The COVID-19 pandemic, and its impact on the way we do business and how financial institutions have been able to function since March 2020, has made time stand still and move at the speed of light all at the same time. But here we are, looking ahead at 2022 and identifying strategic priorities, and developing plans for the next year.
Over the next several weeks, we’ll highlight several key priorities community banks and credit unions will want to consider while developing their strategic plans.
Revenue growth remains a priority and identifying the tactics that will be most effective will be imperative.
MAXIMIZE CROSS-SELL OPPORTUNITY
The cost to expand relationships with your current customers is far lower than the cost of acquiring a new customer household. Identifying low-hanging fruit and targeting those customer cross-sell opportunities to grow revenue in 2022 should be a priority.
Broad Customer Base
Community Financial Institutions hold, on average, 43% of their customers’ deposit wallet share and 18% of their loan wallet share (Galapagos, 6/21) so there’s plenty of room for growth. Targeted email and mail campaigns, linked with branch outreach efforts, consistently increase wallet share by up to four percent per year. And with so many customers still very focused on their personal financial situation, they are more receptive to suggestions from their FI to save more, reduce debt, or embrace the benefits of planning. Targeted offers, informed by thoughtful segmentation and customer behavior analysis, are being well received.
Mortgage Households
Many community FIs have a large segment of single-service mortgage households. This is not unusual and is often a testament to the efficiency and strength of the mortgage process. These households represent a significant opportunity for growth, and you’re leaving money on the table if you don’t find ways to engage these customers early in the mortgage process to establish a foundation for expanding the customer relationship.
A targeted promotional effort to communicate with mortgage applicants early and often throughout the mortgage process can deliver impressive results.
A relationship with a mortgage customer generates on average 2.4 times the revenue. (Galapagos Data, 6/2021)
Flight to Safety Deposits
Market volatility and overall uncertainty has had an impact on customer behavior. It’s important to understand what is driving your customers and have a strategy for it. While some deposit customers are looking at their overall long-term returns, many are seeking a flight to safety – a temporary escape from the market volatility. Your plans for 2022 should include a flight-to-safety strategy for deposits.
EXPLORE NEAR-TERM LENDING OPPORTUNITIES
While mortgage production is likely to slow, opportunity still exists. Homeownership reached 68% of the population in Q2 2020 – the highest it’s been since 2008 (US Census). The largest target for new mortgage messaging is Millennials, which now represent the largest generational cohort. And new regulations are making refinance easier, especially to low-cash homeowners. With 12 million still eligible for refinancing (Black Knight, 8/2021), efforts to promote refinance may still be fruitful. As rates increase, the tipping point approaches where home equities will be more appealing than refinancing.
Consumer credit is increasing at a rate greater than expectations and delinquencies are staying low. The annual adjusted growth rate of consumer lending is 8.8%. Credit card growth and usage continue to climb – Q1 2021 saw 15.5 million new card activations, nearing pre-pandemic levels (Transunion).
Buy Now Pay Later (BNPL) platform use is surging. These tools are especially appealing to younger demographics. Q1 saw a 215% increase in the use of BNPL tools. Klarna, a consumer credit option targeting younger consumers, is being used by 15% of Gen Z and that number is expected to double this year. These platforms are on the rise, and it’ll be necessary to take these into consideration in your strategy to be competitive.
Small businesses were hit hard by the pandemic. However, startups are on the rise – up 24% in 2020. Small business lending and support is a huge opportunity, and FIs should promote payments and advisory solutions, as well as credit. As with other segments, business owners’ needs have changed because of the pandemic. They require a broader service approach and network of advisors on top of basic services.
FOCUS ON “GATEWAY” ACCOUNTS
Many financial institutions may not be looking for deposit growth – but ignoring consumers with deposit needs shouldn’t be a part of your strategy. Retail deposits are booming and are often a primary form of engagement. Now’s not the time to chase rates with CDs – it’s an expensive way to compete. Though deposit growth may not be a priority, the checking account is a gateway account that can encourage engagement that benefits your long-term strategy.
DESIGN LONGER-TERM STRATEGY FOR HIGH GROWTH SEGMENTS
As always, being all-things-to-all-people is not an effective strategy. So, as you look for long-term growth opportunities, analyze the various options in your marketplace. There are several key segments that should be considered in your planning efforts.
Gen Z
This generation (people born between 1997 – 2012) wants 24/7 customer service, advice, and convenience. 59% are financially independent and 61% bank at the same financial institution as their parents (BAI). Most of this generation plans to achieve a higher standard of living than their parents. They want one-click payment, management tools, person-to-person payment options, and creative credit. Gen Z is the largest generational cohort in history and courting this group should be a priority. Consider how you will enhance and package your current product and service mix to appeal to and deliver on their needs.
Small Business
With small businesses recovering from the pandemic’s impacts, and with startups on the rise, a longer-term strategy for targeting this segment is essential. Fintechs targeted this segment during the last recession in 2008 – 2011, with great success, and are doing so again. Many are focused on streamlined and specific services, delivered conveniently via digital platforms. While convenience is key, small business owners need more, and the ability for the community FI to forge advisory relationships remains a key competitive advantage. But as stated earlier, credit, alone, is not enough. An effective small business acquisition strategy will need to address a much broader range of needs from payments, cash flow, sales, and marketing to support growth, cybersecurity and fraud prevention, even business valuation and generational transfer.
Pre-Retired
On average, pre-retired household balances are 1.73 times greater than overall average household balances. While this segment has traditionally been defined as customers aged 50+, the behavioral characteristics of Millennials and Gen Z, plus the impact of the pandemic, have increased consumer interest in planning for the financial future. The key challenge? How to reinvent the way you promote your services so as not to intimidate the consumer and make the topic of investing more approachable and easier to engage.
While 2021 presented its own challenges, the opportunity exists within the recovery. It’s essential to consider the changes in behavior and needs of consumers and businesses when developing your strategic plan for 2022 to maximize revenue growth. Not sure where to start? Give us a call and we can help.