Why customer acquisition is banks’ #1 priority

For banking institutions working to expand their Gen Z customer base, messaging around products and services should be highly personalized and the digital experience should be top-notch for these digital natives. But don’t overlook branch upgrades as well—Gen Zers are heavy users of in-person bank services.

These are among the headline takeaways for banks and credit unions—be they traditional, digital-only or anything in between—from the latest BAI Banking Outlook (BBO) survey, which identified new customer acquisition as the industry’s foremost business challenge this year.

We recently spoke with Mark Riddle, director and research intelligence expert at BAI, to get his take on specific findings from the BBO research pertaining to customer acquisition.

This interview has been edited for length and clarity.

For 2023, new customer acquisition is the top business concern for banking institutions, up from No. 2 last year. Is the driver more than just a renewed need for deposits after a few years of excess liquidity?

New customer acquisition has moved to the top of financial institutions’ priorities because we have a lot of competition for new customers using very attractive deposit rate offers. For years, customers would keep their money in checking accounts at very low rates—there wasn’t enough financial incentive to move money in CDs or switch banks. That is no longer the case. In our latest BBO survey, we found that about a quarter of consumers say they will transfer money out of traditional banks and into online banks or others who offer higher rates for savings or CDs. We see this willingness playing out in our weekly deposit pulse benchmarking. More affluent customers are more likely to move to whoever has the highest rates in the marketplace, while mass market customers are much more driven by paying the least in fees as the primary reason for switching their primary financial service organization.

Based on the BBO research, how much of the customer acquisition opportunity is new households, and how much is attracting existing customers from other competitors?

I think both are big opportunities, but it depends on the bank or credit union’s strategy. If you are trying to grow deposits, attracting high-account-balance customers from other competitors is the best opportunity. That said, it can be a challenge to find the right customers. Typically, banks do not want rate-sensitive customers who will be difficult to retain over time and foster deep relationships with. If you are trying to grow new households with an eye toward the future, it may make more sense to pursue members of Gen Z who are new to banking, as they represent the customer growth potential in the marketplace. These younger customers are not likely to contribute as much today in terms of total deposit balances like the wealthier households, but they can be a solid foundation for the years ahead.

With boomers and Gen X, the idea of the stable primary financial institution seems to be alive and well, but the research suggests it’s less so for the younger generations. What do you think accounts for that lower level of commitment?

The weaker commitment is from Gen Z more than millennials, and I believe this is due to financial services organizations not meeting Gen Z’s expectations. Gen Z has the lowest Net Promoter Scores of all generations. They favor the digital channels, but they still have issues with digital—one being that they don’t think the digital offers they receive are personalized enough. Another is that they find it difficult to open accounts online or get advice about which types of accounts to open. Many potential new customers end up abandoning the online application because it’s too difficult to complete, and many who stick it out ultimately need to visit a branch for identity verification or paperwork. Channel-switching—starting in one channel but finishing in a less-preferred channel, or sometimes needing to start over again—is a major frustration for consumers, and not just those in Gen Z.

Do we have any sense that this lower level of commitment for Gen Z is basically the fickleness of youth that tempers over time, or could it be something more profound given the technology-driven changes in the industry during their formative years?

I think it’s a more profound and lasting change. Those in Gen Z have grown up with technology. They know what a good digital customer experience (CX) looks like because they’ve been using Amazon, Google, Apple and other tech giants that prioritize CX. Gen Z rates the digital CX at their primary bank much lower than any of the other generations, in large part because their experiences elsewhere have elevated their expectations. Younger consumers are also seeking faster payments and quicker money transfers from their financial service organizations. They are the I-want-it-right-now generation.

Something else we saw in the 2023 survey is that nearly all of the demographic groups, even the baby boomers, are willing to share more personal information if it gets them more targeted offers from their bank. How can banking institutions put this greater willingness to use to bring in new customers?

Financial service providers are in a trusted position where most consumers want to share more personal data for relevant offers. This is a significant opportunity. The challenge is to use this information in a thoughtful way that helps their financial lives. For example, it’s irritating for renters to receive multiple home-equity offers. A lot of younger Americans would like to know what their peers are doing for investments, savings, products and services. Banks could use the vast amounts of data they collect to help consumers find peers or see what others in similar situations have done. This would be consistent with banks’ oft-stated intentions to make more education and advice available to their customers.

Kim Collins is director, digital content, at BAI.

We provide insights to help shape and fine-tune your customer acquisition strategy and tactics in the BAI Executive Report, “Meeting the challenge of new customer acquisition.”