fis strategic insights vol 6 march 2012

VOLUME 6 • MARCH 2012

FIS STRATEGIC INSIGHTS • V 6 MARCH 2012 © 2012 FIS and/or its subsidiaries. All Rights Reserved.

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By Fred Brothers EXECUTIVE VICE PRESIDENT, STRATEGIC INNOVATION

Recently, I’ve discussed several ways of improving operational effi ciency at fi nancial institutions – leveraging customer data to improve the top line and outsourcing to improve the bottom line. Given a host of recent industry headwinds, fi nancial institutions have had limited ways to drive revenue to improve their effi ciency ratios. But that’s starting to change as the U.S. economy’s slow climb

from recession seems to be accelerating. For this month’s article I decided to look at the relationship between bank advertising and marketing spend and revenue generation.

The Marketing Department is often one of the fi rst areas where companies trim expenses during tough times. Advertising & marketing budgets at banks were slashed in lock step with the recession and – with the exception of community banks – rebounded strongly in 2010 as many looked for ways to capture additional market share (Figure 1).

Marketing Effi ciency Matters

I N T H I S I S S U E

• Marketing Effi ciency Matters

• Calming the EMV Storm

• Dissecting the Credit Union Member Base

• Attracting and Retaining Gen Y and Gen X

Sources: Call Report data from SNL Financial, analysis by FISn = 6,330 commercial banks

Figure 1: Average spending on advertising & marketing dropped with the recession but rebounded in 2010


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Advertising & marketing expense represented about 3 percent of 2010 total operating expense spending, up from 2.7 percent in 2009. The spending range varies by asset size; banks below $250 million in assets spent 2.2 percent while banks with more than $100 billion in assets devoted 3.4 percent of total operating expense to marketing. But overall, industry spending on marketing is a small percentage compared with salaries & benefi ts (48 percent) and occupancy & fi xed assets (11 percent). So how much effect can a small part of operating expense have on FI performance? Does cutting advertising & marketing, as was done by 77 percent of banks in 2009, negatively affect performance?

Research using commercial bank Call Reports prior to the Great Recession showed that bank profi ts and market share did in fact increase with increased spending on advertising & promotion.1 But in today’s environment the relationship between spending on marketing and performance is not as easy to prove, especially the profi tability part.

To answer some of our questions, we looked at the relationship between advertising & marketing spending and revenue (net-interest income + non-interest income) for a sample 2,292 banks. We assembled the data from Call Reports to exclude banks with incomplete information, de novos, special-purpose banks, and banks with anomalous loan-to-deposit ratios, net-interest margins and effi ciency ratios.

The resulting analysis of the two metrics displayed in the scatterplot below (Figure 3) shows the relationship between:

• Incremental revenue gained in 2010 per advertising & marketing dollar spent in 2009 (vertical axis).

• Advertising & marketing spending (2009) as a percentage of total non-interest expense (horizontal axis).

• The dashed lines in the scatterplot represent the industry averages for both metrics ($1.63 for incremental revenue gain, 2.7 percent for marketing spend)

Another factor that confounds measurement of the return on marketing expense is the rising impact of unpaid social media on market share. An extreme example of the impact of social media is Bank Transfer Day spawned by Kristen Christian, who initially complained about Bank of America’s $5.00 per month debit card fees to friends and family on Facebook. The viral spreading of her complaints ultimately resulted in 85,000 “attendees” to join the “cause” via Facebook, 60,000 Facebook “likes” for the event and 5,100 Bank Transfer Day posts between last October and the end of the year.2 And of course, Bank Transfer Day ended up receiving signifi cant mainstream media coverage.

According to FIS’ tracking of fi nancial institution checking account openings, credit union volume soared by 115 percent year-to-year on Bank Transfer Day (Figure 2). The Credit Union National Association estimated that 40,000 new members joined credit unions on Nov. 5 – Bank Transfer Day – thereby increasing the market share of credit unions. These new account openings will be refl ected in regulatory reports, but will not be captured in marketing metrics since they were driven by unpaid media.

Sources: FIS tracking of fi nancial institution checking account openings, November 2011

Figure 2: Credit union volume skyrocketed on Bank Transfer Day


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The results show the greatest dispersion of incremental revenue among banks that spend the least. It seems that very limited spending on marketing can be a risky strategy − either producing big returns or big losses. Remember, more than three-quarters of banks cut their marketing budgets in 2009. Some experienced healthy incremental revenue growth despite the cuts, but others may have suffered as a result of cutting marketing budgets.

We segmented the banks into four groups based on their placement within the marketing performance scatterplot (Aggressive, Effi cient, Cautious and Ineffi cient). While the level of marketing spending is only one of several factors that can drive incremental revenue gains or losses (particularly in challenging years like 2009 – 2010), some interesting patterns emerged as we analyzed the fi nancial results of banks in the four segments (see Figure 4).

Only 27 percent of banks attained above-average performance in incremental revenue gained per dollar of marketing spending during the period (Aggressive and Effi cient banks). And as one would expect, these banks obtained ROAA and effi ciency ratio performance far exceeding that of the lower performing Ineffi cient and Cautious banks.

A signifi cant size difference exists among the four segments. Effi cient and Cautious banks are much smaller than banks in the other two segments and spend roughly half of the percentage of operating expense on marketing. A far higher percentage of their operating expense is composed of salaries & benefi ts and the proportion of their spending on occupancy & fi xed assets (branches) is higher as well. This of course, makes sense as smaller banks rely much more on their staff, branches and community presence than extensive marketing campaigns to drive revenue growth. On average, Effi cient banks are relatively smaller (only $295 million in assets with six branches) while Cautious banks are more than double that size ($796 million in assets with 12 branches), but are still solidly community banking organizations.

However, the similarities between Effi cient and Cautious banks end there. Effi cient banks performed strongly (on return on marketing) while Cautious banks struggled. Even though the Cautious banks invested a little more in marketing, Effi cient banks grew loans and deposits, had net-interest margin 12 basis points higher and had effi ciency ratios 8 percentage points lower on average. It’s no wonder Effi cient banks generated incremental revenue of $19.60 per dollar spent on marketing while Cautious banks experienced an incremental revenue decline of $2.78. Effi cient banks are managed conservatively and execute their community bank business models very effectively. They had the lowest loan-to-deposits ratio, were less reliant on fee income and made the most of the meager dollars they spent on marketing, staffi ng and branches. Cautious banks had the lowest ROAA of the four segments, which most likely factored into their decision to allocate lower resources to marketing.

Sources: SNL Call Reports 2010, analysis by FISn = 2,292 commercial banks

Figure 3: Lower percentages spent on advertising & marketing in 2009 resulted in more dispersion of incremental revenue per dollar spent


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As a rule of thumb, large banks benefi t from economies of scale that drive more favorable effi ciency ratios. But, as we see in Figure 4, Aggressive banks, which are smaller than Ineffi cient banks, generated better effi ciency ratios –62 percent vs. 68 percent respectively – and realized higher ROAA.

Similar patterns emerged among Aggressive and Ineffi cient banks as did with the banks that spend less on marketing. Aggressive banks performed strongly while Ineffi cient banks performed well, but not in a superior manner. Even though the Ineffi cient banks invested a little more in marketing, Aggressive banks grew loans and deposits during the tough time period, had net-interest margin 8 basis points higher and had an effi ciency ratio 6 percentage points lower on average. As a result, Aggressive banks generated incremental revenue of $17.26 per dollar spent on marketing while Ineffi cient banks only generated $0.53.

The overriding theme of our analysis is banks that manage their marketing dollars effi ciently also manage other parts of their businesses well. For example, Effi cient banks not only spend the least amount per branch on marketing but also spend the least amount per branch on salaries & benefi ts and occupancy & fi xed assets. Aggressive banks spend signifi cantly more per branch on marketing than

Effi cient or Cautious banks but only about half as much as Ineffi cient banks. They also spend relatively less per branch than Ineffi cient banks on salary & benefi ts and occupancy & fi xed assets. Thus, Aggressive banks offset above-average spending on marketing by spending relatively less in other areas.

So did the banks that invested more in marketing during this period spend their money unwisely? It’s not possible to unequivocally conclude as our analysis only examines the impact of marketing spend at the highest level, but consider the following:

• Among all banks that spent less than the industry average on marketing, 67 percent had lower-than-average incremental revenue growth (an unsurprising result). However, 33 percent realized higher-than-average revenue growth (certainly a positive, and likely an unanticipated, result for many).

• Among all banks that spent more than the industry average on marketing, 83 percent had lower-than-average incremental revenue growth. But only 17 percent realized higher than average revenue growth. Ouch! Eight in 10 of these marketing directors had to tell their bosses they spent more aggressively on marketing, but underperformed industry revenue growth.

Sources: Call Report data from SNL Financial and FIS (2009 – 2010), analysis by FISn = 2,292 commercial banks

Figure 4: Average fi nancial results for banks in each quadrant


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The bottom line is that during 2009 – 2010 only one in six banks realized signifi cant upside to higher-than-average levels of marketing spend. Certainly the tough economy contributed to the overall poor performance of marketing dollars during the time period, but also the legacy of “marketing to the masses” produces waste in marketing dollars, which is hard to hide during downturns. While the prospects for growth in the U.S. economy and the banking industry are certainly better in 2012, I believe the industry still faces a relatively moderate-growth scenario. Practicality and specifi city are the best policies for 2012 budgeting and forecasting in this environment. Some products, channels and segments warrant increased marketing investment while others don’t. In any event, fi nancial institutions will need to employ analytics to improve targeting and, in turn, marketing effi ciency.

The economy, the banking industry – and marketing itself – are undergoing a tremendous evolution. More than ever, bank marketing professionals must focus on a comprehensive set of performance measures to understand the effi ciency and ROI of marketing programs and investments. Best practices organizations utilize dozens (if not hundreds) of marketing metrics, but I believe there are about a dozen core metrics that rise above the rest and must be in every marketing executive’s toolkit (see Figure 5).

New constraints, changed market conditions and a new media environment are affecting the performance of marketing dollars. This analysis shows that the effectiveness of marketing dollars during the economic downturn was related to how banks managed their overall expenses and resources, including marketing, more than the amount they spent on marketing. As 2011 data becomes available, we will continue to analyze the impact of change and share our insights with you. We look forward to your input.

1 Donald J. Mullineaux and Mark K. Pyles. “Bank Marketing Investments and Bank Performance.” Journal of Financial Economic Policy. Vol. 2 No. 4, 2010

2 NM Incite (formerly Nielsen BuzzMetrics) October – December 2011

Source: FIS, Forrester Research, Mark Jeffrey at Kellogg School of Management

Figure 5: Essential marketing metrics


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Interview with Bastian KnoppersSENIOR VICE PRESIDENT, CARD PERSONALIZATION

What created the “EMV storm?”

Visa and MasterCard’s recent announcements about EMV cards and terminals include initiatives to: 1. Expand the Technology Innovation Program (TIP) to the U.S., which will eliminate

the requirement for eligible merchants to validate compliance with the Payment Card Industry (PCI) Data Security Standard (DSS) for any year in which 75 percent or more of the merchants’ Visa transactions are made at EMV-enabled terminals (terminals must allow for contact and contactless payments),

Calming the EMV Storm

What is EMV?

EMV is an open-standard set of specifi cations for smart card payments and acceptance devices. The EMV specifi cations were developed as requirements to ensure interoperability between chip-based payment cards and terminals. EMV chip cards contain embedded microprocessors that provide strong transaction security features and other application capabilities not possible with traditional magnetic stripe cards. EMV stands for Europay, MasterCard, Visa, some of the principal owners of EMVCo.

What are the benefi ts of EMV?

The biggest benefi t of EMV for U.S. issuers is the potential reduction in card fraud resulting from counterfeit, lost or stolen cards. EMV also provides interoperability with the global payments infrastructure – consumers with EMV chip payment cards can use their cards on any EMV-compatible payment terminal. EMV technology supports enhanced cardholder verifi cation methods and, unlike magnetic stripe cards, EMV payment cards can also be used to secure online payment transactions.

2. Build processing infrastructure for EMV acceptance by April 1, 2013, and

3. Shift counterfeit and fraud liability for EMV chip cards presented to merchants without EMV terminals to the merchant’s acquirer by Oct. 1, 2015 (except for fuel sellers, which must meet requirements by Oct. 1, 2017).

Because the business case, to date, hasn’t been strong enough to justify its deployment, EMV adoption has been slow. However U.S. travelers abroad have been inconvenienced − according to a study by Aite, nearly half of U.S. cardholders have experienced problems with using their cards abroad.1 And, with more than one-third of the U.S. population holding passports (37 percent according to the State Department), that amounts to plenty of inconvenience and potential lost revenue. But the Aite study also points out that the issue of denied transactions overseas is very complicated and just adding a chip to the card will not completely solve the problem.

Some believed that the Durbin Amendment would mandate EMV fraud protection in the U.S., but that requirement was absent from the fi nal rules. While a few merchants − most notably Walmart − have started the roll-out of EMV terminals at POS to prepare to accept chip-and-PIN cards, most retailers are reluctant to adopt new technologies that don’t show a quick payback on investment.

But nothing stays the same. For a number of reasons, ranging from growing need for EMV to lay the groundwork for secure mobile payment to growing concern about more fraudsters taking up residence in the U.S., EMV deployment is on the horizon. We discussed what EMV deployment means for banks and credit unions with Bastian Knoppers. The following provides a realistic view of what we can expect short- and long-term and how fi nancial institutions should prepare for EMV.


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Calming the storm around EMV

Why is there such a frenzy associated with EMV?

Bastian Knoppers: There is no reason to panic about EMV. The ‘tyranny of the urgent’ certainly is an appropriate way to describe the EMV frenzy, and everyone just needs to take a deep breath and look at the facts. The reality is that there is no mandate, such as exists in other countries such as Australia and to a certain extent in Canada. Visa and MasterCard’s announcement is an incentive, not a mandate. Until issuers are convinced that EMV terminals will be deployed in signifi cant numbers, why start issuing EMV cards? The capability to process those transactions doesn’t yet exist, and the business case justifying the issuance of EMV cards needs to be made.

We ought to pay close attention to the adoption period for EMV in Canada and Europe. The transition to EMV could easily take seven, if not 10, years to occur. This has been the case in Canada (see Figure 1). Each country’s need for EMV differs. The business case for adoption in the U.S. is very different from what it has been for France, Germany, Latin American or even Canada.

Where has EMV been adopted?

Eighty countries are in various stages of EMV chip migration, including Canada and countries in Europe, Latin America and Asia. According to EMVCo, approximately 1.3 billion EMV cards have been issued and 20.7 million POS terminals accept EMV cards as of Q3 2011. This represents 42.4 percent of the total payment cards in circulation and 75.9 percent of all POS terminals installed.

The U.S. is one of the last countries to migrate to EMV. Both MasterCard and Visa have announced their plans for moving to an EMV-based payments infrastructure in the U.S.

In August 2011, Visa announced plans to accelerate chip migration and adoption of mobile payments in the U.S., through retailer incentives, processing infrastructure acceptance requirements and counterfeit card liability shift.

In January 2012, MasterCard announced its U.S. road map to enable the next generation of electronic payments, with EMV the foundational technology.

Within the U.S., the contactless credit and debit (e.g. MasterCard/PayPass and Visa/payWave) cards already being issued include some EMV security features.

Why has the rest of the world adopted EMV and not the U.S.?

Issuers outside of the U.S. are including chips in bank cards and merchants are moving to EMV-compliant terminals to increase security and reduce fraud resulting from counterfeit, lost or stolen cards. The rest of the world adopted a decentralized approach to combating card counterfeit and skimming fraud by adding security features to the card and terminals so that transactions could be approved off-line. The U.S. adopted a more centralized and online approach to combating fraud, so that adding chips to cards and terminals was not necessary.

Figure 1: Canadian EMV Migration Milestones

Source: The National Club, Toronto. “Mobile, Debit, and Coming Crisis.” December 16, 2010


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Another myth is that EMV is easy and quick – we just grab a card off the shelf and away we go. EMV represents a fundamental change in both technology and in payment processing in terms of how PINs are used. It also has the potential to allow for off-line transactions. Whatever its form, future deployment of EMV will require signifi cant analysis and planning.

Planning for EMV Deployment

What will ultimately drive EMV issuance in the U.S.?

Bastian Knoppers: There is a long- and short-term answer.

Long Term: Terminals and cards are akin to chickens and eggs – both are necessary to make EMV work, but which comes fi rst? The issuance of cards needs to be aligned with terminal deployment. Merchants will have a large impact on EMV deployment. It’s important to watch Walmart and listen to what the National Retail Federation is saying about EMV. Both are on record as being strong proponents of EMV. I think Walmart is a proponent of chip-and-PIN EMV because of the impact of what Walmart would pay the issuer for that type of transaction. Their terminals are EMV-enabled, but not yet deployed for EMV transactions.

We will be examining how serious the movement is toward EMV. One way to determine conversion and movement is to track statistics on EMV terminal shipments. You would want to know if there will be enough demand for EMV in 2015 to begin planning cardholder migration to chip for the next 2 – 3 years. If there is, then you will need to work EMV into your card re-issuing plans. You need to build the business case for EMV and then put together a timeline, which aligns with terminal deployment.

Another key driver in deployment will be fraud consideration. FIs need to build a business case around EMV as a fraud reduction technology. FIs need to weigh the cost of adopting EMV against the potential reduction in fraud. Confounding that comparison is the likelihood of more fraud moving to the U.S. as the weakest link for fraudsters due to the vulnerability of the magnetic stripe vs. EMV. As I’ve talked with Canadian issuers of EMV, they’ve told me that they are seeing a reduction in fraud but until the magnetic stripe technology is eliminated from cards, the full benefi t of fraud reduction cannot be realized.

As demand increases for mobile payment in the U.S., more pressure will be brought to bear on deploying EMV to boost security around mobile payments. In Visa’s announcement they clearly link EMV with NFC-enabled terminals. At FIS, we are looking at over-the-air personalization for smartphones so the same data that’s on the EMV card in the chip would be replicated in the chip on the smartphone. The data needs to be transferred securely and quickly.

Another factor that will impact the rate of EMV deployment is clarity around technology solutions. For example, Visa has announced that its U.S. interface will be both contact and contactless technologies. That’s very different from the European technology, which is a contact only card that’s inserted into a terminal and held there during the transaction. The Visa dual interface card is more expensive. Ultimately EMV deployment will be driven not by the technology, but by the business cases among various stakeholders, including merchants and issuers.

Short term?

Bastian Knoppers: The most immediate concern is for fi nancial institutions to be able to serve their customers traveling outside the U.S. Some specifi c fi nancial institutions, such as credit unions that serve the military or airlines have the most immediate need for EMV.

Although some travelers’ transactions are being denied, you need to look at the circumstances around why their cards aren’t working and determine whether an EMV card will solve the problem. For example, the inability to make off-line transactions at places such as transit stations, parking lots and vending machines is a common problem in some countries. Those terminals are set up to accept only chip-and-PIN enabled EMV cards.

Short term, you need to do the business case around your traveling customers. You need to fi nd out how bad the problem is for them and determine the fi nancial implications of providing solutions to them.

The good news is that if an FI wants or needs an immediate solution, our Prepaid team offers an EMV Travel card today.


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What are the cost implications for banks and credit unions?

Bastian Knoppers: Frankly, the investment and budgetary impact will be signifi cant. If you look at what the small Canadian FIs have spent, it amounted to a sizeable budgetary item, in some cases, hundreds of thousands of dollars. Most people only think about the cost difference between the EMV card and the magnetic stripe card, but the cost per card is only a fraction of the total expense. The fi xed costs can be quite high. There are upfront costs for development, platform costs and costs associated with educating your customers, as well as your employees. At FIS, we’re working on solutions to make those costs more affordable for our clients, but EMV is going to be an expensive proposition for which FIs need to budget.

EMV Opportunities

What are the opportunities for banks?

Bastian Knoppers: Besides the potential for reducing fraud, EMV has other possibilities that could be very benefi cial. Being able to conduct off-line transactions at terminals, which historically have accepted cash payment, could benefi t issuers. Also, EMV is becoming the transaction technology of choice for mobile payments. That’s why Visa is linking EMV and NFC. It’s a more secure technology. Finally, there are many possibilities to tie the card into loyalty, and multiple applications to make it more useful to the consumer, thereby improving cardholder retention.

Where do we go from here?

Bastian Knoppers: There is a tremendous amount of EMV planning and work going on behind the scenes at FIS on an enterprise-wide level. FIS is well-prepared and positioned to help our clients do the analysis and planning needed to make the right decisions for EMV deployment. We are fully leveraging our international experience with EMV in both Europe and Canada to help us in this planning.

FIS’ Everlink Payment Services in Canada has been involved with EMV for more than seven years and has advised many credit union and banking clients in various stages of EMV chip migration. They have assisted in scheduling, planning and implementing chip migration programs. We have leveraged their expertise and experience for our U.S. clients and will continue to do so.

Both InfoShare 2012 and FIS Client Conference 2012 this year will include a lot of updates and Buzz Sessions regarding EMV. Those will be followed by EMV webinars and EMV updates on the FIS web site.

1 Aite. “The Broken Promise of Pay Anywhere, Anytime: The Experience of the U.S. Cardholder Abroad.” October 2009


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By Paul McAdamSENIOR VICE PRESIDENT, RESEARCH AND THOUGHT LEADERSHIP

In my January 2012 article, I talked about how community banks face challenges in their retail banking franchises mostly because the community bank customer base is older and has less income and future earning potential. The affl uence gap between the community bank customer and the average bank customer results in community bank customers holding lower-than-average investable assets and loans overall, with correspondingly less opportunity. This month’s article applies the same analysis to credit unions to examine the infl uence of demographics on both the composition and the fi nancial behaviors of credit union members. In particular, I’ll explore the distinctions between credit union members and community bank customers. All analysis cited in this article is generated from primary research of 3,345 consumers conducted by FIS in August 2011.

There are several signifi cant differences in the clientele of credit unions and community banks. The fi rst lies in the geographic concentration of customers. My last article highlighted that within rural and small towns (population less than 50,000) consumers are three times more likely to identify a community bank as their primary checking account provider. This level of small town concentration does not exist within the credit union member base (see Figure 1). Whereas community banks’ customers are more likely to reside in rural/small towns and less likely to reside in midsized/large metro markets, the distribution of credit union members is relatively proportionate across all three markets. Thus, credit unions are less likely to face the challenges associated with customer bases disproportionately drawn from smaller, low-growth markets. In terms of demographics, my last article described how community bank customers tend to be older, are less likely to be employed (i.e., a higher portion are retired), and have less education on average. The credit union industry benefi ts from a member base that is demographically broader and much more likely to look like the typical U.S. resident in terms of age, employment status and education.

In terms of customer age, credit unions attract somewhat lower percentages of Gen Y consumers, but all other generations’ proportions are consistent with national averages (see Figure 2). Conversely, our prior analysis demonstrated a clear trend of community banks being underrepresented in younger and overrepresented in older consumer segments.

Dissecting the Credit Union Member Base

*Read as: Within rural and small towns consumers are 3 times more likely to bank with a community bank (index = 319).Source: FIS primary consumer research, August 2011; n = 3,345

Figure 1: Relative to credit union members, community bank customers are more concentrated in rural and smaller towns


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These patterns in the geographic and generational differences of consumers who bank with a community bank vs. a credit union infl uence other notable observations. Credit union members are:

• Just as likely as the national average to be employed while community bank customers are 46 percent more likely than credit union members to be either retired or not working;

• Sixteen percent more likely than community bank customers to have a college or post graduate degree;

• Twenty-three percent less likely than community bank customers to possess only a high school degree or less;

• Fourteen percent more likely than community bank customers to be single;

• Fifty-six percent more likely than community bank customers to be students

As a result of credit union members resembling national norms in terms of geographic location and key demographic characteristics, they reported average household income that was statistically equivalent to the norm of a little more than $60,000 in our research. Community bank customers reported average household incomes about 15 percent ($9,000) lower.

But despite their advantage of having clientele with higher incomes, credit unions capture lower deposit and loan balances from their members than community banks capture from their customers (see Figure 3). Among members who have their primary checking account relationship with a credit union, they hold an average of $30,300 in deposit and investment balances and $13,400 in loan balances with the institution. Community banks capture an average of $32,200 in deposit and investment balances and $16,300 in loan balances with their primary checking account provider. Community banks top credit unions in deposit and investment balances primarily because community banks have an older customer base on average (older customers tend to hold greater deposit balances). Community banks also capture a larger share of investment products and balances from their customers relative to credit unions.

The lower loan balances captured by credit unions are the result of them having a higher proportion of total loan balances in auto loans and credit cards. Community banks lag credit unions in these two types of lending, but do a better job of capturing higher balance residential mortgage and home equity loans.

*Read as: Community bank customers are 21% less likely to be members of Generation Y (index score = 79).Source: FIS primary consumer research, August 2011; n = 3,345

Figure 2: The credit union member base is underrepresented in GenY, but is otherwise consistent with national norms

*Read as: Consumers who identifi ed a community bank as their primary checking account provider hold an average of $32,240 in deposit and investment balances with the bank.Source: FIS primary consumer research, August 2011; n = 3,345

Figure 3: Credit unions capture lower deposit, investment and loan balances than community and large banks


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Of signifi cant note, community banks perform better than credit unions in capturing small business relationships. In our survey, 9.1 percent of consumers who held their primary checking relationship with a community bank identifi ed themselves as self-employed or a small business owner. Only 5.7 percent of consumers who held their primary checking relationship with a credit union identifi ed themselves as such. There are a couple reasons for this. Credit union members are younger than community bank customers (younger people are less likely to own a small business). In addition, many credit union members belong to company-sponsored credit unions. Thus a large portion of the credit union member base is naturally less likely to be self-employed.

Higher small business penetration is a key advantage to community banks as small business owners generally intermingle their personal and business banking accounts. And according to a national survey of more than 2,200 small businesses that FIS conducted in November 2010, the typical small business with $5 million in annual revenue utilizes 1.9 deposit services, 3.4 payment and cash management services, and 3.5 secured and unsecured credit services. Credit unions will surely continue to attack this bank advantage over time through greater outreach to small businesses and industry lobbying efforts to raise their regulatory cap on business lending above the current threshold of 12.25 percent of total assets.

Finally, both credit unions and community banks benefi t from considerably higher customer loyalty than larger banking institutions. Our research scored consumers’ loyalty to their primary checking account provider based on several factors including trust in the institution, willingness to recommend, willingness to repeat purchase, wallet share, willingness to switch and identifi cation with the institution’s brand values. Fifty-fi ve percent of credit union members are loyal compared to 54 percent of community bank customers (dead even given our survey’s margin of error). Both have signifi cantly more loyalty customers than the 47 percent noted for regional banks and 39 percent for large banks.

While credit unions and community banks have unique legacies and certainly distinct operating models, both types of institutions benefi t from high customer loyalty and this bodes well for their ability to gain additional customer wallet share.

In next month’s article I will round out this series by examining the customer bases of large banks. I’ll continue to explore themes of community bank and credit union competitiveness in future newsletter editions. In the meantime, feel free to contact me at paul.mcadam@fi sglobal.com with your questions or comments.

This article is derived from recent research with 3,000 FI customers on elements that drive customer loyalty. Achieving Profi table Customer Loyalty, a research brief based on fi ndings from this research can be accessed through http://www.fi sglobal.com/solutions-insights.

*Read as: 55% of credit union members are loyal to the institutionSource: FIS primary consumer research, August 2011; n = 3,345

Figure 4: Credit unions and community banks experience higher levels of customer loyalty


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By Mandy PutnamDIRECTOR, RESEARCH AND THOUGHT LEADERSHIP

Generations often hold common values shaped by shared experiences during their key developmental years. Social media allows experiences and attitudes to be widely, and nearly instantly, shared. The collective discontent with the status quo among youth – spawned by the Great Recession and manifested in movements such Occupy Wall Street, Occupy spinoffs and Bank Transfer Day – could change how and where up-and-coming generations handle their fi nances.

Our research with 3,000 consumers with primary checking accounts shows that the least loyal generations are Gen Y and Gen X – the latter of which is entering peak spending years and is

a prime target for loans. Given younger generations’ current low levels of loyalty and discontent with the status quo, traditional fi nancial institutions will be challenged to attract and retain these customers.

Electronic Access Is Cost of Entry

The type of fi nancial institution where customers have their primary checking accounts differs among generations (Figure 1). Younger generations are more likely to patronize large national banks or savings institutions instead of regional and community banks. Geography accounts for some of the difference in where younger generations bank but, as discussed in “Overcoming the Demographic Disadvantages of Community Banking” (January 2012), residence doesn’t tell the whole story.

One reason younger generations patronize large national FIs is that they offer more sophisticated online and mobile banking services. Another is more convenient access to ATMs. In looking at the factors that drive bank choice across generations, there are only a few differences in how each generation ranks various factors. For example, free services and branches at convenient locations are fi rst- and second- ranked respectively by all generations as being most infl uential in FI choice. However, the third-ranked choice differs between younger and older generations. Online or mobile banking is an infl uential factor for about a quarter of younger generations, but only 18 percent of Older Boomers or Matures. Conveniently-located ATMs also are less important to older customers. Among Gen Y customers, word-of-mouth recommendations are fi fth-ranked while other segments place more importance on the reputation of the institution. Gen Y is more likely to pay attention to what their friends are saying, texting or perhaps entering on their Facebook page about the fi nancial institution than what the FI is saying about itself.

Gen Y differs from other segments in the way they want to fi nd out about new products and services. Unlike Boomers and Mature generation members, Gen Y prefers to receive communications via the bank’s online banking site (after login), e-mail to their computers or the bank’s web site more than by “snail mail.” Gen Y also is more receptive than others to communications via the bank’s ATM machines or their mobile phones.

Attracting and Retaining Gen Y and Gen X

Source: FIS primary consumer research, August 2011. n = 3,000Gen Y = born 1980 – 1993; Gen X = born 1965 – 1979; Younger Boomers = born 1946 – 1954; Older Boomers = 1946 – 1954; Mature = born prior to 1946

Figure 1: Younger generations tend to bank with large national institutions


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Four out of 10 Gen Y Members Have Student Loan Debt

On the asset side of their ledgers, Gen Y and Gen X are more likely to have savings accounts than older generations but only because they are less likely to have money market accounts and certifi cates of deposit (Figure 2). As consumers shift into their nesting lifestage (Gen X), the percentages of 401(k) and educational savings increase but the penetrations of other investments do not rise signifi cantly until later (Younger Boomer or Older Boomer) lifestages.

The effect of not having very many deposit and investment accounts is that Gen Y members’ accounts are more likely concentrated with their primary providers. This concentration of assets could offer the primary providers an opportunity to build a “stickier” relationship with Gen Y members as they evolve into their nest-building lifestage when they will need additional credit to fi nance houses, cars and babies.

Loans among Gen Y are most commonly student loans and credit card debit (Figure 3). While an above-average percentage of Gen X members (28 percent) still has student loans, Gen X is taking on more debt in the form of credit card debt balances, mortgages and auto loans. Home equity loan/line of credit penetration increases with age while most other debt declines. The exception is the increase in credit card balances among the Mature generation compared with Boomer generations, which could refl ect the impact of tough economic times upon retirees.

Young Generations Are Likely to Switch

Gen Y and Gen X are not as loyal to their primary FIs as Boomer or Mature generations (Figure 4). Attitudes about switching fi nancial institutions reveal that Gen Y is particularly vulnerable to changing their FIs especially if they feel they’ve been overcharged. They also are more receptive to switching if incentivized by better interest rates, appealing loyalty programs or better online and mobile banking services. Gen Y and Gen X may have a legitimate reason for lack of loyalty considering that larger percentages of them (32 percent and 27 percent respectively) pay fees than other generations. With age, consumers are less likely to pay fees. Only 14 percent of the Mature generation pays fees.

Source: FIS primary research, August 2011. n = 3,000



Figure 2: Younger generations have few asset accounts beyond their DDA and savings account

Figure 3: Younger generations have loans and credit card debt

Figure 4: Younger generations are not as loyal to their primary DDA FI


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Younger Generations Expect Rewards

What attracts and potentially retains younger generations differs from what motivates older generations. The greatest difference in attitudes occurs between the younger two generations (Gen Y and Gen X) and the Boomer generations (Younger Boomers and Older Boomers). Another signifi cant shift in attitudes occurs between the Boomer and the Mature generations:

• Younger generations are much less likely to view switching their primary checking account provider as a hassle. If an alternative fi nancial service offers a valuable benefi t, they will likely switch.

• One reason why younger generations are more prone to switching is that fewer of them view their primary DDA providers as trustworthy. The majority of consumers still trust their banks, but the majority for Gen Y only equals 61 percent vs. the majority of 85 percent for the Mature segment.

• Younger generations are much more willing to trade in-person service for saving money. This reinforces the rationale for “self-service banking” packages.

• Younger generations place more value on rewards programs than older generations.

Loyalty rewards are part of the currency used by younger generations to obtain things they want. Having grown up with a plethora of retailers using loyalty programs to gain entree into their wallets, young people expect rewards. Participation rates in loyalty programs offered by their primary DDA FIs are highest among the youngest generations and drop off signifi cantly with age (Figure 5). When asked which types of rewards they value most, all generations rated cash-back rewards at the top of the list followed by points to redeem for gift cards. Four out of fi ve Gen Y and Gen X members vs. three out of four members of Boomer generations and six out of 10 Mature generation members expressed interest in rewards.

Final Thought

Although many young people are struggling fi nancially and don’t fi t the defi nition of the “ideal” target customer today, the scales tip in their favor long term. The cost of switching fi nancial institutions – or even opting out of banking with a traditional fi nancial institution – is relatively low for younger generations, especially Gen Y. In contrast, the cost to FIs of not engaging customers early in their lifestages could be high in the long run as alternatives to traditional fi nancial institutions are increasingly accessed by mainstream consumers and disenchanted youth.

This article is derived from recent research with 3,000 FI customers on elements that drive customer loyalty. Achieving Profi table Customer Loyalty, a research brief based on fi ndings from this research can be accessed through http://www.fi sglobal.com/solutions-insights.


Figure 5: Younger generations participate in rewards programs


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Strategic Insights is a newsletter that provides research, thought leadership and strategic commentary on recent events in banking and payments. The newsletter is produced by the Global Marketing and Communications team at FIS. FIS is one of the world’s top-ranked technology providers to the banking industry. With more than 30,000 experts in 100 countries, FIS delivers the most comprehensive range of solutions for the broadest range of fi nancial markets, all with a singular focus: helping you succeed.

If you have questions or comments regarding Strategic Insights, please contact Paul McAdam, SVP, Research & Thought Leadership at 708.449.7743 or paul.mcadam@fi sglobal.com.

fis strategic insights vol 6 march 2012

Business