With the end of 2021 in sight, it’s time to start thinking about what we might experience in banking in the coming year.
Karl Dahlgren, who heads the research group at BAI, is with us to talk about emerging issues and ongoing trends that stand to affect the industry in 2022.
A few takeaways from the conversation:
- Key themes for banks in 2022 include figuring out the new customer normal, finding and keeping talent, and adjusting to changing macro conditions
- BAI research indicates that banks and credit unions have worked hard to connect with consumers, and that their efforts are creating more loyalty
- Research also shows that half of millennials and Gen Z have some form of crypto investment, but bankers plan to keep moving slowly on that asset class
Watch BAI’s Karl Dahlgren and Mark Riddle discuss the results of the most recent BAI Banking Outlook survey in the recent webinar “Are you prepared for 2022?”
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Below is a full transcript of my interview with Karl Dahlgren.
Karl, this is our annual conversation where we look back at the year that’s winding down and then look ahead to the year that’s coming up. So in that order, what were some of the key banking related trends that BAI Banking Outlook research identified in 2021?
So in 2021, Terry, two of the top three challenges for bankers were, one, improving the digital experience, and then, two, new customer acquisition. And those two are obviously interrelated since so many of the new customers come in by way of the digital channel, improving the digital experience will also improve new customer acquisition. One interesting fact on that is, in 2021, bankers felt there was a lot of work to be done there because a small percentage of them – single digits – felt that they have an excellent digital customer experience. And then when we went out and talked to the consumers, seven out of 10 of them that opened up new accounts did so at direct banks, meaning those banks that don’t have any branches. So there’s obviously a fair amount of work that can be done there to improve the digital customer experience and therefore improve customer acquisition. Also in 2021, with the new administration in place, there was increased regulatory scrutiny, and that was on the mind of many bankers, particularly wrestling with the question about how they can provide services to customers that are in the low- to moderate-income segment. And related to that is the important issue of fee income that folks were working with in 2021. How can those fees be removed or reduced? And then finally, big topic for 2021 was DEI – diversity, equity, inclusion – and then also ESG – environmental, social and governance. And there were some big improvements there in 2021, but that will roll over into 2022 as an aspect of what they’ll be focusing in on.
So that’s a good segue to moving our conversation forward toward the coming year. What do we anticipate being among the front-burner issues for financial institutions in 2022?
We have a research business that I lead, and that’s where banks provide us with account-level data. And we utilize that data so that they can compare and see how they’re performing relative to peers and the industry as a whole. And as part of that, we present industry trends when we read back the results to the various different banks. As we’ve been going through those presentations, there’s been four key themes that have emerged. The first theme is “What is the new consumer normal?” Everybody knows that digital behavior has increased during the pandemic. But the question on most financial service leaders’ minds is “What’s here to stay and what is transitory?” And then a second major theme is increasing competition. It’s not only coming from the fintechs but also the newly combined banks, as there’s been a lot of M&A activity over the course of 2021. And then also the war for talent – the Great Resignation, as it’s called, and how that might impact their ability to perform in 2022. And then the final topic or theme relates to the macro environment, and mostly that’s what’s going to happen with interest rates and inflation.
So let’s take those issues one at a time, maybe in reverse order, starting with the macro conditions facing the industry heading into 2022. There’s a lot of liquidity in the system right now, which we can see both in the bulging deposit data and also to some degree in the latest inflation figures, which are running hotter than anybody expected, even as GDP growth is slowing. Of course, rates and spreads continue to be repressed. Can you take us down into the numbers and our survey research, and maybe talk about that macro a little bit and what bankers might be expecting?
Yes, so, the survey was fielded in August and September, and at that time, financial service leader said that inflation would be a small problem or transitory. So then the question became, “How do you define transitory?” And as of late, the word transitory is being dropped. So this is a fast-evolving topic matter. It’s safe to say that inflation is going to be higher, and higher than what most financial services leaders were expecting just a few months ago. So I think it’s safe to say that the Fed is going to taper a little bit quicker than was originally anticipated, and that rates will likely raise more than what was anticipated. And that’s obviously a good thing for banks in general, because as the Fed raises rates, generally speaking, the banks will lag behind in raising rates on their deposits, and that’s a good thing for spreads for banks. But of course, it’s a balancing act. So you don’t want the rates going up so high that it negatively impacts the economy, and therefore business and the demand for loans, and affect the banks adversely on the other side of the balance sheet, on the lending side.
The focus on improving the customer experience is certainly something that we’ve written a lot about and talked about – whether it’s via better digital capabilities or via personalizing the experience to strengthen that connection. Of course, a lot of this is being driven by the pandemic. So let me ask you, what sense do we get about which consumer behaviors have undergone long-lasting change to the point of constituting a new consumer normal and which behaviors tend to revert as the pandemic eases off?
Consumer attitudes towards their primary bank have really improved, and that’s a positive thing. And we think that’s going to be a lasting effect. Banks have really stepped up during the pandemic in many ways to help shift consumer sentiment across the board. There’s been continuing efforts on DEI – diversity, equity, inclusion, and then ESG. And those are having real impact, particularly for the younger generations, on how they perceive banks. And then the business case for digital became quite clear during the pandemic, and there’s been a lot of investment by financial service leaders and banks in that space. And the consumers have really embraced a new level of digital services. It peaked during 2020, when essentially branches were closed and the digital channel was really the only available channel. But once branches came back online, it didn’t snap back to a baseline. And so there was a new normal of digital usage. In fact, as we looked at our survey, by 2024, consumers expect 61 percent of their banking business to be digital and 39 percent to be human-assisted. The biggest projected increases come from mobile and ATM, and that’s going to come at the expense of branch and drive-up, as those become a lower percentage of the channel mix over time.
BAI is particularly attuned to generational considerations at play when it comes to banking. What’s the research showing us about how the various generations are thinking about what constitutes a desirable customer experience?
Yeah, so consumers say the No. 1 way that financial service organizations can improve their customer experience is by improving the omnichannel experience. The No. 2 priority is giving tools and options to customize their own solution. And then the No. 3, which is interesting here, is improving branches for a better in-person experience. But when you look at those, as you ask the question from a generational perspective, one of the big differences is that Gen Z and millennials have enhanced the mobile channel in their top three. That didn’t appear for the other older generations. How do you make that actionable? So we asked a question of the consumers how they want their banking apps and digital capabilities to be improved. And the No. 1 priority was, for all generations, 24/7 customer service, so sort of a non-digital aspect of the digital channel.
So on the competition issue, there’s been a flood of new entrants into the financial services market, and that probably won’t change in 2022. There’s been a lot of merger activity as already big banks drive to get even bigger and smaller institutions, try to bulk up a little bit to protect themselves, and that probably won’t change in the coming year either. So how do we see the competitive landscape evolving over the next 12 months?
Well, it’s certainly increasing from the fintechs, and so the traditional banks are responding. They’re fighting back by adopting some fintech-like products or, at least, some of the features of fintech products. And those features are early payday advance, NSF grace and forgiveness or no NSF fees. And so that’s really to appeal to the younger customers and the low- to moderate-income households. In addition to the pressures from the fintechs, there’s competitive pressures from within the traditional competitors as their M&A activity continues. So we have many banks that contribute to our research by providing us data and, even within the consortium of BAI, we’ve had a number of acquisitions. PNC and BBVA Compass combined, U.S. Bank and Union Bank combined, and so did Iberia and First Horizon. So there are many examples of larger banks combining, and we expect merger-and-acquisition activity to continue as banks really need scale to spread technology and branch expenses across a larger customer base to gain efficiency.
You mentioned banks offering fintech-like products. There’s also been growing collaboration between banks and fintech – more mutually beneficial partnerships on that front. Scale being so important in banking these days, I would think that developing those fintech connections could be especially impactful, particularly for smaller banks and credit unions. What does our research show there?
So, for a while now, we’ve been asking financial service leaders to what extent they feel competitive pressure from fintechs, and 51% said “always” or “often”, and that’s up from 36% in 2020. So that number is significantly increased. Also, 56% of leaders said they learned lessons from fintechs that they plan to implement in 2022, and that’s up from 42%, so another example of what I would call a dramatic increase. And then 57% said they plan to collaborate with fintech companies, and that’s up from 42% from the year previous. Only 6% said they plan to acquire a fintech, but when you start slicing that by the size of the bank, that pops up to 25% when you’re talking about the large banks. So as you get smaller with the banks, there’s more of a tendency to collaborate versus acquire.
So finally, there’s that talent issue facing banks that you mentioned. All of the things that need to be sorted out as more workers return to the office in 2022. The competition between banks for talent and between banking and other industries. So many people rethinking their future as part of the great resignation that you also referred to. Take us through the BAI Banking Outlook research on how institutions are thinking about the various talent questions that they face.
Well, banks are not just competing against other banks for talent, especially in the highly competitive roles like technology and analytics. We’ve seen, in our talent management benchmarking study, that the average time to fill open positions continues to take longer – much longer, particularly as it relates to the higher-paid, more specialized roles. And if you talk to the leaders in the talent space inside the banking industry, what you find out is that the talent acquisition groups are just overwhelmed with the number of open positions, so it’s changing significantly. You also find that banks who have had a tough time recruiting in the high-cost-of-living markets, like out on the East Coast, in New York and similar, are now starting to recruit in lower-cost markets now that the workforce is more flexible and can work from home. According to our research, 66% of bankers believe that non-customer-facing employees will be in the office three days a week or more as the new normal work schedule for 2022. So this is the return-to-office topic matter, and it’s changing relatively rapidly and that’s evolving – as time goes on, I’m sure it’s going to be impacted by this new variant that we’ve recently learned about. Also, on the diversity, equity and inclusion front, which is something that we also track, it was important in 2021 and it is going to continue to be important in 2022. In our benchmarking studies, we’re seeing that representation on ethnicity, race and gender on both the executive team, as well as the board of directors, is improving. Female senior leadership and Black or African-American senior leadership percentages are improving at banks over time, although there’s still some work to be done there. So quite a lot is happening on the talent front.
Okay, Karl, so this is our final podcast of 2021. So you get to make the last forecast of what we might expect to see in the coming year. I’m looking for you to go beyond the areas that we’ve been discussing in this conversation by offering a prediction, based on our research or on your own knowledge or observations, of a banking-related product or service or trend that is going to really move more front and center in 2022. Go.
So, Terry, I’m coming off of a meeting that I attended with some C-level bankers, and there were three speakers that we brought in. Two of them talked about either cryptocurrency or blockchain. So that’s a topic matter you and I have not discussed in this podcast yet. And we ask consumers, “Are you invested in cryptocurrencies or a fund with exposure to crypto?” And as you know, cryptocurrencies include like, Bitcoin and Dogecoin and Ethereum, and then there’s other ways to invest and get exposure to crypto that isn’t necessarily buying crypto, like Coinbase or even investing in Tesla. Our research found that 53% of Gen Z are invested in crypto, and 52% of millennials. It’s a little lower, like 30%, when you get to the older generations. And then we ask financial service leaders if they have plans for cryptocurrency, and the overwhelming majority, 76%, said they had no plans for crypto, and there are some 6% that say that they plan to offer crypto as an investment alternative. So quite a gap versus the consumers and what they’re investing in, and the bankers and what they’re offering. So I think that this is going to be an emerging topic that will get a lot of attention in 2022.
And if history is any guide, that gap will certainly narrow as financial services providers recognize the opportunity. So Karl Dahlgren, managing director for research at BAI, thanks again for joining us for the last Banking Strategies podcast of 2021.
Thanks for having me, Terry. Appreciate it.