Banking on the Millennials

by tom 11. June 2015 11:45

The banking community is becoming more focused on Millennials as their next generation of customers. As the Baby Boomers start to retire the fresh capital is coming from the new generation entering the workforce, many of whom are looking at lower salaries than their parents, and most of whom are carrying more debt than ever before. The characteristics that define Millennials’ attitudes about personal finance are different, and will require a banks and credit unions to apply different tactics to get their business.

The U.S. Council of Economic Advisers reports that Millennials are the largest and most diverse segment of he population, making up about one-third of the country. Their world is shaped by technology, they value family, community, and creativity above all, and they are much more willing to invest in human capital. They also are in debt with student loans and are much more debt-imageaverse, being less willing to take on credit card debt, car loans, and mortgages.

In its profile this week of Young Americans Bank, American Banker reports that those who were raised during the recent ‘08 recession are now reluctant to borrow; a trait that may follow them into adulthood. The Young American Bank is trying to educate the younger generation about credit to combat some of the fear of debt that has become a trademark of Millennials.

Bankrate conducted a study that shows that 63 percent of people between the ages of 18 and 29 do not have a credit card, and 35 percent of adults over 30 do not have a credit card. Of those 37 percent who do have credit cards, 40 percent pay the balance every month, as opposed to 53 percent of those over age 30. Although experts note that avoiding credit cards does damage their credit scores, this generation doesn’t seem concerned because they don’t intend to borrow. Another study conducted by Princeton Survey Research Associates International (PSRAI) shows that 33 percent those aged 19 to 29 say they are better off today than they were a year ago even though, statistically, Millennials earn on average $2,000 less than their parents at the same age.

The good news is that Millennials are saving. The same PSRAI study says that job security has improved (report 32 percent) and that young workers are saving for the future. Thirty percent said they are move confident about their savings.

We know that Millennials aren’t saving their money in a mattress and so they are using banks and credit unions, but they aren’t making maximum use of their money either. Fear of debt and the taint of the 2008 financial crisis have left younger depositors wary of financial risk, hence the “save without incurring debt” attitude.

What this means for banks and credit unions is that they need to use a different approach to attract Millennial dollars, not just for savings but for other financial needs:

  • More education – Financial institutions need to do a better job of educating their younger customers and helping them manage day-to-day finances. Even though they have accumulated tens of thousands of dollars in student loan debt, many college graduates don’t understand how to create a household budget. These consumers will have to deal with debt at some point when they buy a car or a house. Better financial education and providing tools to help them manage their finances is one way to encourage both accumulating savings and taking on responsible debt, thus increasing share of wallet for the bank.
  • More technology – Financial institutions have been aggressively embracing mobile banking, partly to attract tech-savvy younger customers. They need to do more. Millennials live online and on their smartphones, and banks and credit unions need to to more to incorporate financial management strategies into their online world. Developing integrated strategies that help depositors manage income, savings, debt, and spending as part of a holistic strategy will go a long way toward easing Millennial fears about debt. 
  • Better relationship banking – Building trust with Millennial customers starts with protecting their savings. Once they have an established relationship with the customer, developing new ways to help them save with credit card rewards, direct deposit, and other strategies will help customers achieve their savings goals and build trust with their bank.

The new generation of banking customers have different concerns than their parents, and a lot less trust of financial institutions. The banking community has to take steps to rebuild that trust, starting by understanding the needs and attitudes of Millennial customers.

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Do Promotional Deposit Rates Really Attract New Money?

by tom 7. July 2014 09:23

We recently compiled a new research report,"Likely Scenarios of Rising Deposit Rates in 2014 and Beyond,” which draws from 25 years of cumulative data here at MRI to consider the future of deposit rates based on past performance. This article was written by Dr. Dan Geller, executive vice president for Market Rates Insight, for this BAI Banking Strategies about some of his research findings.

Specials on deposit accounts are promotional rates designed to attract new money or to shift balances to term accounts, which provide stable and projectable liquidity to the institution. In the 12-month period from June 2013 to May 2014, neither of these objectives has been reached overall by the use of promotional rates. Moreover, it is likely that institutions incurred higher interest expense with specials on balances they could have obtained for a much lower regular rate.Dan Geller Ph.D.

Analysis of the percentage change in regular annual percentage yield (APY), special APY and balances of deposit accounts shows that specials on long-term certificates of deposits (CDs) of over three years were the most ineffective in attracting new money. During the 12-month period, the average APY of specials on such CDs increased by 75.7%, yet balances fell by 5.9%. Similarly, the APY on promotional mid-term CDs (one to three years) increased by 15.7% while balances decreased by 3.5%. For short-term CDs (up to one year) the specials’ APY rose by 13.3% while balances dropped by 2.3%.

The picture is slightly different but not any better for checking and money market accounts. The APY on promotional checking and money markets was flat in the past 12 months, yet balances increased by 14.1% and 6.6% respectively. Moreover, the balance increase in these accounts occurred despite a decrease of 4.1% in the regular APY of checking and 6.5% for money market accounts.

Perhaps the most revealing finding of this analysis has to do with savings accounts, which experienced a 13.7% increase in specials’ APY during the period while balances increased by 9.1%. However, it is not very likely that these promotional rates contributed much to the increase in savings balances since balances of other liquid accounts increased as well even while the rate on their specials remained flat. Thus, it is plausible that savings account balances would have risen anyway without institutions having to pay a higher APY for specials.

The obvious conclusion, then, is that promotional rates are not very effective in attracting new money or in shifting balances to long-term accounts. It is possible that gains might be achieved for individual institutions and/or in specific markets, but overall, nationally, the specials aren’t working in the current rate environment.

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Market Research | Banking Trends | Deposit Products

M&A Could Spell Opportunity for Regional Bank Competitors

by tom 4. February 2011 14:54

0309-merger_full_600A recent article in American Banker magazine entitled, “Stealing customers. Poaching deposits. It's all on the table when M&A disrupts a marketplace,” offered some interesting statistics about the shift in deposits when a bank is acquired. We have seen a lot of M&A activity in the banking community as troubled institutions are being gobbled up by their healthier competitors, and the result has created some new opportunities for smaller, healthier, regional banks. As one source in the article states:

"When there's a strong local competitor like a WSFS and out-of-market large banks come in out of acquisition, those local banks I believe do stand to benefit and pick up customers that are either not wanting to bank with an out-of-state bank competitor or just experience some turmoil related to the integration effort," said Mary Beth Sullivan, a partner in the Capital Performance Group consulting firm. "It always has created opportunities," she said, "and it will continue to do that. But my sense is, the best opportunity is on the business banking side of the equation when that happens."

The article cites a number of examples where, following an acquisition, they acquired bank actually increased its deposits. For example, when New York Community Bancorp acquired AmTrust in Cleveland, the New York Community executives were conservatively estimating a loss of 15 percent of $8 billion in deposits would likely follow. Instead, AmTrust’s deposits grew by nearly $200 million in the first quarter. This could be because AmTrust kept its name and the fallout from the merger was fast, and AmTrust stopped its layoffs and started hiring right away. Hence a perceived turnaround for an established local brand.

An interesting observation about this example is that depositors tend to leave a struggling bank at the first sign of trouble. By the time AmTrust was acquired by New York Community, only the most loyal customers were still banking with AmTrust.

The article also tells a David-and-Goliath story of how FirstMerit Corporation of Akron was able to attract depositors from Cleveland competitor National City after the latter was acquired by PNC Financial Services Group. FirstMerit was a healthier bank with fewer problem home builder loans, and was able to attract depositors with new special offers, such as a new checking account with one free overdraft per year and free return of canceled checks. FirstMerit was able to increase its core deposits by $1.34 billion in the first year following National City’s acquisition, and it moved into number 7 in deposit market share as of June 2010.

“Ali Raza, an executive vice president at Speer & Associates, a financial services consulting firm in Atlanta, said he has seen acquisitions play out in two ways in his local market. ‘When a new bank comes in to town, there is some opportunity for consumers to look at a new alternative," he said. "At the same time, there is some defensive play and an opportunity created by a longtime hometown bank to assert itself as a player that has been there for a long time and differentiate itself, 'We know the market better than the newcomer' sort of thing.’”

Whether consumers switch banks or not is really a matter of convenience. If there are enough local branches and ATMs then they will consider an alternative when their bank goes through a transition. Offering innovative products and aggressive deposit rates to attract their attention helps as well.

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