The principal role for bank and credit union branches is gathering low-cost deposits and gaining new customers or members. While there may be many channels to drive lending, branches remain the most effective approach for gathering deposits and serving customers — although some digital-only backers might disagree.
In fact, branch sales may be heading for increasing trouble. I’m hearing more reports from C-suite types that sales levels are down from a few years ago.
In considering this it occurred to me that there may be structural factors in play in many markets. The key drivers of revenue growth are:
- Acquisition of new customers or members.
- Cross-selling of additional accounts to existing customers or members.
- Increased balances in existing accounts.
Currently, there are evolving market factors that impact each of those aspects of retail financial services. Let’s review each.
1. Slowing Mobility Rates Shrink Account Acquisition Trends
Consumers change banks or credit unions for a wide variety of reasons. People marry or divorce. They have children or grandchildren. They change jobs or retire. They get upset about how they’re treated or don’t like the fees. Another institution may give them a better offer. It may be simply that the purpose for the account may have been resolved and it’s not needed anymore.
Geography Still Matters:
The #1 reason that people change banks and credit unions remains that people move.
Based on studies over the last decade, as much as 50% of “bank switching” is tied to a change in address. Far more people cite this reason than any other reason for switching providers.
But Here’s the Rub:
Fewer people are moving every year, according to the U.S. Census. American mobility has been falling for five straight years.
To put this another way: 20 years ago, about one-in-six (16%) households moved during each year. Ten years ago, while we were in the beginning recovery from the Great Recession, the figure fell to nearly 1-in-8 (12.8%). In 2020, the figure dropped to nearly 1-in-11 (9.2%).
If the rate had held steady from 20 years ago, we would have 22 million more people moving during the year. Using the rate from 10 years ago, we would have over 11 million migrating beyond today’s levels.
Lower migration rates impact financial providers in several ways, not all of them bad.
First, they reduce their own attrition rates, as people have fewer reasons for leaving. In fact, we’ve seen industry attrition rates drop from about 16% annually to about 11% today, although estimates vary.
Lower attrition rates benefit the largest banks the most, as they have the largest customer bases. However, because of the ubiquity of some mega banks, they also enjoy the benefit of being convenient nearly anywhere the customer moves.
2. Lower Migration Rates Shrink the Consumer Pools in Play
As migration rates fall, it grows more difficult for new market entrants to gather share. Growth markets remain attractive, but stable markets become more difficult to enter.
On a somewhat positive note, renters make up a third of all households but they represent three-fifths of all movers. They tend to be younger with lower incomes, so their lost deposit balances are generally below average.
For these reasons, new customer and member acquisition levels have declined in the past two decades.
Teller Referrals Drive Cross Selling. (What Tellers?)
Cross-selling additional accounts or services to existing customers can comprise half of total sales volumes. Historically, about two-thirds of those sales resulted from a teller referral. We all know what has happened to teller staffing over the last decade or so, with the introduction of ATMs initially for cash withdrawals, then deposits, and then online channels for account servicing and bill payments, and finally mobile channels for remote deposits.
Branch traffic, and by that, I mean teller traffic, has fallen as much as 50% in the last decade. Some research from Kronos indicates community banks and credit unions have seen less of an impact, with about a 30% decline in the last 20 years.
But for all institutions, it’s hard to make a teller referral when the customer doesn’t see a teller.
The idea behind Interactive Teller Machines was that you could offer somewhat of a hybrid experience, where a customer could still “see” a teller. But I haven’t heard any stories of firms successfully generating significant incremental sales via that channel.
Probing Poor Performance:
Is there a lack of testimony to ITM sales success because we tend to measure call center performance on the number of calls handled — not the quality of those calls?
For these reasons, cross-selling levels have been hurt in the past 20 years as well.
3. As People Stayed Put, Stimulus Payments Boosted Local Savings
Remember, a level of annual attrition occurs everywhere, and it tends to be among younger, lower-income households, so lost balances generally aren’t huge. At the same time, there’s a naturally occurring rise in balances from existing customers.
Historically, the average balance in deposit accounts grew at a rate slightly better than inflation. Then the pandemic hit. Many customers faced lost jobs and incomes, draining down savings, but the government stepped in with two huge stimulus infusions into people’s wallets.
According to the Federal Reserve, about half of the 2020 stimulus paid down loans, and about a quarter went into savings, with the remainder going to new purchases. Data is not yet out on the 2021 stimulus, but you should expect another boost in savings rates. Bank branch deposits grew at twice the normal rate between 2019-2020, according to FDIC Share of Deposits reporting.
The problem is that 2022 likely won’t see more personal stimulus payments. The challenges banks and credit unions face are daunting, as stimulus events are rare and the impacts short-lived.
On the other hand, the recent stimulus payments did more than just pump-up deposit balances. It also reduced the balances of outstanding loans as people paid off debts, hurting loan-to-deposit ratios and reducing earning assets.
What Can Institutions Do to Stimulate Growth Again?
So, financial institutions face a triple threat, which will stymie deposit growth going forward, pulling branch performance down further. Branches aren’t going away anytime soon but building a successful branch network is becoming increasingly difficult. Approaches that worked ten years ago no longer perform.
Fortunately, the science behind branch and ATM planning has improved dramatically in recent years, with machine-learning AI-based modeling tools delivering insights unthinkable just five years ago. This will at least yield better analysis.
Acting on the resulting insights may or may not pay off. However, doing nothing when the world around you is evolving drastically is a choice, but not a smart one.