Banking Believe it or Nots

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To say the least, these are very different times for the banking industry — and especially community financial institutions. The past year has challenged traditional thinking and forced new ways of doing business. Making smart decisions is imperative right now, and there are some oft-heard beliefs going around that we think need to be explored deeper — so you can have the information you need.

Belief #1: There couldn’t be a worse time to want to grow accounts.

We get it…pandemic year, flush with deposits, unclear future. Holing up and trying to ride it out can seem like a viable strategy. But the reality is: there’s never been a better or more critical time for banks and credit unions to connect with consumers to build profitable and beneficial relationships. Growth must come through robust relationships, ones that encompass the whole range of consumer needs (loans and deposits) and drive deeper engagement with the financial institution’s products. These types of relationships provide more profit, more non-interest income, and flexibility to respond to varying economic conditions.

In fact, our research team found that those with a highly engaged relationship with their financial institution were more likely (than those who didn’t have a relationship) to have a directly related consumer loan in the first year the account was open.

Reward checking accounts outperform standard checking accounts on nearly every metric, including loan adoption.

Belief #2: Deposits are just necessary cost centers.

It may seem like that. But if you look at it from a relational point of view, you’ll see a very different story. What truly changes the perception of a deposit from a cost center into a profitable relationship is the examination and attribution of “what else” an account holder relationship could bring to the table if fully engaged. 

When the focus on deposit profitability widens to encompass directly attributable loans, non-interest income, and non-interest expense, data reveal that the deeper relationships have more annualized profit per account. The propensity of a deeper relationship to drive loan adoption and transactional engagement far exceeds the expenses (such as reward payouts) that brought the consumer to your institution in the first place.

Belief #3: You can’t succeed if you don’t go out and find loans.

 When a checking account rewards consumers for transactional behaviors and setting up an ACH, the result is highly engaged consumers who are top-of-wallet — which leads to more loan adoption because you are already in their consideration set when shopping for other financial products. When you compare consumer loan balances as a percentage of their checking balances (i.e., the relationship-level “loan-to-deposits” ratio), as shown in the chart, you can see a dramatic difference. 

Data shows that regular checking portfolios are somewhat effective at bringing new loans into their community financial institution, with the median portfolio showing loan balances at 58.4% of checking balances. In contrast, the median reward checking relationship portfolio raised that number to 98.4%, a 68% increase. In short, the reward checking relationships, at the median, brought in almost as much in directly attributable consumer loan balances as they did in checking deposits.

Belief #4: Consumers are content where they currently bank.

 For some, that’s definitely the case. But a post-COVID survey conducted by The Financial Brand revealed that almost a quarter of respondents say they’re looking to switch financial institutions in the next year or two. And of those folks, nearly three out of four were Gen Z or Millennials — the group that will drive the future of many institutions. 

Those kinds of attrition numbers can have a significant effect on your bottom line. And they’re a sobering reminder that just winning a customer once won’t cut it anymore. You have to continue to win them every day. Products that fit their needs and lifestyle better, marketing that meets them where they are, and the convenience and ease of a local branch with today’s technology all can help deepen relationships and strengthen loyalty.

Belief #5: It’s too much of a hassle to switch financial institutions.

Although a 2015 internal poll revealed that 1 in 5 Americans (1 in 3 Millennials) would rather stand in line at the DMV than switch financial institutions, the landscape has changed dramatically since that time, not to mention the effects of a pandemic. 

Whereas, switching used to be a huge hassle — finding an institution you trust, closing accounts, opening accounts, transferring funds, and more — these days it’s completely different. Many consumers already have relationships with multiple institutions, all of whom they already trust and who continually make it easier and more convenient to switch. In fact, a 2018 survey by GoBankingrates.com found that 50% of consumers have accounts at multiple financial institutions — with 22% of those having three or more. And that number is only going to climb. The simple fact is: counting on apathy due to inconvenience is no longer the viable retention strategy it may have once been — and a very real opportunity exists for gaining new accounts from others looking to move.

The truth is, beliefs that have been long-held or that make a lot of sense may not be what they seem when we dig into the data — especially in these quickly-evolving times. One thing is certain, becoming a preferred financial institution is way more complex than just a checking account or a loan. It’s about the relationship. A deeper connection is key, so be open to things that can help cultivate that — like more personal communications, innovative products, and non-traditional offers. They may be different from what you’re used to, but you may like the difference they make to your bottom line.

Want to see how you can flip the script on these challenging times? Download this free report that dives deeper into the research and what it means for your financial institution.

Article by Kasasa.