Financial Institutions: Listen to your Customers and Deliver the Products and Services They Desire

Transcription

1 INDUSTRY INSIGHT Financial Institutions: Listen to your Customers and Deliver the Products and Services They Desire A RESEARCH WHITE PAPER MAY 2015

2 With increasing regulatory requirements, intense competition and the rapid growth of non-bank providers, financial institutions are under immense pressure to find new ways to acquire customers, strengthen and grow existing customer relationships and generate revenue. Understanding what motivates different customer groups is critical for designing and delivering products and services that satisfy these objectives. Saylent commissioned a study, conducted by Informa Research Services, to assess consumer and small business banking preferences and the depth of relationships they have with their financial institutions. The research findings provide key insights into how different groups prefer to interact with their bank and the products and services they desire. METHODOLOGY The study was conducted in Q4 2014, with a survey of 1,200 consumers and 400 small businesses. Consumers represented three groups: lower mass market, with investable assets from $1,000 25,000; upper mass market, with investable assets from $25, ,000; and mass affluent, with investable assets over $100,000. Small businesses surveyed ranged from $250,000 to $1 million in revenue. Data was further analyzed by demographic criteria like age and behavioral variables like account usage, payment product preferences and propensity to attrite. Study findings and strategic takeaways are outlined in this whitepaper. THE STUDY 1,200 consumers lower mass market upper mass market mass affluent investable assets from $1,000 25,000 investable assets from $25, ,000 investable assets from $100, small businesses revenues from $250,000 1,000,000

3 KEY FINDINGS 56% 3x would switch to bank that did not automatically pay overdraft items for a fee more likely to prefer mobile as money management channel Millennials Millennials represent the largest cohort of Americans in history. Much ink has been spilled about how this generation is different. Saylent s focus was in assessing which specific features of an account were desired and which were not. The study found that 56 percent of millennials would switch from their current bank for an account that did not automatically pay overdraft items for a fee. This indicates that millennial consumers prefer to have control over their funds, and offering a product which does not include overdraft fees can be a point of differentiation. In fact, many see overdraft features as a reason to look at a different account or a different bank. It also found that online banking is the preferred money management channel for all segments analyzed; however, millennials are three times as likely to report that mobile is their preferred channel. CONSUMERS STATING THAT MOBILE IS THEIR PREFERRED BANKING CHANNEL FOR MONITORING THEIR FUNDS 40% 20% 0% MILLENNIAL MASS AFFLUENT MASS MARKET UN/UNDERBANKED 54% 25% would switch to bank offering product with no overdraft fees would pay between $10 20 per month for no-overdraft fee account Underbanked Un- and underbanked consumers are defined by the FDIC as those who have used an alternative financial service product (like a payday loan, auto title loan or check casher) in the previous 12 months. These consumers are a large and growing segment who can be profitably brought into the mainstream of financial services if they are offered the right products. Saylent s study found that 54 percent of underbanked consumers would switch from alternative financial service providers to a bank offering a product with no overdraft fees. In addition, the findings determined that 25 percent would pay between $10 20 per month for this account. 52% 48% prefer debit card as primary funds access channel prefer checks or cash as primary funds access channel Mass Market Consumers Mass market consumers show a large variance in how they prefer to bank. For example, 52 percent of mass market consumers prefer to use their debit card as their primary funds access channel; however, 48 percent prefer some combination of checks and cash. When it comes to making existing mass market accounts more profitable, cash rewards and interest drive the most behavior change towards electronic delivery

4 channels. 70 percent of consumers would enroll in estatements for a cash reward or preferential interest rate. 74 percent would enroll in ACH direct deposit or draft payment plan. Interestingly a small but solid 30 percent of mass market consumers would stop using branches to receive rewards on their checking account like ATM refunds, above market interest rates and cash rewards. This, again, reflects the variance in how mass market consumers choose to bank. CASH OR INTEREST REWARDS WOULD DRIVE BEHAVIOR CHANGES 60% 40% 20% 0% WOULD ENROLL IN DIRECT DEPOSIT WOULD ENROLL IN ESTATEMENTS WOULD STOP USING BRANCHES Mass Affluent Consumers 51% 27% in market to purchase CD in next 12 months deposits in CDs today Identifying and taking advantage of cross sell opportunities is the most successful way for banks to increase market share in the mass affluent space; however competition for this segment is intense from both banks and other financial service providers like wealth managers. The study s analysis found that mass affluent consumers show a preference for termdeposit products, with just over 50 percent indicating they will be in the market for a CD in the next six to 12 months. However, mass affluent consumers indicate only 27 percent of their liquid savings are currently in CDs. This suggests that when rates rise, money housed in low rate money market accounts will be looking for a higher yield. Small Businesses Small business deposit products overall have grown very stale over the past few years. Banks looking to grow market share need to try a different approach that balances growth with protecting existing income streams of fee-based services. SMALL BUSINESSES FIRST PRODUCT AT BANK 80% 60% 40% 20% 0% LOAN DEPOSIT

5 97% 71% satisfied with their banking relationship would consider switching banks to save time and money The old adage that credit leads in the business banking space has been supported by findings indicating that over 70 percent of business clients began their relationship with their bank based on a loan or line product. 97 percent of respondents were satisfied with their banking relationship. However, 71 percent would consider switching to a bank that helped them save time and money. KEY TAKEAWAYS 24.8 MILLION U.S. households underbanked in MILLION Millennials in 2015 The Underbanked and Millennials Present a Substantial Opportunity Franchise growth only helps the bottom line when acquired households are profitable. However, competition for profitable households is intense, reducing expected returns. A better strategy is to take the path of least resistance, in this case, the underbanked market and millennials. In 2013, the FDIC found the underbanked market size included 20 percent of U.S. households, totaling 24.8 million households. While there may be concerns regarding serving this market, real-time, account screening services make it easier for institutions to assess potential customers financial stability. In 2015, millennials are projected to surpass baby boomers as the U.S. s largest living generation, according to the population projections released by the U.S. Census Bureau. Millennials are projected to number 75.3 million. Both the underbanked and millennials represented a significant opportunity for financial institutions, particularly, in the case of millennials, as they are just reaching their peak borrowing years. While institutions have seemingly addressed millennials to some extent, they have basically sacrificed the underbanked market to alternative providers of financial services. Other millennial strategies which give away the bank in the short term will not be around long enough to take advantage of the growth this age demographic offers. Recapturing the underbanked market and strengthening and growing relationships with millennials profitably requires a better understanding of what these customers and potential customers are looking for in their products and services. This study demonstrates some of the things that these groups are seeking. To learn more about what s important to these groups, it is critical for institutions to analyze their customers demographics, transactions and purchasing behaviors to gain an understanding of how they prefer to interact with their primary financial institution. With that knowledge, institutions are better equipped to influence behaviors with incentives that matter to these audiences and that benefit both the customers and the institutions. Flexibility and Contextual-Based Pricing Are Key to Success This study demonstrates that products should be flexible to meet the needs of different consumers as well as the need for incentives to change consumer banking behaviors. Contextual-based pricing which allows financial institutions to personalize and price products based on customer behaviors enables institutions to optimize their products and create a 1-to-1 relationship with each customer. 1-to-1 products drive acquisition and retention of the most profitable customers by offering customers the ability to customize their banking experience.

6 Mass affluent consumers are bombarded constantly by marketing messages and sales efforts from many bank and non-bank financial service providers. Positioning products with contextual pricing strategies allows custom pricing of deposit products to cut through the noise in order to maximize growth and retention. Using contextual pricing also allows banks to reduce disintermediation risk of high balance accounts as rates rise. For the mass consumer market, contextual pricing strategies allow consumers to self-select rewards and fees, giving clients control of their banking relationship. Pricing based on behavior allows banks to maximize their accounts consumer appeal while operating within guiderails to maximize profitability. Working within the account profitability construct (interest rate, fees and waiver criteria), banks can use tools to allow customers to control the feature functionality of their consumer and small business accounts, making contextual pricing simple to manage. Context is important because it represents the way in which buyers evaluate price. Knowing context competition, decision process, timing, availability, etc. explains why buying decisions are made. Knowing context allows sellers to design optimum price structure and set optimum price points. Robert Docters, Contextual Pricing: The Death of List Price and the New Market Reality Differentiating and Packaging Products for Different Audiences Drives Adoption One of the many missteps financial institutions have made over the past few years with millennials has been assuming that one-size-fits-all products and services meet their needs because the consumer conveniently fits into an age range. However, in reality, a millennial technology worker in the Southeast has significantly different banking habits and needs than a graduate student in Los Angeles or a new family looking to buy a house in Chicago. Offering a specific lifestyle account for each of these consumers is not always an option so using tools that allow for consumers to self-select features and benefits that are meaningful to them creates competitive differentiation. Similar to millennials, mass affluent customers are looking for differentiated deposit products that meet their needs by simplifying their financial lives. Providing a welldesigned mass affluent focused product can overcome challenges to growing these relationships. Given this segment s preference for time deposits and high relative balance, implementing a product which is priced based on the profitability of a customer s relationship would help drive cross sell and deeper share of wallet. The study also found that small businesses don t choose banks based on deposit products; however, deposit accounts can be a barrier to gaining business deposits if not positioned correctly. 97 percent of small businesses with a credit relationship shopped their financial institution based on credit policies and pricing first. Businesses are looking to save time and money above all else. Deposit products were a secondary consideration. However, delivering a small business deposit product with desirable features (such as packaged cash management services) will help give a financial institution a differentiated offering to encourage client engagement.

7 78% 13% considers branch location to be important or extremely important report branch as primary channel for managing money Optimizing for the Mobile Channel Enables Banks to More Effectively Serve Customer Needs Across all segments, branch location is considered important or extremely important by 78 percent of survey respondents. However, only 13 percent report the branch as their primary channel for managing their money. This indicates that branches are critical to acquiring new clients but that they will be lightly trafficked. This confirms the need to continue investments in mobile banking and indicates that some incentives may be required to convert customers to the mobile channel. The need for a focus on mobile is further validated by a report released in March 2015 by the U.S. Federal Reserve. It found that 52 percent of smartphone owners with a bank account used mobile banking in 2014, up from the year prior, demonstrating that smartphone use is on the rise in the banking space. With the ubiquity of smartphones and the way that they are changing consumer and small business banking behaviors, the mobile channel presents a great opportunity for institutions to provide customers with convenience, enhance satisfaction and loyalty and reduce costs. Leveraging the investment in branches will take a new approach. Branch consolidations, reformatting and outright closures are not always possible. Driving new product sales through branch networks will require a rethinking of products and how they are delivered to keep the branch a complementary channel to mobile and other new technologies. IN CONCLUSION Profitability, specifically finding the point where price and quantity-demanded maximize revenue, is the holy grail of every business venture, no more so than in banking. Banking adds an additional dimension when outside forces, like the U.S. Federal Reserve s management of interest rates, cause extra complexity. When financial institutions use their own data to truly listen to and understand their customers and what motivates them, they are best equipped to deliver them solutions that drive customer satisfaction, bolster loyalty and account growth and enable the institutions to reach the profitability holy grail they are seeking. ABOUT THE COMPANY Saylent provides financial institutions with data analytics software and services that improve profitability and product innovation by delivering smarter, deeper, actionable insights on the financial behaviors of consumers and businesses. With Saylent s solutions Card360, which provides payments intelligence for card issuers; and Account360, a cloud-based relationship product and pricing platform financial institutions are empowered to drive new revenue streams and increase loyalty by delivering programs and solutions that their customers and members desire. To learn more visit or contact