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Key banking issues and trends for 2023

On this week’s BAI Banking Strategies podcast, BAI’s Karl Dahlgren shares survey findings on the biggest business challenges for bankers in 2023.

Dec 13, 2022 / Consumer Banking
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A number of key uncertainties face banks and credit unions in the coming year.

BAI’s Karl Dahlgren shares findings in our latest survey the biggest business challenges for bankers in 2023: new-customer acquisition, digital experience and talent.

A few takeaways from the conversation:

  • Customer acquisition: Key issues are fewer new customers available, more options for them to choose from, and the survey shows that fewer established customers are open to switching.
  • Digital experience: Core challenges were largely related to new account opening, as Gen Zers and millennials expect to be able to conduct most of their business via digital channels.
  • Finding and keeping talent: We likely will not return to pre-pandemic work models, so lessons are available from institutions focused on blazing the trail into the future of work.

So Karl Dahlgren, managing director of research at BAI. Welcome to the BAI Banking Strategies podcast.

Thanks, Terry. Thanks for having me back.

So Karl, to frame our conversation, could you give us a little more background on what the BAI Banking Outlook Surveys are and what we are trying to learn from this research?

Yeah, so BAI Banking Outlook is a survey that we do several times a year. We’re well known for the benchmarking reports that we provide, but we also field surveys on topics that are interesting to financial service leaders. We have both voice of the customers, so we go out and we survey consumers, and we also have voice of the bankers, so we go out and survey bankers as well. Information that I’m going to be providing today is from a survey that we fielded in September. We went out to various different financial service leaders from small to large organizations, including banks and credit unions, and then went out to over a thousand consumers.

As you were saying, each year brings different issues that financial services leaders have to contend with, and as a result, there are different priorities for them to focus on. Looking at the latest BBO survey, what are the top business challenges for banking institutions, as they see it, going into 2023?

So the top three for this coming year are digital experience, new client acquisition and then acquiring and retaining top talent.

This is a pretty wide range of challenges that they see, so let’s take them one at a time, starting with the digital experience for clients. Of course, digital is the leading growth area for most financial institutions when it comes to delivering products and services. So making the digital experience pleasing to the client, that’s a key objective. Tell us more about this in the context of being a business challenge and not just an IT challenge.

Financial service leaders rate their digital experience much lower than they rate their branch experience. In fact, only 4% of financial service leaders rate their digital experience as excellent and a much larger amount of 40%-plus feel that it’s a marginal experience. So there’s a lot of work to do there and there’s some gaps that exist in the client experience, and it’s mainly due to feature functionality. Most clients can’t do everything online that they can do in a branch. Online and mobile banking continue to be a client’s top channel for a preference for routine activities. So when we went out and surveyed them, mainly what they’re using those channels for is checking balances, transferring funds, making deposits or learning about simple products or services. However, the top channel preference is branch for the more complex activities like getting advice on a complex product or closing an account or opening a deposit loan or investment account. So consumers just don’t feel that digital has the same features or functionalities as the branch for the more complicated activities. So bottom line, financial service leaders are working on the omnichannel experience. We call it channel harmony, so that clients have a wonderful experience in every single one of the channels no matter what channel preferences are. And if they’re switching, they might actually switch channels with one activity, for example, opening an account. And it’s nice to have a fluid experience between the various different channels.

So digital, Karl, was already an established growth area when COVID-19 arrived in early 2020, and the response to the pandemic certainly supercharged it as a channel. Now more consumers use digital for more of their banking than they perhaps would’ve done otherwise. So does the BBO research identify specific digital services or transactions or experiences that financial services leaders see as needing particular attention as they work on their upgrades?

It’s definitely online account opening – that includes deposits, loans, or investments. So in opening deposits, our research shows that Gen Z has the highest preference of all of the generations for opening deposits via a mobile app or desktop. In fact, 70% have opened an account online in those younger generations at some point in their life versus only 24% of boomers, so there’s quite a big difference there. And they expect to be able to do most of, the younger generations that is, expect to be able to do most of their activities digitally as well as being able to perform those things in the branch. BAI Research, we actually just released a new program this past year. We call it Digital Funnel Pulse, and it tracks online deposit account openings – so that sort of sales funnel that comes in through the online channel. And the banks contribute data to us, and what we’ve seen is that the abandonment rates for those who started deposit application online are just really high in the industry at this point. And so it’s become really important for financial service organizations to benchmark that whole digital account opening activity. And what it’s doing is helping folks understand where people are falling out of that funnel. There’s a lot of starts and not as many finishes.

So Karl, you bring up the younger generations, the Gen Zs, the millennials, and of course as digital natives, they are much more attracted to digital channels than the older folks. But the older folks, they’re still doing more of their banking digitally as well, as you point out, but not to the same degree as the younger ones. Looking at the broader experience, did the research show other demographic differences in terms of satisfaction with digital?

Gen Z is less happy overall with the digital experience at their financial service organizations, particularly in comparison to the other generations as you mentioned. And part of that is because they don’t just scope what they expect out of a digital experience to financial services. They are looking at other services that they get through tech companies like Apple and Amazon and Google, and they’re comparing it to that and they just don’t feel that the financial service organizations are keeping up with the same type of experience they’re getting within other industries. And that bears it out in some of the data that we’ve collected. Nearly three-quarters of Gen Z and millennials say they’d switch for a better banking app, and that compares to only 23% of boomers. We also found that those who self-describe themselves as late adopters, and there tends to be high correlation with the older and more mature customers there. They rate their financial service organization much lower on understanding their digital experience. I think that’s an important insight because it shows the importance of educating some of these late adopters to help them understand and embrace the digital experience. And then one other notable data point on this topic matter is that we ask the consumers the best way to improve their mobile and digital experience. Every single one of the generations had the same top rating, which was they cited 24/7 customer service, which is interesting to me because when you’re asking what is the top way you can improve your digital experience, it’s actually a non-digital feature.

Let’s move on to new customer acquisition. You mentioned it as being one of the other three top business challenges. I’m assuming this is across all channels and not just digital. So from a business standpoint, what are the key issues that emerged in the BBO survey regarding new customer acquisition?

There’s just far fewer new customers in play. We asked consumers how likely it would be that they would be with their primary financial service organization a year from now, and the answer was over eight on a 10 point scale, and that’s up from last year. So there’s just fewer people that are leaving, and that’s obviously good news in terms of retention, but it’s going to drive up acquisition costs. Another trend that we see is that more consumers are citing a direct bank, and we define a direct bank as a bank that does not have branches. One of the drivers of that is that direct banks have, particularly in a rising rate environment, have been moving their rates up a little bit faster than the traditionals. And then relative to the last time we had a rising rate environment, they’ve increased the breadth of their product set, so they have checking accounts and other types of accounts that they can offer to clients. And so one challenge is the alternatives that consumers now have relative to traditional banks with these new direct banks that are on the move.

So maybe not so much with Gen Z, whose members are really just starting to get into the earning part of their lives, but certainly millennials are reaching that age where they’re getting into family mode, where they’re in the market for a wider range of financial products and services beyond just the basic checking and savings. What do we know about the kinds of opportunities that this might create for banks to bring in new customers – to attract them from others or to find newcomers to the marketplace?

So one of the big challenges that Gen Z and millennials, they’re more likely to spread their business around. So over 60% of Gen Z and millennials have multiple relationships for deposits. So really what’s important is becoming the primary financial service organization. That’s the key to success. I mentioned that we do a lot of benchmarking studies, and in those studies we track primacy, and primary households contribute around 80% of deposit balance growth for financial service organizations, regardless of the type of interest rate environment that we’re in. Primary households, they have higher digital engagement, higher deepening, higher deposit share of wallet, all relative to the non-primary clients. So it’s really critical to establish primacy in order to have the additional product and service opportunities beyond just the basic checking and savings account. Also, our survey shows that younger generations are more open to receiving financial advice. That’s one opportunity for those younger generations of financial services, service organizations provide that type of advice. It’s one way to gain the loyalty and business of those younger generations.

The third key business challenge that we identified is acquiring and retaining talent, which really moved into a front-and-center position for financial institutions as a result of the pandemic. What insights were we able to glean from the BBO survey on what many in banking refer to as “the war for talent?”

This is an interesting one. The war for talent just showed up in the top three, and that hasn’t been the case in the past. Clearly the labor market has been challenging over the course of the last couple of years. I think it’s probably peaked, but it still remains a big challenge. I mentioned some of the benchmarking that we provide and another benchmarking study that we do is talent benchmarking, and inside of that program, voluntary turnover was up dramatically relative to pre-pandemic levels. It’s interesting, we went through the pandemic and the question is what kind of elasticity is there going to be to snap back to baseline? And I think we’ve stretched ourselves in ways that aren’t necessarily going to allow us to come back to the way things used to be. There’s several leaders within banks and credit unions that have expressed concern about the ability to maintain a strong workplace culture with less face-to-face interactions than we have today and there’s concern about lower productivity as well as keeping up competitively relative to other organizations. I think the issue is there’s a relationship between the employer and the employee, and that relationship has changed and it’s not going to snap back to the way it was. And certainly with the younger generations – millennials and Gen Zs — they just have different expectations in terms of the need to be in the office. So with any relationships, there’s going to be give and take on both sides, and there’s going to need to be a lot of work on those relationships.

I can see where younger workers would especially be attracted to an alternative to the five day in the office model that you and I and other more seasoned workers grew up with and were used to. But part of me wonders about the long term trade-offs that come with that approach, the benefits of collaboration that you just can’t get over Zoom. So do you have any examples of what financial services organizations might be doing to help acquire and retain talent with using flexible work arrangements?

We have at BAI several round tables where leaders in the financial services world get together and talk about challenges and share best practices and the like, and one of those round tables is the CHRO, Chief Human Resource Officer roundtable. And I’ve sat in on some of those meetings and there’s a lot of great discussion, and I cited in your last question there that there just needs to be a lot of work done. And let me tell you, those folks have put forward a lot of work. And in fact, they’ve developed new hybrid work programs that they’ve labeled and put new names on, and they’ve worked very hard. A lot of that work revolves around categorizing different types of roles because not all roles are created the same. They have varying degrees of the need to be in person. And then working on ways in which those different categories of roles can get together and in hybrid type methods so that they do get that in person experience along with being able to have some remote aspect to their roles and their jobs. This is a relationship-oriented thing and there needs to be give and take on both sides. And there’s just a lot of work being done within the banking industry.

So Karl, this conversation has centered on the three key business challenges that financial services leaders identified as being their main concerns in the coming year. The BAI Banking Outlook survey, it extended far beyond those three themes. So as you think about other findings from the research, what stands out to you as something that might be surprising or something that might be interesting to financial institution leaders?

I’ll tell you what I found surprising, and it may not be as surprising to others, but it’s interesting that nearly two thirds of Gen Z and millennials, so the younger generations, say that they’d switch from one to another that’s more committed to diversity, equity, inclusion or DEI or ESG, environmental, social and governance. We also asked consumers if their primary financial service organization committed dollars or resources into DEI or ESG, and 60% of them said “I don’t know” or “No.” And so to me that illustrates the point that first just realizing that it’s a deciding factor for many. And then second, the importance of communicating, having a plan, and then communicating that plan out. And that’s going to be very important in terms of attracting the younger generation as clients. And then if we think back to what we were just talking about in the last question, also as talent.

We’ve covered a breadth of territory here in this chat, but just to wrap things up here, do you have any other thoughts about what financial institutions can do to help stay competitive in 2023 and beyond that maybe wasn’t covered in the BBO research?

There’s been a lot of volatility and I expect that to continue on into 2023. There’s a lot of things going up and there’s a lot of things going down, and certainly rates are on their way up and the talent pool is one of those things that’s on its way down. Any time you have things that have sort of sharper curves moving up or down and that type of volatility, you need to be addressing those things – working at them, and you want to make sure that the work you’re putting forward and the strategies that you’re putting forward are being effective, particularly relative to your peers. And so I would just say that benchmarking is going to be really important in ’23 as a way to navigate through the volatility that we’ve experienced this year and will continue to experience in ’23.

Banks or credit unions always seems like they’re juggling a lot of balls, but it feels like now with all the variables in motion that it’s just that much more of a juggling act heading into the new year. So Karl Dahlgren, managing director of research at BAI, many thanks again for taking time to be with us on the BAI Banking Strategies podcast.

Thanks for having me, Terry. Great to be here.