Behind HSBC’s U.S. retail banking turnaround

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HSBC has traveled a long and winding road since the financial crisis. It endured heavy losses from the mortgage crisis, unloaded nearly 200 U.S. branches and later paid an infamous $1.9 billion fine for anti-money-laundering violations.

However, the headlines have been noticeably brighter this summer. The $2.5 trillion-asset HSBC is said to be in talks to resolve a U.S. probe into its sale of toxic, crisis-era mortgage bonds, and last week it reported 4% revenue growth and higher-than-expected profits in the second quarter. It also plans to buy back up to $2 billion in shares — which would make $5.5 billion in buybacks since mid-2016.

Its once bedeviled U.S. retail bank is a part of that comeback story. Though its primary markets are in the United Kingdom and Asia, HSBC, which is based in London, sees its U.S. operations as critical to serving its international customer base.

It has 229 U.S. branches, largely concentrated in six markets. HSBC’s U.S. retail and wealth management business reported $175 million in pretax profits, compared with $1 million a year earlier. And deposits in its Premier program — a business line aimed at the internationally minded mass-affluent customers whom HSBC covets — grew to $26 billion at midyear, up 7% since Dec. 31.

Pablo Sanchez, who joined HSBC USA as the head of retail banking and wealth management in mid-2015 from JPMorgan Chase, has overseen much of the progress in deposits and wealth management.

“We had to make a decision to really up our game,” he said in an interview with American Banker. “Certainly the company has shown a lot of confidence in us in providing a fairly large investment to really crank up our franchise … and in branches, making sure that we can provide better customer experiences for folks and really start to compete in a more digitally led world.”

Sanchez recently spoke with American Banker about specific improvements that HSBC is trying to make in retail banking, the future role of banks and the challenges of catering to an international clientele in an uncertain political climate. The following interview has been edited for length and clarity.

What kind of goals do you have for the retail bank over the next 18 months?
PABLO SANCHEZ: J.D. Power & Associates just came in and told us that we’ve improved faster than any of our peer banks in terms of customer satisfaction, so I want to keep that moniker. For me that’s very, very important. We’ve had significant improvements in earnings year over year, and that has to continue. A lot of that has come from deposits, so we’re starting to build that trust with our customers. We’ve grown our deposit base well over 6% over the course of the last couple of years. The historical averages are 3% to 4%, so that’s a very good sign when you can attract deposits.

Probably lastly for me, retail is very much about net customer growth, the ability to grow your customer base is of the utmost importance. If you can’t continue to grow your customer base, then you’re dying.

What kind of investments have you made into your U.S. retail bank?
Part of the spend, which is well in excess of $125 million, has been to upgrade the operational aspects of our business: things like cash recyclers, having some world-class ATMs and having the functionality in those ATMs really be able to meet and exceed the expectations of customers in a self-serve way. We made lots of hardware improvements so we could increase our ability to help customers in self-serve channels, but also help employees so they can spend less time administratively and spend more time with customers and engaging with customers so we can fulfill more of their needs.

We’ve also invested in improving the look and feel of our branches. We’ve now touched a significant number of our branches to be able to update them and quite frankly take them from these old, stodgy traditional transaction centers and really start to bring them into transaction centers and advice centers, so having the ability with some of these savings that we do to add more bankers and advisers so they can help more people.

Some of the more exciting things are our ability to do things for customers so they can bank with us when, where and how they want to. So the ability for customers to do very traditional things in a digital way, like remote deposit capture, mobile messaging, and having a more mobile-first strategy and being able to do things for customers from a security perspective — for example, voice ID as folks call into our contact centers, which actually has proven for us to be a more effective way than just a traditional PIN.

Can you tell us a little bit more about that voice ID option?
Well, you have to sign up for it, so it’s not just an automatic thing. We are very much an organization that believes in having folks opt into things. So when you sign up or you call in a number of times, the system starts to recognize your voice. It’s amazing. The old traditional “How do I authenticate a customer with just an account number and a PIN,” that has an 80% success rate. The reason it does is because people forget their PIN, or they don’t have their information right with them, etc., so we have to authenticate them in a much more rigorous way. With their voice, they just have to talk to us and have a normal conversation and that has an upwards of 90% of success rate.

Tell us a little bit about your customer base.
We’re in 37 countries around the world with retail branches and consumer-type products, so for us, one of the most important customers is that international customer that comes from one of those 37 markets, especially our two key markets in the U.K. and Hong Kong. Our ability to service those customers is really compelling for us, and it gives us what I think is a competitive advantage because not a lot of folks want to do that. Many, many banks kind of shy away from nonresident aliens and don’t really have a compelling international composition, so we’re able to bring that to bear here, which I think is great.

We are in six markets in the U.S., and those markets represent 80% of the newcomers into the country, so making sure that we really capture those newcomers into the states is something that we’re really focused on, and typically that’s with our premier franchises. This is still the No. 1 destination in the world for education. Affluent folks send their kids here, and they recognize that HSBC name, so we want to be able to help them there.

Is it tough having a strategy that relies on an international customer base at a time when there’s so much uncertainty around the future of U.S. immigration policy?
We believe that there will continue to be international growth opportunities for people from other countries to live and bank in the U.S., and we are well positioned to serve them. There are few retail banks as global as HSBC, which gives us a competitive advantage, when it comes to offering retail banking services to serve both expats and U.S. citizens who are internationally minded and mobile.

There’s a lot going on in retail banking right now, from the decline of foot traffic to the branch to the explosion of technology to shifting demographic needs and preferences. What trend do you find to be most significant or challenging, and where do you see banking going because of that?
I think what we see is that customers want value from their bank, and they don’t want to have to think about it. We just did a customer focus group on millennials, and they said, “I don’t necessarily think about banking. I think about what I need to do and who’s going to help me to do that and add value along the way.”

As you look out into the future and look at things like machine learning or machine intelligence, I think the personalization of banking is not that far away. For us, we see where people’s money goes, where they transact, how they spend, how they save, so the ability for us to kind of personalize offerings for a customer when the time is right, I think, is a real value-add that can be created in financial services that nobody’s quite figured out.

So thinking about not just financial services, but we know you like to go out to eat on Thursday nights. Maybe partnering with somebody that gives you a coupon for a restaurant for Mexican food because we know you like it because that’s the last three places you ate. That might be a great way to engage customers and add value for them from a bank that people don’t traditionally think about.

Where do you think there’s vulnerability in the market?
Our natural advantage is this internationally oriented newcomer into the U.S., which are millions upon millions. There’s no shortage of folks that travel around the world, and I know there’s a lot of populist sentiment today and people thinking about the world shrinking, but we really believe that customers still want to be able to move money around, they want to be able to bank in a place that can provide them all those opportunities. Winning in this digital space is a way to become even more relevant in the marketplace. We don’t have a huge number of branches, 228 branches. In a brick-and-mortar world that's a competitive disadvantage, but in the digital world, that may translate into a competitive advantage because we’re not saddled with these huge real estate costs.

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Consumer banking Wealth management Deposits Mortgages Branch network HSBC JPMorgan Chase