The closing of branches and the corresponding transition to online banking will generate substantial advantages for the nation’s largest banks. This article will describe the inherent advantages for large banks in digital acquisitions, underwriting analytics, and digital-first branch cafes.
The U.S. banking industry has dramatically shifted towards dominance by large banks. Driven by consolidation, the number of banking institutions fell from 10,175 to 5,743 during 1995-20151. Over that same period, market share (as measured by deposits) for banks with >$100B in assets rose from 7% to 58%, almost all coming at the expense of regional and local banks2.
Customer Acquisitions: From branches to online
Branch Acquisitions: To this day, branches remain the majority channel for opening new banking accounts3. Traditionally, a nearby branch was critical for customers, who regularly visited banks to conduct most banking activities such as deposits, withdrawals and loan applications. As banks have shifted transactions online to reduce costs, they have been closing branches across the U.S. After peaking at 83,576 branches in 2012, the number fell to 79,163 in 20174. While not a huge decline, the more relevant story is the branch’s reduced role in new account openings. For instance, one study found the number of customers who considered ‘branches nearby’ the most important consideration in opening a new account fell from 30% to 16% from 2014 to 20165, replaced mainly by ‘mobile and digital capabilities’.
As banking acquisitions move online, large players will benefit from increasing advantages in growing their market share.
Digital Acquisitions Landscape
To understand acquisitions landscape, we will discuss the four main channels:
- Natural(unpaid) search,
- Promoted(paid) search,
- Affiliates (resellers),
- Digital Ads & ‘Direct to Bank’ (customer already has bank in mind)
- Natural Search is the ultimate battleground for online acquisitions, in which Google plays the key role of arbitrator. A company’s success on search is almost entirely based on its rank on Google searches. One online study (which mirrored several others available online) shows the correlation between page rank and click rate on mobile searches6:
|Search Rank||Click-Thru-Rate||Search Rank||Click-Thru-Rate|
Success in natural search is driven by a bank’s ability to produce relevant content and optimize their site to Google’s search algorithm. Large banks have numerous advantages in this space. Their larger technology teams are better able to use search engine optimization (SEO) techniques to improve their ranking. Their strong brand names mean customers are more likely to click on them, increasing their relevance and by extension their ranking. To test this hypothesis, a quick Google search for ‘open checking account’ produced the following rankings (location: Boston, MA):
|Rank (unpaid)||Institution||Bank Rank (Assets) 7|
Across several other search terms, large banks consistently had the best rankings on Google, giving them a significant advantage over smaller banks.
- Promoted (Paid) Google Search is a way for small or regional banks to make up for their disadvantage in unpaid search. Google determines Paid Search results based on the bank’s bid-per-click amount and click-through-rate. While smaller banks can use paid search, it is more expensive and less effective than unpaid search. Furthermore, smaller banks have to bid more to make up for their lower click rates (driven by lower awareness). Below is a sample of Google click bid rates:
|Search Term||Cost per click (low)||Cost per click (high)|
|Business Credit Card||$56||$123|
Source: Google Ads Custom Keyword Search, 3/3/19
Overall, while paid search is a viable alternative to smaller banks (indeed most paid results I encountered were smaller banks), the strategy is less effective and more costly than natural search.
- Affiliates, which are websites like CreditKarma or NerdWallet that aggregate and compare banking products, are growing in importance in online banking acquisitions.
While affiliates seem unbiased to consumers, the companies receive significant commissions for generating new accounts for banks (usually ~$100, although varies by product). Thanks to these commissions, predominantly from large banks, affiliates have skyrocketed in valuations (e.g., NerdWallet valued at $500M8, Bankrate at $1.24B9, and Credit Karma at $4B10). While the affiliates claim to be unbiased in their disclaimers, larger banks are likely to negotiate better placement deals with affiliates. For instance, in the credit card segment, most affiliates emphasize products from the largest banks.
In some cases, affiliates are less biased in showing products to customers. This scenario is especially true for Savings accounts, which are generally ranked by highest interest rate. While this may seem welcome news for smaller banks, that’s not necessarily the case. To beat the competition, smaller banks have to enter an interest rate ‘arms race’, which costs them money (e.g., Ally and Barclays offer 2.2% today). In contrast, large banks, accustomed to paying significantly less (e.g., Bank of America offers 0.03% today) do not engage in this race. While this interest rate discrepancy presents a vulnerability to large banks, they remain able to maintain their dominant market share despite significantly inferior interest rate offerings.
- Digital Ads / Direct-to-bank: In this space, the equation is quite simple. Through extensive marketing budgets, large banks become top of mind for consumers and place the largest number of ads. However, the advantages of scale are less here, as smaller banks can pursue targeted online marketing campaigns at reasonable costs.
AI and Underwriting Analytics:
For financial products requiring advanced underwriting (such as credit cards and car loans to subprime buyers), large institutions with better access to technology and engineers will create better models to serve these customers. For example, JPMorgan Chase global head of AI and machine learning indicated that machine learning will allow the bank to develop new products and better engage traditionally non-served customers11.
The use of advanced analytics for underserved customers was key to the emergence of Capital One in 1994. An early mover in underwriting analytics, the bank grew to become the nation’s largest subprime auto lender (non-captive) and credit card issuer12. While subprime customers represent only 20-25% of U.S. consumers, they command significantly higher interest rates (often 15%-20%)13 and thus profitability.
The success of large banks to win in AI-driven underwriting presents vulnerabilities as well. Several AI-centric technology companies are likely to develop new underwriting models that disrupt the large banks’ current dominance.
Digital-first Branch Cafes
Imagine creating a branch designed predominantly to take advantage of customer acquisition benefit of branches in a low-cost, effective manner. To achieve this goal, Capital One, which lacks the branch network of its larger rivals, developed Capital One Cafes in partnership with Peet’s Coffee. The company is placing the cafes in highly transited locations to build brand recognition. A Capital One product is not required to use the cafes, although current cardholders receive a 50% discount in store14.
While the cafes contain ATMs, they offer no other banking transactions (other than what customers can do online at CapitalOne.com). Driving customers to online products saves the company costs, as it eliminates the need for relationship bankers and compliance with state-level bank branch regulations. Results for the strategy are yet to be seen, but it seems like an innovative idea for banks of all sizes to efficiently build a digital-first, low-cost branches focused on acquiring new customers.
- St. Louis Fed FRED Economic Data, “Commercial Banks in the U.S., https://fred.stlouisfed.org/series/USNUM, accessed March 2019.
- Lavecchia, Olivia, “Share of Deposits by Size of Institution, 1995-2014,” Institute for Local Self-Reliance, April 20, 2015, https://ilsr.org/distribution-of-deposits-by-size-of-financial-institution/, accessed March 2019.
- Rubin, Rob, “Get Ready for Mobile Account Opening,” The Financial Brand, April 22, 2014, https://thefinancialbrand.com/38869/mobile-checking-account-opening/, accessed March 2019.
- Federal Deposit Insurance Corporation, “Historical Bank Data,” https://banks.data.fdic.gov/explore/historical?displayFields=STNAME%2CBANKS%2CASSET%2CDEP%2CNETINC%2CINTINC%2CEINTEXP%2CTPD&selectedEndDate=2017&selectedReport=CB&selectedStartDate=1934&selectedStates=0&sortField=YEAR&sortOrder=desc, accessed March 2019.
- Novantas Research, “2017 Omni-Channel Shopper Survey A Digital Inflection Point for Banking,” 2017, http://www.consumerbankers.com/sites/default/files/Novantas%202017%20Omni%20Channel%20Shopper%20Survey.pdf, accessed March 2019.
- Advanced Web Ranking, “Google Organic CTR History,” https://www.advancedwebranking.com/ctrstudy/, accessed March 2019.
- Dixon, Amanda, “America’s 15 Largest Banks,” Bankrate, February 20, 2019, https://www.bankrate.com/banking/americas-top-10-biggest-banks/#slide=1, accessed March 2019.
- Huddleston Jr, Tom, “After being laid off, this 35-year-old founded NerdWallet with $800 – now it’s worth $500 million,” CNBC, May 9, 2018, https://www.cnbc.com/2018/05/09/tim-chen-started-500-million-company-nerdwallet-with-800.html, accessed March 2019.
- Lane, Ben, “Financial publishing giant Bankrate selling to Red Ventures for $1.24 billion,” HousingWire, July 5, 2017, https://www.housingwire.com/articles/40608-financial-publishing-giant-bankrate-selling-to-red-ventures-for-124-billion, accessed March 2019.
- PYMNTS, “Credit Karma now valued at $4B Thanks to $500M Funding Boost,” March 29, 2018, https://www.pymnts.com/news/investment-tracker/2018/credit-karma-funding-silver-lake-investment/, accessed March 2019.
- Knowledge @ Wharton, “What’s Behind JPMorgan Chase’s Big Bet on Artificial Intelligence?,” Wharton University of Pennsylvania, February 6, 2019, http://knowledge.wharton.upenn.edu/article/whats-behind-jpmorgan-chases-big-bet-artificial-intelligence/, accessed March 2019.
- Dee, Steve, “How Does Capital One Differentiate Itself In The Card Industry,” Forbes, September 11, 2015, https://www.forbes.com/sites/greatspeculations/2015/09/11/how-does-capital-one-differentiate-itself-in-the-card-industry/#591abec33cda, accessed March 2019.
- Andriotis, AnnaMaria, “Millions of U.S. Consumer Are Escaping Subprime,” WSJ, June 22, 2016, https://www.wsj.com/articles/consumers-improving-credit-scores-give-banks-reason-to-cheer-1466587801, accessed March 2019.
- Capital One, “Capital One 360 Brings New Banking Experience to Boston with First Area Café,” February 18, 2014, http://press.capitalone.com/phoenix.zhtml?c=251626&p=irol-newsArticle&ID=1900755, accessed March 2019.