In many ways the nation’s largest banks resemble the battleships of a couple of generations ago. They can’t turn as quickly as smaller ships, but once they’ve turned, take cover.
To get a sense of the retail strategies and course corrections of the three largest U.S. banks, The Financial Brand reviewed earnings calls, investor presentations and senior executive interviews. Overall, it’s apparent that the struggle to find and fine-tune the right combination of retail strategies continues. To varying degrees, the battleships are still turning, but the resources of these industry giants are vast, and they have momentum.
Citigroup Reveals Details About Google Cache and Its Branch Plans
Ever since the November 2019 announcement that Google would partner with Citigroup and a small credit union as the first institutions to offer the Google Cache financial account, the industry has speculated over what would follow the bare bones announcement. While discussing Citi’s retail banking strategy in a Bloomberg TV interview, Michael Corbat, CEO at Citigroup, let out some particulars about the accounts.
Corbat said the partnered product would likely launch in spring 2020, and he spoke of it as offering a form of economic inclusion. This had been one of the themes of the World Economic Forum meeting in Davos that he was attending at the time of the interview.
“No one can be everything to everybody,” said Corbat, saying that part of the banking industry’s problem leading up to the Great Recession was too many players were trying to do just that. While banks shouldn’t attempt to cover all consumer groups, it is important for financial institutions to improve their products and make them available to consumers who have not had access to banking before, Corbat stated. He suggested that this is part of what Google Cache is intended to accomplish. The accounts will be offered through additional institutions beyond Citi and Stanford Federal Credit Union, eventually.
Corbat said financial institutions need to pay attention to the level of service other industries are making available through technology. He pointed to ride hailing apps and retailing apps as two examples of industries further ahead of banking in solving consumer pain points. He said consumers increasingly expect financial institutions to match that level of service.
Along those lines, Corbat suggested that the partnership with Google would bring more consumers into the banking system and accelerate the digitization of banking. He said it would also help promote compression of consumer banking fees and eliminate friction in consumers’ lives.
In the interview, Corbat was asked what kind of marching orders had been given to Jane Fraser, who in October 2019 was named President of Citi and CEO of the bank’s huge Global Consumer Banking unit.
“The marching orders are that we are offering the ‘best in life’ experiences,” said Corbat. “It’s not about being the best in banking anymore.”
Fraser was also in attendance at Davos. During a panel discussion, she spoke of concern about competition from platform players like Google and how it would shake out.
“The common thread for all of us is … you have to capture not just the wallet, but you have to capture the heart and mind of the customer,” said Fraser, according to a report on the discussion by Fast Company. “That’s the strongest defense against the huge platform player, making sure you’re relevant to your customer at all times. Otherwise you will become a utility.”
More detail on Citi’s branch plans. In the course of the Bloomberg TV interview Corbat shifted to the issue of physical channels versus digital channels. Citi has a smaller branch footprint in the U.S. compared to the other megabanks, though it would be open to selected branch opportunities where it made sense in relation to its existing network.
Yet while it has a small network today, Corbat made it clear that Citi still believes in branches, for the time being.
“The pace of change is probably slower than people think. We cover a continuum of people and we are running both an analog and a digital bank,” said Corbat. “That will change over time, but we believe a large cohort of people who want it now, in terms of digital banking on their app, also want to come into our branches and speak to people. When you can provide that and segment that in the right way, it’s very powerful.”
Still, newer channels keep growing. Active mobile users grew by 13% in North America for Citi in 2019, and internationally, mobile users grew by 30%.
JPMorgan Chase: Blending Physical and Digital Works Best
JPMorgan Chase, the country’s largest bank by assets, continues to stoke both the physical channel and the digital channel.
In 2018 the company announced ambitious plans to open 400 new branches in new markets over five years, with plans for opening up to 90 in 2019 alone. As it turned out, the bank opened 70 new locations in 16 new markets in 2019. At the same time the bank was consolidating, remodeling, or closing other branches in existing markets, so that it ended the year with 4,976 branches, down 1% from yearend 2018. A Chase spokesperson confirmed that the five-year goal for 400 openings remains in place, subject to regulatory approvals and construction factors.
JPMorgan Chase is a technology pioneer, but Jamie Dimon, Chairman and CEO, continues to be a big believer in branches. While rethinking and reimagining them are a key part of Chase’s game plan, Dimon not only believes that many consumers continue to want to be able to access live bankers, but that younger consumers like Millennials will increasingly want to visit branches as they accumulate greater assets. In 2019 Chase grew deposits by 5%, in part because of the expansion to new markets. It now holds over 9% of total U.S. consumer deposits.
During a fall 2019 investor conference, Sarah Youngwood, CFO for Chase Consumer and Community Banking, gave a deeper sense of how the bank sites its new market branches, after an analyst asked how the effort was going.
“It is early days,” said Youngwood, “… but it’s going very well. Our deposits are growing about three times faster than some of the plans that we had.”
Youngwood explained that part of what made such growth possible was data on consumers in those markets who Chase was already serving with cards and other products. She said these consumers already know the Chase brand and have a level of trust that helps the bank as it physically enters the market.
“The thesis was, can we put the branches in the right places,” Youngwood continued. “We’ve got card data and we put the branches exactly where needed. We put the ATMs exactly where needed.” Chase officials have indicated that about a third of holders of Chase cards have additional relationships with the bank and that mortgage customers represent a strong source of deposits.
Beyond this, Youngwood made the point that the line between physical branches and digital banking is hazier than diehard advocates for either channel might care to admit.
She pointed out that with digital account opening, Chase can ramp up consumer connections before making its beachhead in a city.
“Two-thirds of the accounts in the new markets has actually been digital,” she explained. “That should probably level off as we continue to expand, but it’s a great accelerator.”
To put some numbers on this potential audience, at yearend 2019 Chase had over 52 million digital customers, which includes active users of online, mobile or both. This is up 6% from yearend 2018. Active users of mobile came to over 37 million, up 12% in the same period. All told, about 80% of Chase transactions occur in self-service channels.
Really deep pockets help. Youngwood pointed out that Chase spends about half of its $11.5 billion tech budget on investments for the future.
“It’s really hard for regional banks to put on numbers that are of that caliber. Our consumer business is spending a lot on all of the things for an ecosystem that works for our customers in catching the customers the way they want to be served, whether that is digital or in the branch or in their homes,” said Youngwood.
She added that what separates Chase’s product development from fintech firms is that the latter often concentrate on “slivers of experience” that work well on their own, whereas bank product development ideally takes place in one ecosystem such that all parts work with all other parts. Youngwood believes consumers can tell the difference.
Bank of America: Erica Sets a High Bar for Rest of Industry
Bank of America CEO Brian Moynihan was about to wrap up a “fireside chat” during an investment analyst conference when a listener raised his hand for a question. He said he’d been talking to a BofA competitor that was trying to develop its own version of Erica, the bank’s very successful artificial-intelligence-based chatbot. He’d been told that the rival had postponed its implementation date. Building its own competitive chatbot was proving to be a struggle. Why, he asked, did Moynihan think matching Erica was so hard?
Moynihan had just given a presentation in which he noted that Erica — from the last part of “America” — had hit 10 million users since its soft launch in June 2018. That was a good beginning, he said, but he saw huge potential for further adoption of the chatbot as new capabilities are added.
“If you say to Google, ‘What’s my balance?’ you might get a different answer than you’d expect from a bank. You might get something back about yoga classes.”
— Brian Moynihan, Bank of America
Then he began ticking off what had gone into building Erica. First, bank staff working with SRI International had to devise a natural language processing specifically for financial services. That’s harder than it might seem.
“If you say to Google, ‘What’s my balance?’ you might get a different answer than you’d expect from a bank,” said Moynihan. “You might get something back about yoga classes.”
Coming up with the solution took a year and a half. Then testing followed to see how well the program worked. Moynihan said that many bank systems go into making Erica work so that it can give instant information to consumers with a minimum of friction.
He was speaking at a New York City event so he gave a local example. “Someone is riding up the West Side Highway in a taxi, talking on their phone. The system has to be able to decipher what they are asking about regarding their exact account. And you have to get it to do this in real time, or they’ll hang up,” says Moynihan.
That requires voice recognition software, AI to understand and execute the consumer’s request, instant access to multiple systems and fast connectivity, even before widespread implementation of 5G networks.
“So that’s why it was hard,” Moynihan concluded. Efforts like Erica take time and a lot of money, with BofA spending billions — $3.2 billion in 2019 and 2018 and the same amount budgeted for 2020 — to develop new technology, on top of keeping current tech running.
Bank of America’s consumer banking journey. Erica was one of several examples Moynihan gave at the conference illustrating the journey BofA has been on overall, and specifically in the consumer banking area in the decade since he stepped into the top role at the bank. Among the points he gave to show how the bank has evolved:
- BofA has more than 38 million digital users — online and mobile — and over 29 million mobile users, up 26% and 81%, respectively, over a five-year period.
- Digital represents 26% of total sales, with 48% of that coming from desktop and 52% from mobile.
- Through technology, branch closings and branch rationalization and renovation, and cost-cutting, the bank’s efficiency ratio improved to come in at 45% versus 61% five years earlier.
- More specifically, the bank had slimmed down its branch footprint, even while making major new market expansions, by about 14%, in the same period. The bank now has about 4,300 financial centers, as it calls branches, with nearly a third completely redone. (BofA had peaked at 6,100 centers.)
- From 2017 to 2019, the bank added 200 new centers, and plans call for 400 new centers and 1,500 more renovations from 2020 to 2022.
Moynihan noted that new market expansion into Denver (24 centers) and Minneapolis (21 centers) have each reached $2.7 billion in deposits. Nationally, BofA has a 12% share of consumer deposits.
What makes Moynihan optimistic for the future is that many of the bank’s new channels have considerable room for growth. For example, only one third of active mobile users are using mobile check deposit capability. And only about half of the consumers who could be using Zelle are doing so. Erica has a long way to go before it will be fully utilized, too.
So the economic and operational tension between mobile and physical continues at BofA. But there’s one branch-based activity that can’t be replaced by a smartphone.
In late 2019 BofA announced a deal with Electrify America, which operates a network of fast charging stations for electric vehicles. By the end of 2020, the firm plans to have 140 chargers in place at 40 BofA locations. So far there’s no way to charge your car via internet.