Why Every Bank or Credit Union Should be Building a Specialized National Offering

"What happens in Vegas. stays in Vegas?” Not any longer. In fact, whether you’re a super-regional holding company, a regional powerhouse, or even a community bank or credit union, you should be rethinking your approach to geographic acquisition and servicing.

In this session, PwC shares its latest research on how and where consumers bank, what they expect, and how financial institutions can react. As leading firms improve their ability to segment buyers, it’s no longer good enough to target based on physical proximity. We’ll look at how competition is changing, and opportunities you can pursue regardless of your size.

Transcription:

00:00:09:11 - 00:00:35:23
Dean Nicolacakis

Hello everyone, this is Dean Nicolacakis. I really wish we were live with you like we normally are down in Austin, but we will try and make this as interactive as possible, virtually. So just an admin item, we would ask that you bring questions through the chat as you can, and we'll try and either address them live here in the session or at least follow up with you if we don't have time.

00:00:37:21 - 00:01:00:09
Dean Nicolacakis

So first of all, let me just do a quick introduction. I'm a bank transformation partner at PwC, I live in the Bay Area. Basically spent my career designing and redesigning banks. I've never seen more activity than we see right now in terms of both digital transformation and core transformation. So a great time to have a discussion about what we see going on.

00:01:03:16 - 00:01:44:01
Greta Capps

Hi, everyone. I'm Greta Capps. It's nice to be here. I am a director in our customer transformation and practice. I focus on customer analytics. So what that really means is I help our clients primarily in the financial services space leverage data and analytics to help accelerate the path to customer growth. And part of that and a lot of what we're going to share today, what I'm going to share today anyway is focused on the primary research, the consumer research that we do that I helped lead that really try to get under the covers with understanding what consumers prefer and need and what goals they have and how that's evolving over time, relative to their banking, their investing, their borrowing, etc.

00:01:50:02 - 00:02:06:09
Dean Nicolacakis

Yeah, I think on that point, we're just going to scratch the surface in terms of the data that we're going to share today. So there's a ton behind this. So please, please ask the questions because I'm sure we can answer some of the questions you have right away. In terms of how we're going to spend the time,

00:02:06:09 - 00:02:24:22
Dean Nicolacakis

we're going to really break the session into kind of two parts. Greta is going to lead us off and share the latest views from our annual research. We've seen some tremendous shifts due to COVID, some of which are lasting, some of which we see as a little bit more transient. But we're going to share the big aha takeaways from that.

00:02:25:15 - 00:02:47:05
Dean Nicolacakis

And then I'll spend the second half talking a little bit about, what do we think you should be doing about these shifts that are happening and what are we encouraging clients to do, given the dramatic nature of the shifts we're seeing? Okay, so why don't we start by having Greta, get you going on what we see going on.

00:02:47:05 - 00:03:16:02
Greta Capps

Sure. I look at the slides. So as Dean said, we do a lot of primary research focused on consumers and a key piece of that research, a key survey that we do, if you actually advance to the next slide, and the next one Thank you. So a key survey that we do is focused on what we call digital banking and wealth.

00:03:16:13 - 00:03:39:24
Greta Capps

And so this is really looking at consumers and how they think about what habits they have in terms of behaviors, what goals they have, what preferences they have around their full financial life. So certainly with regard to banking, but also in terms of, you know, payments, insurance, wealth, etc. So it is pretty holistic. We've been doing this survey and we've been doing this kind of research for the last ten years.

00:03:40:10 - 00:04:10:29
Greta Capps

And this particular survey on an annual basis for that time, we not only do it for sessions like this to draw some pretty high level insights and share those, although we certainly love doing that, but we also tie that data to our PwC data fabric, which is, you know, pre stitched view 40 plus sources for the full U.S. adult consumer population of about 280 million people where we've got about 60,000 plus attributes.

00:04:10:29 - 00:04:50:02
Greta Capps

So again, to this point, there's a lot of depth here that we're going to be scratching the surface of today. But these kinds of insights are leveraged for pretty granular views as well. So this year as we pulled together the insights here and sat down to really see what consumers were telling us, given the environment we've been in with the pandemic and really all that's happened since early 2020, which was the prior survey of this one, we saw some big changes and not surprisingly, we saw some big changes but there were some big shifts that we had not seen happen in the

00:04:50:02 - 00:05:34:19
Greta Capps

space of a year, you know, historically. And so if you advance to the next slide for a second, wonderful. You know, as we know with the pandemic, we all have been forced to do things differently in terms of if we think about the kinds of things that we've tried, the brands that we bought from and believed in, how we've accessed doing business in different ways and and had to given the, you know, the lack of options in terms of, you know, physically going somewhere and interacting with strangers, certainly the ways that we work, the ways we've connected with other people, a lot has changed.

00:05:34:19 - 00:06:08:07
Greta Capps

And financial services and banking have not been immune to that, obviously. And so do you advance the next slide. From a banking perspective, there's a couple of these changes that we want to highlight today. The first is certainly where bank consumers are telling us that you know, given that the changes that they were immersed in, that we all were immersed in over the course of the last year and a half ish, their preferences of where they bank have actually changed.

00:06:08:17 - 00:06:37:23
Greta Capps

And the shift has been more significant than we've seen in past years, although we've seen it's just accelerated the evolution that we've been seeing otherwise prior to this. So from a direct perspective, they're telling us they're going direct and what I mean by that and what you see here on the slide is that consumers are more so than ever viewing, more consumers than ever are viewing primary banks or direct banks as their primary bank.

00:06:38:07 - 00:07:06:01
Greta Capps

So you see that that orange line at the bottom of that left-hand graphic, where the portion of consumers that view a direct bank as their primary has has risen over 80% to now 20% of the full U.S. consumer base and that has overtaken the credit unions and community banks in terms of the portion the share of primary bank and it has it's right on top of it's tied with regional banks.

00:07:06:02 - 00:07:34:24
Greta Capps

So about 20% of U.S. consumers feel like a regional bank is their primary and it's it's the consumer that's defining that. And I'll get to what that means in a second but 20% also now as of 2021 view direct banks as their primary and so if you look at that top right it's not. So certainly direct banks are indeed eating the lunch of regional banks and credit unions of community banks with some of the younger generations.

00:07:35:00 - 00:08:03:28
Greta Capps

But it isn't just the younger generations that are part of that 20% who see a direct bank as their primary. You do see over 40% that are either Gen Xers or boomers, you also see that other 60% ish or a little less than that are Gen Z ers and millennials and that is definitely, you know, a strong penetration for those two segments.

00:08:05:01 - 00:08:44:09
Greta Capps

Why is that? In part it's because the value proposition of these direct banks aligned very closely to what… and again, within any generation, there are segments that behave in different ways and have different preferences. But high level, the value proposition appeals to what millennials and Gen Z ers are looking for and what they value. And as we talk about how a consumer thinks about their primary bank, it's not just the traditional paradigm of my primary bank is where my primary checking account is.

00:08:44:17 - 00:09:17:04
Greta Capps

That is definitely the case for boomers. You see, 60% plus of boomers have defined their primary bank with that paradigm. But when you look at Gen Z, it's different. In fact, they're one and a half times less likely to view their primary bank as where their primary checking account is. In fact, for Gen Zers in particular, if they have a credit card, it's likely to be there if they have a mortgage and not a lot of Gen Zers have a mortgage at this point.

00:09:17:04 - 00:09:40:14
Greta Capps

But it's likely to be where they have their mortgage. But it's not just about product. It's about what they see in that institution, what they're looking for from that institution. So Gen Zers are about twice as likely to define their primary bank as where they see the trusted advice coming from, who is their trusted advisor.

00:09:41:10 - 00:10:18:00
Greta Capps

And this is really the first year that we've seen this pop. They're looking for that. They're looking for their primary bank to be the bank that they see as having shared values. So in this environment that we've seen in all of the headlines and all of the happenings around ESG really kind of coming to the surface and being consistently something that consumers are seeing more and more that is beginning to be more important to them in terms of particularly in the younger generations around where their primary bank is and who's serving them from that perspective.

00:10:19:11 - 00:10:25:05
Dean Nicolacakis

Hey, great. We have a question coming in that people are asking to clarify our definition of what we mean by a direct bank.

00:10:25:21 - 00:10:49:22
Greta Capps

Sure. A direct or digital bank we are defining as a bank where there isn't necessarily a physical network. There isn't a physical office that they can go in and they can do their banking entirely remotely. So whether it be solely digital channels and or direct call call center and interaction that way.

00:10:50:24 - 00:10:51:03
Dean Nicolacakis

Thanks.

00:10:51:26 - 00:10:52:07
Greta Capps

Sure.

00:10:54:19 - 00:11:25:06
Greta Capps

So then the last thing I'll say on on Gen Z is as we think about nontraditional players, as we think about the retail companies, the social media providers, even auto manufacturers or automakers that are getting into the banking business, lots of people are getting into the banking business. Gen Zers are much more likely to be willing to consider having banking relationships and primary banking relationships with those nontraditional players.

00:11:25:07 - 00:11:47:17
Greta Capps

So that's something that's coming on the horizon as well. And it's something that Gen Z is more so than than their older counterparts. And not that that's old. Millennials are not old, but much more likely than some of the other consumers that are older than them to go to those players. So if you advance the slide for us.

00:11:48:18 - 00:12:24:00
Greta Capps

Wonderful. The second piece here, the second key theme, it's not just where they think. It's the ways that we bank. So consumers are telling us and we've certainly seen digital usage and digital preference take off in the last few years. I would say this year and again, not surprisingly, given where we are and where we've been with the pandemic and the things that people were forced to do, given the situation, we've seen a greater shift in digital evolution.

00:12:24:03 - 00:12:46:05
Greta Capps

So what you see here are, really we break consumers into four groups based on their usage of different types of channels. Certainly digital channels versus physical channels. Their preference in doing so and what they feel like it's important. And these four groups, you'll see a change that we've seen over just one year. And these shifts are bigger than we've seen before in one year.

00:12:47:01 - 00:13:13:02
Greta Capps

So digital native on the far left, those are pretty self-explanatory. They're very digitally engaged. They don't use a physical network. They don't care if their bank has one. It's not relevant to them. They will do business with someone who doesn't have one. And we've seen that jump substantially this year. On the far right, we see the branch dependence.

00:13:14:10 - 00:13:36:12
Greta Capps

And again, self-explanatory. They are very heavy users of the physical branch. And that is hugely important to them. That's still a significant population. It's still that 35%. But it has dropped and it has dropped more quickly in a year than it has in the past. We've seen it drop over time as well prior to that.

00:13:36:13 - 00:14:03:05
Greta Capps

But again, the shift is bigger in the middle and you'll see are really the people who use or need both that digital adopter group I kind of call the fence sitters. They are very digitally engaged they never use a physical branch, but they need one as their security blanket and they won't bank with a bank or an institution that doesn't have one nearby just in case they need it.

00:14:03:26 - 00:14:24:05
Greta Capps

We've seen that group drop pretty significantly, almost in half this over the last year. Most of them went and became digital natives. They got off the fence. They said, I don't need the training wheels. I'm going to be a digital native because I really never use the branch anyway. And I got comfortable with that. A few of them moved to the other side.

00:14:24:05 - 00:14:52:05
Greta Capps

They basically said, You know what, I really do need that branch. I'm still doing digital engagement. I still want to interact digitally, but I'm also going to use the branch. And they became digital, which is the group that are really heavy users of both sides, the physical and the digital. So with that shift, certainly as we talk to clients within the banking space, everybody's working on how do we improve our digital capabilities and functionality.

00:14:52:29 - 00:15:16:08
Greta Capps

But there's still a gap. We hear from consumers, for example, those that want to open their new accounts, for example, fully digitally, there's still a gap where depending on the banking product between 20% to 25% of the consumers who want to open new accounts fully digitally say they can't because their bank doesn't offer them that full functionality.

00:15:16:23 - 00:15:36:23
Greta Capps

So the capabilities are not keeping up with the expectations and the needs and the preferences of consumers. And so that stood out to us as very interesting as well. I guess from your perspective, these insights are hopefully interesting. Certainly. But what do we what do we do about it?

00:15:37:17 - 00:16:00:05
Dean Nicolacakis

Yeah, it's very interesting. Would you mind going to the next slide, please? So what I wanted to start with is when we looked at, you know, hopefully everyone in the room other than maybe the people that are at the very largest banks, you'll see yourself fitting into one of these three buckets. And I wanted to spend a minute just talking about when we talk to these clients, what do we see them trying to achieve?

00:16:00:21 - 00:16:21:21
Dean Nicolacakis

And then how do these trends affect what they're trying to achieve? Right. So starting with the community banks, I think to a bank, whenever we work at a mid or small sized bank or a credit union, we generally find a heavy skew towards older clients. And a lot of these banks make most of their money off of commercial loans, SMB loans.

00:16:22:14 - 00:16:52:28
Dean Nicolacakis

Some are more full service. But, you know, they need basically a line to try and figure out how to get either lower-cost deposits that are lower cost than their current consumer-driven deposit model. Or through branches or they need a younger base just because of the fact that when they look at the whole lifecycle of the company, they don't have enough fuel coming in of the younger companies to basically have, you know, the 20 year plan out doesn't look good when you look at the customer base.

00:16:52:28 - 00:17:05:12
Dean Nicolacakis

Right. One of the things Greta that you didn't mention, but maybe you can give a little highlight is what portion when you go to community banks are actually boomers or Gen X, do you have a view on that?

00:17:06:01 - 00:17:37:22
Greta Capps

Yes. And it is very skewed. So to your point of credit unions and community banks, it's about 55% of the customer base that says a credit union or community bank is their primary bank. But 55% of them are boomers. And another almost 24% are Gen Xers. So it's really very small, a little bit more than 20% are either millennials or Gen Z.

00:17:38:01 - 00:17:53:22
Dean Nicolacakis

Very skewed. Yeah. So what they're doing, which I think is great, is most of them are trying to build out. We're seeing the survivors, the ones that really want to grow and be around for a long time, are owning their digital channels. They're trying to house it or they're moving to more flexible platforms for digital.

00:17:54:01 - 00:18:14:01
Dean Nicolacakis

They're trying to own integration. They're really trying to address it. So that's a great sense. But generally they're doing it in a traditional model. I just want better online and mobile banking than I have today, which we think there's an opportunity to do more, which we'll get to in the second. The super regionals, which are, you know, much more diverse businesses right.

00:18:14:18 - 00:18:45:22
Dean Nicolacakis

We're starting to see a really heavy focus on mass affluent propositions. People are trying to figure out how to go after small medium enterprises in a segment in a way which we think is a great trend because we're certainly seeing, I think, ERP overall move down market. And you're starting to see that pretty much every specialty business now has some software company out there building very specific software for managing a business, whether it's a doctor's office or moving company or whatever.

00:18:45:23 - 00:19:06:00
Dean Nicolacakis

Right. And so they're realizing that that is the way they have to look at the market. But early days of figuring that out and then obviously the direct banks, you look at it and you say, okay, it's 20% now that banks that are primary obviously they don't have full relationships yet because they don't all have full offerings yet.

00:19:06:00 - 00:19:24:01
Dean Nicolacakis

So they're building out a ton of more offerings so that they can expand to the share that they have and capture more of the wallet. And that to me is showing that is working. I think, you know, a few years ago we would look at the direct banks and we go, you haven't got a lot of customers, but they got these thousand dollar balances like, is that really going to work out?

00:19:24:01 - 00:19:46:01
Dean Nicolacakis

And now what we're seeing is adding products, deepening relationships, building on a cross-sell model, building better bundled products, etc. All right. So I think the first question I would ask is what group are you in? And when we look at these, what we see is kind of common capabilities that you need to have, regardless of which group you're in.

00:19:46:20 - 00:20:19:11
Dean Nicolacakis

We came to the conclusion that pretty much every one of these groups needs to do something with a national approach or a segmented national approach. So if you go to the next slide, please just give me a few examples about what we see people doing. Right. And this is obviously public information, right? So Zions, you know, has gone out and bought Practice Pathways and has taken their commercial lending and payments capabilities and put them right into a context for the medical profession.

00:20:19:29 - 00:20:47:06
Dean Nicolacakis

And we see Truist, KeyBank, others also doing the same sort of offerings where you see a segment-driven approach at scale in that kind of medium enterprise model. I think that's a really interesting example of the industry kind of seeing this trend and going after it that way. Another one, you know for those that were at Money 2020, you know Valley Bank announced an offering that they're basically building a closed loop payments offering.

00:20:47:07 - 00:21:14:11
Dean Nicolacakis

Think of it like Starbucks but white labeled for multi-state cannabis companies which are heavy cash-based businesses. A ton of challenges but logistically and and and security wise to their business basically building a new offering that’s digital and virtual but going right after a segment need in the market in a national way.

00:21:15:10 - 00:21:47:15
Dean Nicolacakis

Chime obviously started as a very segment driven and it's now showing that they're adding more products, as I mentioned before and Nerve too, I think, actually presented maybe yesterday or the day before here, really interesting to see a bank come to market that's so focused on a very real and niche segment. And I think we're going to see more and more of that where once you get kind of the basic infrastructure of having a bank, having this kind of segment and really high-value approach that's laser focused on a segment we see that kind of becoming more of a real thing that people are doing.

00:21:48:26 - 00:22:10:24
Dean Nicolacakis

The next slide, please, So in terms of what what do you need to have to do this? And these are kind of starting to get to the questions we think you should be asking yourself. Right? Which is what all these real companies are doing or people that are reacting to this trend are doing is they're taking a solution-based approach, not a product.

00:22:10:24 - 00:22:32:11
Dean Nicolacakis

Not just, do I need to go sell checking accounts? That's not what they're doing. They're starting with the segments and some affinity group and I'm going to build something very specialized for that group that it hits on a nerve, not just because they need to figure out how to get people to switch but because you're seeing that people are making decisions now.

00:22:32:21 - 00:22:51:26
Dean Nicolacakis

They're not making the decision, as Greta said before, based on what's the bank that's closest to my house. They're making the decision based on who's got the offering that actually is right for me. And what we're seeing is people building things nationally. And once you build that sort of offering, you go why would I do this regionally?

00:22:51:26 - 00:23:18:11
Dean Nicolacakis

There's no reason to do that. And of course, there are reasons for risk and licensing and things that you have to be prepared to do things, and not everybody's charter to be able to do that. So there are operational things that need to be dealt with. But what we're seeing is people doing that and then saying Hey, for me too, especially if I'm a community bank or a regional bank that's got half my customer base being 58, 65 years old, and I don't see how I'm acquiring the next generation.

00:23:18:22 - 00:23:41:19
Dean Nicolacakis

This is one of the ways to deal with that. And to create the lower-cost deposits and also build on a proposition that frankly is a different way of doing it than a traditional rollout of extending the branch network. The other thing which I think we're seeing that's really key is building acumen around partnerships and saying, hey, I don't have to do all this alone.

00:23:42:15 - 00:24:01:29
Dean Nicolacakis

Lots of partnerships out there that I can form. And some of these examples are built their own. Some we're seeing are people that are partnering with others to go bring offerings to market. So we would just ask yourself, think about whether you're actually doing things this way. And if you're not, you know, what do you need to do?

00:24:01:29 - 00:24:24:10
Dean Nicolacakis

And we'll get to that on the next slide. What are some of the things we think you need to do to get the wheels going in the company around thinking in this way and being wired to think this way? Can you go to the next slide, please? So to deliver this right. One thing we're seeing is more community and regional banks really building product development capability.

00:24:24:10 - 00:24:50:03
Dean Nicolacakis

And I don't mean the traditional, so-and-so runs deposits and so-and-so runs Treasury financial products. I mean products in an Agile sense, meaning thinking about a domain like payments or thinking like a segment like a mass affluent domain as an example, and saying, I'm going to go build the offerings and the whole kind of value proposition around what I'm trying to achieve in the market.

00:24:50:13 - 00:25:15:18
Dean Nicolacakis

And then building out a team that really figures out how to work with partnerships. You know, a lot of midsize banks and especially regional banks have varying degrees of acumen around how they think about partnerships. Do you have the vendor management abilities so that you can quickly add vendors, that you can do POCs, that you can test them? This is a new kind of muscle that we think that you've got to build as a bank.

00:25:16:09 - 00:25:45:25
Dean Nicolacakis

And then and then finally, they're figuring out that they need a customer data platform. And so one of the things that Adam mentioned here that we've actually built out is, all this data that we've built out. And then we use one, not only these surveys, but how we help people through these segmentation strategies is actually also a CDP that we can use for audience development and campaign development and marketing execution and multi-step, you know, personalization as well.

00:25:46:26 - 00:26:15:21
Dean Nicolacakis

So that if you don't have strength in these three areas, we think that you should be going to the strategic plan and figuring out how to get strength in these areas because you need different muscles and different capabilities to operate and frankly to take advantage of what this great opportunity is. Okay. So let me just just wrap up on the next slide, which is, you know, I think kind of the summary takeaways.

00:26:15:21 - 00:26:38:17
Dean Nicolacakis

And then if anybody has any more questions, we would ask you to please send them on. The first thing we're saying is segmentation is going down market. What do I mean by that? You know, the idea that we have even the most granular segmentation, the most coarse level segmentation like we talked about generations and things like that is not good enough.

00:26:38:29 - 00:27:01:17
Dean Nicolacakis

All right. You have to be much more segmented about digital propensity. You have to be much more segmented about industry. You've got to be much more segmented about different ways that behavioral segmentation. So this is one of those areas where as a firm, we just think that you’ve got to get this capability and start to think that way.

00:27:03:10 - 00:27:23:06
Dean Nicolacakis

The second thing is, you need tools to do that. Obviously, a bit of an advertisement here for our customer knowledge tool. We would love to talk to you about that if you want to see how we're doing this for clients. But it is something that we've built a full capability on it and rely on that several banks now where we're helping them run the entire marketing function and personalization.

00:27:24:24 - 00:27:51:13
Dean Nicolacakis

The other thing is, digital is not just something that young kids I hope you're taking away. Oh, just the younger generations are doing it now. The switches that we're seeing to these direct banks are happening even in the older and the older segments. So not to the same extent, but they are and you can't like assume this is only something you have to pause and decide whether you're going to be on offense.

00:27:51:21 - 00:27:57:24
Dean Nicolacakis

You actually have a defensive issue, too. And so you want to say something on that.

00:27:57:25 - 00:28:12:06
Greta Capps

Now, I was going to say, we do have a question relative to direct banks. The question is, are there touchpoints with the Federal Reserve for direct banks? I'm not sure I fully.

00:28:13:25 - 00:28:45:14
Dean Nicolacakis

Have that one. Yeah, I don't know that exact question. Yeah. So listen, there are multiple models for how this direct banking is happening today. Some is happening through a fintech with a sponsor bank behind it. Some is happening with fully chartered banks. There's a mix of state charters, national charters. But needless to say, there is no example of people that are banking without a banking license somewhere in the mix there and someone being accountable for all the outcomes of that.

00:28:45:14 - 00:29:05:28
Dean Nicolacakis

So I'm not sure that's what people were asking about. If you want to follow up afterwards with a more specific question and if there's a specific question you have, we've got people that know how to handle that. All right. The last thing is, you know, competition is not just you versus the startups.

00:29:06:23 - 00:29:23:29
Dean Nicolacakis

You should think about them. The people that are going to win here are the people that are thinking about the customer segment first and then solving for them. So ask yourselves whether that's the way you're going to market. That's the way you're planning and I don't mean the traditional. Yeah, we love our customers.

00:29:23:29 - 00:29:44:23
Dean Nicolacakis

We take care of them. I mean, specifically just segments and what their needs are and how you're helping them solve those needs sort of outside it. And then the last thing I would say is there's urgency. We've been tracking this for a decade, but it's coming faster. So this is not an option that you guys can like, oh, let's figure this out over ten years.

00:29:45:08 - 00:29:58:00
Dean Nicolacakis

Ten years is too long. You've got to figure out something much more urgently. Very good. Well, thank you guys for the for the time. We really appreciate it. Hope you got something out of it. Take care.