What's hot — and what's not — in retail banking: A midyear update
June 14, 2018 10:00 AM
What's hot — and what's not — in retail banking: A midyear update
Competition in consumer banking is suddenly heating up as midyear approaches.
Already, the nation’s largest bank, JPMorgan Chase, has rolled out a digital-only bank — dubbed Finn — that primarily targets consumers in markets where it lacks branches. Several of its rivals, including Citigroup, Citizens Financial Group and PNC Financial Services Group, are following suit.
These banks detailed their plans for their new digital offerings at an investor conference in New York this week hosted by Morgan Stanley. Their strategies differ somewhat — Citizens is targeting consumers nationwide, said Brad Conner, its head of consumer banking (above, center), while PNC is focused on attracting clients in markets where it does commercial lending. But banks developing these new digital platforms all share the same goal: to gain a competitive edge in the never-ending quest for low-cost deposits.
Deposit-gathering was perhaps the biggest topic of discussion at the two-day conference.
It has been well documented that thelargest banks hold the upper hand in attracting deposits these days because they are perceived as having the best technology, and investors and analysts were eager to hear what smaller rivals are doing to help narrow the gap. Those that aren’t building their own digital banks say they are fighting back in more old-fashioned ways. KeyCorp's Don Kimble, right, said he expects more banks to begin raising CD rates. Others are hiring teams of bankers in new markets or, in the case of one bank, rolling out a new rewards checking account.
The conference also featured plenty of discussion about mergers and acquisitions, the state of mortgage lending in a rising-interest-rate environment — Wells Fargo's John Shrewsberry, left, is a bit bearish — and the evolving role of the bank branch. What follows are some of the highlights from the conference.
Already, the nation’s largest bank, JPMorgan Chase, has rolled out a digital-only bank — dubbed Finn — that primarily targets consumers in markets where it lacks branches. Several of its rivals, including Citigroup, Citizens Financial Group and PNC Financial Services Group, are following suit.
These banks detailed their plans for their new digital offerings at an investor conference in New York this week hosted by Morgan Stanley. Their strategies differ somewhat — Citizens is targeting consumers nationwide, said Brad Conner, its head of consumer banking (above, center), while PNC is focused on attracting clients in markets where it does commercial lending. But banks developing these new digital platforms all share the same goal: to gain a competitive edge in the never-ending quest for low-cost deposits.
Deposit-gathering was perhaps the biggest topic of discussion at the two-day conference.
It has been well documented that the
The conference also featured plenty of discussion about mergers and acquisitions, the state of mortgage lending in a rising-interest-rate environment — Wells Fargo's John Shrewsberry, left, is a bit bearish — and the evolving role of the bank branch. What follows are some of the highlights from the conference.
Counting on digital-only affiliates to drive deposit growth
Citizens Financial Group in Providence, R.I., expects to add another $2 billion in deposits by the end of the year through its new online bank, Citizens Access .
Brad Conner, the head of consumer banking at the $158 billion-asset Citizens, said Tuesday that he expects most of those deposits to come from outside its 13-state footprint in the Northeast and upper Midwest. Its target market, he added, will be “digitally savvy” consumers who “tend not to use the branch networks.”
Citizens Access will offer only high-yield savings accounts and certificates of deposit for now, and Conner said that depositors will not be able to do any of their banking through the branch network.
Citizens Access is in a live pilot right now with employees and will officially launch this summer, Conner said.
Brad Conner, the head of consumer banking at the $158 billion-asset Citizens, said Tuesday that he expects most of those deposits to come from outside its 13-state footprint in the Northeast and upper Midwest. Its target market, he added, will be “digitally savvy” consumers who “tend not to use the branch networks.”
Citizens Access will offer only high-yield savings accounts and certificates of deposit for now, and Conner said that depositors will not be able to do any of their banking through the branch network.
Citizens Access is in a live pilot right now with employees and will officially launch this summer, Conner said.
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Digital first, branches later?
Citigroup also recently launched an online bank with the goal of attracting more retail customers in markets where it doesn’t have branches. Citi is one of the nation’s largest issuers of credit cards and Chief Financial Officer John Gerspach said the bank intends to market its new online deposit account to that base or customers.
Unlike Citizens, Citi does not intend to try and attract new depositors by enticing them with rates higher than those offered through its branches, Gerspach said.
“We’re not looking as though we’re going to lead by raising rates on deposits,” he said. “What we’re looking to do, as I said, is actually build relationships with existing credit card customers and people that know us already. We like to think that we know what they value, and there are other things that they value beyond interest rates.”
Gerspach added that Citi may “augment” its digital bank with branches down the road. For instance, if it notices a concentration of users in a particular area, it may add a branch that focuses on wealth management.
The company, however, has no imminent plans to do so. “That would be something for another day,” Gerspach said.
PNC Financial Services Group is also rolling out a digital bank this year, primarily in markets where it has no retail presence but does do commercial lending, such as Kansas City and Dallas. If the digital strategy proves successful, it will likely add some branches in those markets, Chief Financial Officer Robert Reilly said.
“Our data tells us that only 10% of the U.S. consumer population contemplates a 100% digital offer,” Reilly said. “But possibly as high as 50% or greater are willing to take a predominantly digital offer supported by some branch. So that's the model that we're looking to deploy in these markets.”
Unlike Citizens, Citi does not intend to try and attract new depositors by enticing them with rates higher than those offered through its branches, Gerspach said.
“We’re not looking as though we’re going to lead by raising rates on deposits,” he said. “What we’re looking to do, as I said, is actually build relationships with existing credit card customers and people that know us already. We like to think that we know what they value, and there are other things that they value beyond interest rates.”
Gerspach added that Citi may “augment” its digital bank with branches down the road. For instance, if it notices a concentration of users in a particular area, it may add a branch that focuses on wealth management.
The company, however, has no imminent plans to do so. “That would be something for another day,” Gerspach said.
PNC Financial Services Group is also rolling out a digital bank this year, primarily in markets where it has no retail presence but does do commercial lending, such as Kansas City and Dallas. If the digital strategy proves successful, it will likely add some branches in those markets, Chief Financial Officer Robert Reilly said.
“Our data tells us that only 10% of the U.S. consumer population contemplates a 100% digital offer,” Reilly said. “But possibly as high as 50% or greater are willing to take a predominantly digital offer supported by some branch. So that's the model that we're looking to deploy in these markets.”
Customers still want to visit branches — but mostly just to get advice
As the number of bank branches declines across the country, those that remain are becoming hot spots for financial advice.
At Bank of America — which earlier this year announced a500-branch expansion — visits from customers seeking advice on everything from mortgages to investments have increased 70% over the past five years, according to Dean Athanasia, head of small business and consumer banking.
Over the same period, transaction-related visits, in which customers deposited a check, for instance, have fallen by about 25%, Athanasia said.
As of March 31, BofA had 4,435 branches, or 3% fewer than a year earlier.
BofA has redesigned many of its branch layouts to facilitate the shift. Like many of its competitors, the company has ditched teller lines and carved out space for client meetings. It has even eliminated “teller” as a job title, opting instead for “customer service rep,” according to Athanasia.
In its presentation, U.S. Bancorp also emphasized advice as the primary offering at modern bank branches.
“People want to talk to someone eyeball to eyeball when they want to understand what type of mortgage they want. Is it fixed or floating? How do I think about my retirement savings?” said Andy Cecere, the chairman and CEO of the Minneapolis company.
U.S. Bancorp has just over 3,100 branches, according to the Federal Deposit Insurance Corp. Over the past few years, it has shrunk its total branch count by about 1% per year, executives said.
Citizens Financial, meanwhile, is looking at revamping its footprint, using three different layouts: small, self-service branches; traditional, full-service branches; and branches that are mainly designed for giving advice to small businesses and wealth management customers.
“We believe the branch has a role to play long term in consumer banking,” said Brad Conner, its head of consumer banking. “But we see the shape of the branch changing over time.”
At Bank of America — which earlier this year announced a
Over the same period, transaction-related visits, in which customers deposited a check, for instance, have fallen by about 25%, Athanasia said.
As of March 31, BofA had 4,435 branches, or 3% fewer than a year earlier.
BofA has redesigned many of its branch layouts to facilitate the shift. Like many of its competitors, the company has ditched teller lines and carved out space for client meetings. It has even eliminated “teller” as a job title, opting instead for “customer service rep,” according to Athanasia.
In its presentation, U.S. Bancorp also emphasized advice as the primary offering at modern bank branches.
“People want to talk to someone eyeball to eyeball when they want to understand what type of mortgage they want. Is it fixed or floating? How do I think about my retirement savings?” said Andy Cecere, the chairman and CEO of the Minneapolis company.
U.S. Bancorp has just over 3,100 branches, according to the Federal Deposit Insurance Corp. Over the past few years, it has shrunk its total branch count by about 1% per year, executives said.
Citizens Financial, meanwhile, is looking at revamping its footprint, using three different layouts: small, self-service branches; traditional, full-service branches; and branches that are mainly designed for giving advice to small businesses and wealth management customers.
“We believe the branch has a role to play long term in consumer banking,” said Brad Conner, its head of consumer banking. “But we see the shape of the branch changing over time.”
Andrew Harrer/Bloomberg
The changing economics of M&A
Though BB&T is on hiatus from dealmaking until it is released from an enforcement order, Chairman and CEO Kelly King made clear in his presentation that its next whole-bank acquisition would look very different from its more recent deals.
“We certainly would be willing to look at M&A, but the economics of M&A have really changed,” King said when asked about BB&T’s appetite for acquisitions.
BB&T’s last two acquisitions, in 2016 and 2017, were in central and southeastern Pennsylvania, a state where it had previously had no presence. Now, King said, it would only be interested in buying banks in markets where it already does business so it could both build on in existing market share and save money by closing overlapping branches.
As King sees it, banks that buy their way into new markets risk overpaying because pricing has yet to take into account the fact that cash flow at branches is declining.
“Today if we were looking, for example, at an out-of-footprint deal, it's almost impossible to make the numbers work,” he said. “The market is already pricing that bank higher than I'm willing to pay because the market doesn't get to completely understand what's going on with regard to the nature of branch banking.”
Early in 2017, BB&Tagreed to a consent order with the Federal Deposit Insurance Corp., which cited the $220 billion-asset company for internal deficiencies with its Bank Secrecy Act and anti-money-laundering compliance.
The FDIC did not identify any criminal activity associated with those problems, nor did it fine BB&T, but the consent order has hampered its ability to expand. Though BB&T has continued to make acquisitions in its insurance business, most recently agreeing to buyRegions Financial’s insurance operation , it is prohibited from buying another bank or engaging in de novo expansion.
King has said that he expects the company to be released from the consent order soon.
“We certainly would be willing to look at M&A, but the economics of M&A have really changed,” King said when asked about BB&T’s appetite for acquisitions.
BB&T’s last two acquisitions, in 2016 and 2017, were in central and southeastern Pennsylvania, a state where it had previously had no presence. Now, King said, it would only be interested in buying banks in markets where it already does business so it could both build on in existing market share and save money by closing overlapping branches.
As King sees it, banks that buy their way into new markets risk overpaying because pricing has yet to take into account the fact that cash flow at branches is declining.
“Today if we were looking, for example, at an out-of-footprint deal, it's almost impossible to make the numbers work,” he said. “The market is already pricing that bank higher than I'm willing to pay because the market doesn't get to completely understand what's going on with regard to the nature of branch banking.”
Early in 2017, BB&T
The FDIC did not identify any criminal activity associated with those problems, nor did it fine BB&T, but the consent order has hampered its ability to expand. Though BB&T has continued to make acquisitions in its insurance business, most recently agreeing to buy
King has said that he expects the company to be released from the consent order soon.
Old-fashioned strategies: Play up CDs, add bankers
Certificates of deposit used to get a bad rap. That’s changing, said Don Kimble, chief financial officer at the $135 billion-asset KeyCorp in Cleveland.
During recent years when the industry was flush with liquidity, bankers and investors frowned upon CDs because they increased banks’ interest expense. Now, with interest rates rising and rate-chasers coming out of the woodwork, CDs are seen as more valuable due to their stability.
“It really does provide a lot more predictability, as far as the cash flows and deposit balances,” Kimble said at the Morgan Stanley conference on Tuesday.
KeyCorp views CDs as a vehicle to pay higher deposit rates to customers without having to also boost rates on core deposit products like money markets, he said.
KeyCorp’s CD balances had been plummeting as the bank de-emphasized them. Time deposits of at least $250,000 dropped to 1.48% of total deposits in the first quarter of 2017, a 10-year low. Since then, time deposits of at least $250,000 have increased to 2.43% of total deposits, and Kimble said that he expects the growth to continue.
Signature Bank in New York is looking to boost deposits by opening a new office in San Francisco — its first outside of the New York City area — and adding teams of bankers along the West Coast.
The bank has already hired several veteran bankers in market and Eric Howell, the executive vice president of corporate and business development, said it expects to announce the hiring of several more teams this summer.
Signature’s primary aim for setting up shop on the West Coast is gathering deposits and it has no intention of making commercial real estate loans there, Howell said.
During recent years when the industry was flush with liquidity, bankers and investors frowned upon CDs because they increased banks’ interest expense. Now, with interest rates rising and rate-chasers coming out of the woodwork, CDs are seen as more valuable due to their stability.
“It really does provide a lot more predictability, as far as the cash flows and deposit balances,” Kimble said at the Morgan Stanley conference on Tuesday.
KeyCorp views CDs as a vehicle to pay higher deposit rates to customers without having to also boost rates on core deposit products like money markets, he said.
KeyCorp’s CD balances had been plummeting as the bank de-emphasized them. Time deposits of at least $250,000 dropped to 1.48% of total deposits in the first quarter of 2017, a 10-year low. Since then, time deposits of at least $250,000 have increased to 2.43% of total deposits, and Kimble said that he expects the growth to continue.
Signature Bank in New York is looking to boost deposits by opening a new office in San Francisco — its first outside of the New York City area — and adding teams of bankers along the West Coast.
The bank has already hired several veteran bankers in market and Eric Howell, the executive vice president of corporate and business development, said it expects to announce the hiring of several more teams this summer.
Signature’s primary aim for setting up shop on the West Coast is gathering deposits and it has no intention of making commercial real estate loans there, Howell said.
Discover: Taking advantage of swipe-fee loophole
Discover Financial Services is utilizing an advantageous regulatory quirk in order to build its base of low-cost funding.
Unlike its peers, the Riverwoods, Ill.-based company now offers cash rewards on debit card purchases. Checking account holders are eligible to receive 1% cash back on up to $3,000 in debit card purchases each month.
The firm’s chief operating officer, Roger Hochschild, said Wednesday that Discover is able to offer those cash rewards because, unlike other large and midsize banks, it is not subject to the regulatory cap on debit card swipe fees. He said the advantage stems from the fact that Discover operates a payments network.
Discover plans to start marketing the checking account more aggressively in the second half of the year.
Historically, the firm has relied less heavily on deposit funding than some of its competitors in the credit card business.
“Realistically, it will take a while for it to be a meaningful portion of our funding,” Hochschild said.
Unlike its peers, the Riverwoods, Ill.-based company now offers cash rewards on debit card purchases. Checking account holders are eligible to receive 1% cash back on up to $3,000 in debit card purchases each month.
The firm’s chief operating officer, Roger Hochschild, said Wednesday that Discover is able to offer those cash rewards because, unlike other large and midsize banks, it is not subject to the regulatory cap on debit card swipe fees. He said the advantage stems from the fact that Discover operates a payments network.
Discover plans to start marketing the checking account more aggressively in the second half of the year.
Historically, the firm has relied less heavily on deposit funding than some of its competitors in the credit card business.
“Realistically, it will take a while for it to be a meaningful portion of our funding,” Hochschild said.
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Wells Fargo: Bearish (for now) on mortgages
Wells Fargo, the nation’s second-largest mortgage lender, is bearish about its near-term opportunities in the home lending. Still, the San Francisco bank is taking a long-term view of the business.
“We’re in it forever,” Chief Financial Officer John Shrewsberry said.
Rising mortgage rates have already shrunk the pool of home owners looking to refinance their existing loans.
Shrewsberry said that if rates continue to climb, the home purchase market will probably also contract.
“Unless employment remains as strong as it has been, and a preference for ownership increases from where it is, and available supply ticks up also, my guess is higher rates mean a smaller mortgage market,” he said.
Laura Alix, Kristin Broughton, Frank Gargano, Andy Peters and Kevin Wack contributed to this slideshow.
“We’re in it forever,” Chief Financial Officer John Shrewsberry said.
Rising mortgage rates have already shrunk the pool of home owners looking to refinance their existing loans.
Shrewsberry said that if rates continue to climb, the home purchase market will probably also contract.
“Unless employment remains as strong as it has been, and a preference for ownership increases from where it is, and available supply ticks up also, my guess is higher rates mean a smaller mortgage market,” he said.
Laura Alix, Kristin Broughton, Frank Gargano, Andy Peters and Kevin Wack contributed to this slideshow.
