Responding to liquidity fears during the global financial crisis, bank regulators encouraged banks to rely more on retail deposits and less on wholesale funding sources.
A recent Ernst & Young survey of 20,500 global retail bank customers concluded that boosting deposits could be a significant challenge.
Despite renewed economic growth in most regions, confidence in the banking system for 44% of those retail clients surveyed fell in the 12 months leading up to the poll. In the U.S. that figure was 55%.
The crisis affected developing economies less severely, and depositors in those countries did not experience a similar decline in confidence. In fact, 75% of those surveyed in India said their trust in their banks increased last year.
Many retail customers blame the banking industry for their woes, and they're voting with their feet.
This is most pronounced in Europe, where 39% of survey participants changed their main bank last year, followed closely by the U.S., where 38% switched. Globally, 36% of customers have done so, and 7% said they were planning to make a change. Nearly half of those who changed banks said service quality was the main reason, while 43% said pricing was their motive.
Price competition for deposits, however, is a double-edged sword. Today, healthy banks typically offer depositors minimal, or negative, real interest rates. Coupled with the retail clients' waning loyalties, opportunities emerge for other institutions to compete on price. But this makes depositors less loyal and more prone to chase the highest rates.
Also, competing for depositors squeezes banks' net interest margins. And such a strategy is becoming more painful as lawmakers and regulators are imposing legislation that will roll back retail fees, such as the debit card interchange charge. So, while a low-volatility base of retail liabilities may be valuable from a risk management perspective, it is becoming harder to profit from it.
Until there is a significant improvement in household balance sheets — and that may take 18 to 36 months longer than the unfolding improvements in bank balance sheets — and banks are able to rebuild the trust they lost during the crisis, these retail depositors may prove hard to corral.
Nearly a quarter of those who switched their main bank cited loss of trust as their reason. While banks have always sold the notion of trust, they will now have to take more concrete steps to back it up.
This will include better understanding customer needs by mining data, using behavioral analytics and other tools and using the information they glean to create a more personal experience.
Three clear priority areas are emerging alongside rebuilding trust: focusing on strengthening the brand, segmenting the customer base to further personalize product and services offerings and making measurable improvements to service quality.
