Improving the chances of acquisition success

New customer acquisition is the number-one challenge for banking institutions, according to the 2023 BAI Banking Outlook survey. The number of new checking households is an excellent gauge for how well banks and credit unions are acquiring new customers, as most consumers consider their primary institution to be where they have their main checking account.

During the worst of the pandemic, financial institutions were flush with deposits as many people spent less money and parked their stimulus checks. Today is a much different story: institutions are clamoring for more deposits, and many are working tirelessly to lure customers away from competitors.

The solution starts with understanding the biggest acquisition challenges facing institutions and incorporating insights to create more appealing strategies.

ACQUISITION CHALLENGES AND KEY INSIGHTS

The stated number-one challenge is not just a survey finding. It is reflected in actual numbers. Driven by low origination, new household growth last year was at the lowest level in the last six years of our consumer deposit benchmarking data. In fact, it was negative.

There are a number of contributing factors to acquisition challenges. People aren’t moving around the country like they used to, and if they are, they don’t necessarily have to switch to a new bank. They can continue digitally with their existing institution. On top of that, prior to recent rate increases, there wasn’t much consumer incentive to switch in a flat, low-rate environment.

On the other side of the equation, banks and credit unions limited their pursuit given historically high pandemic-driven deposit balance growth rates. According to our survey, the percentage of customers that say they will give all their future business to their primary financial services organization was up year over year, and the average number of depository relationships was down year over year. With declining rent and homeownership affordability, future pressure will come from a likely decrease in new U.S. household formation rates.

Despite these challenges, certain segment insights provide potential solutions. When you break down the deposit household growth rate by generation, boomers are slightly negative, while Gen X and millennials are in the 2% to 3% range, and Gen Z is up around 9%. While Gen Zers don’t make up that much of the typical institution’s current client base, they are still worth pursuing for their future business.

In addition, younger folks may be easier to lure away from competitors. In our survey, we asked consumers whether they expected to change their primary financial service organization over the next two years. 47% of Gen Zers and 32% of millennials said yes, compared to low single digits for boomers.

ATTRACTING YOUNGER GENERATIONS

So how do institutions attract Gen Z? We asked consumers to list their top reasons for selecting a new financial service organization. For Gen Zers, the key is low fees (similar for every generation) and other monetary incentives. But another factor is the institution’s positive reputation.

A positive reputation can mean a lot of different things, including whether an institution shares Gen Zers’ sustainability values. When we asked consumers whether they would consider switching to an institution that is more committed to environmental, social and governance considerations than their current one, 49% of Gen Z and 39% of millennials answered in the affirmative.

Many institutions are also redesigning their existing products and services or launching new ones to attract more customers. For Gen Zers with low balances, living from paycheck to paycheck early in their careers, market checking accounts with little to no fees.

Younger generations also crave more financial advice across all channels, including brick-and-mortar branches. According to our survey, Gen Zers use the branch far more than the older generations. They want to talk to a human being for advice. As such, more and more institutions are slowly transitioning their branches into advice centers, even while opening and closing accounts and conducting transactions are the main in-branch activities.

But it’s not just branches. Gen Zers interact with their institution more than any other generation across all channels. You are more likely to attract them if you provide more omnichannel capabilities, like the ability for customers to start an application on a smartphone, and then get help with completion at the branch.

You can also invest in more digital capabilities to attract young people. Gen Zers prefer to have faster payments, 24/7 customer service and the ability to turn on and off misplaced credit and debit cards.

Institutions are also attracting new customers via deposit flight, as some depositors spooked by the failures of Silicon Valley Bank and Signature Bank fled smaller banks and opened accounts at others. Indeed, Chase Bank estimates it acquired $50 billion in deposits as a result of the March crisis, increasing deposits by 2% in the first quarter.

In the quest for new customers, banks should focus on bringing in primary relationship customers. This means quality acquisitions and not just any acquisition—after all, hot money is only going to be rented for a little while.

To fund loan portfolios by offering higher rates on CDs and money market accounts, banks could also include the requirement to open a checking account with a set balance and transaction minimums. Why? Checking accounts are stickier. Those customers stay with their primary institution for years, whereas the average stay for purely CD and money market customers is months.

When possible, leverage the branch network by communicating the value of a local, physical safety net. Customers like to know a physical presence is readily available if needed. Also, best-in-class onboarding processes are paramount to augmentation that leads to primacy, and institutions with more primacy naturally have better margins with more low-cost deposits.

Attracting new customer accounts in this low-growth environment is a competitive challenge for virtually every bank and credit union. Our research suggests the chances of success improve by knowing what potential new customers are looking for in their next banking institution and targeting accordingly.

Karl Dahlgren is managing director for research 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.”