level pricing, but the audience generally agreed that it’s been a difficult concept to operationalize.
Brian and Eric separately discussed the importance of the broader value proposition. Leo D’Acierno’s presentation on day three provided a compelling recommendation on how to do this: focus on your strengths as a bank. Our networking group discussed this as well via the idea of banks “unbundling” their offering and focusing only on things they are especially good at. In practice, I’m seeing this play out presently at a large UK bank whose customers are being tempted by TransferWise’s low FX rates but who ultimately are very much looking for reasons to stay with the bank.
An especially interesting part of the gathering was hearing about various banks’ apps and digital offerings, and how they are being used to circumvent rate-based competition.
Increasing Relevancy to Customers
It was fascinating to hear how banks were using technology to increase product relevance without increasing the rates being offered.
Velo is a truly digital offering from East West Bank. The bank was able to automate the entire customer onboarding process while adding no additional staff or back-office operations. In the words of Catherine Zhou of East West, “We use one single rate whether branch or digital.” Instead of focusing on rate, Velo offers easy onboarding, incredible functionality, and very desirable app integrations with apps like Alipay. For East West’s customers who are accustomed to Alipay’s ubiquity in Asia, not having immediate access to it in the US is a significant problem. Velo, the solution to that problem, is worth far more to them than a moderately higher rate. This drives sticky relationships and high product utilization.
But digital offerings are nothing if a bank’s people don’t buy-in. Catherine discussed the rationale behind the rate by saying, “We want branch to be the advocate for digital so that everyone is on the same page.” East West Bank went above and beyond in its efforts to align digital and branch by ensuring products purchased digitally can be attributed to branches near the customer, allowing branch employees to be compensated for sales for products purchased online.
WSFS Bank took a different approach in its launch of the myWSFS app. myWSFS provides a significantly higher and more personalized level of service to customers by allowing them to match with their own personal banker based on criteria like expertise and hours of availability. The ability to chat with this banker whenever you have a question and to almost certainly receive an answer within 24 hours is a profound point of differentiation. This concierge banking model is scalable because people don’t typically need to speak to their banker every day; Martin Lespada from WSFS estimates that one banker should have a capacity of 1500 clients.
Like East West Bank, branches are critical to the success of myWSFS. According to Martin, “Having 1:1 conversations in branches has been the best way to sign up customers for the platform.” In this way, myWSFS is more like a digital expansion of the branch than a replacement of it. Intentional branch and digital strategies like this one are crucial; Martin believes that there is “no excuse even for a small bank not to have digital applications.”
Agility is another essential aspect of growing relevance in the eyes of the customer. Eric framed this relatable problem well when he said, “It’s about being prepared on the back-end and having the capabilities to launch new products and iterate on them quickly. It can’t take us a year to get things to market.” Zafin’s Meenaz Sunderji urged banks to develop the capabilities to “fail fast” so that they can learn what works and allocate resources accordingly.
While competition for customer deposits has never been fiercer, it’s also clear that banks are acutely aware of it. Banks need to launch sub-brands to target different customers, invest in technology that exceeds customer expectations, and be as flexible and relevant as possible when it comes to launching new products and offers. If they do all of this, banks have a fighting chance when it comes to keeping and growing their market share.
If you have any questions at all about how Zafin’s net new money, offer management, and relationship pricing use cases can help you to eliminate cannibalization, acquire and retain customers, and grow the breadth and depth of customer relationships, please don’t hesitate to send me a note at firstname.lastname@example.org or give me a call at 1-416-301-3241. See you next year!