Primary In Name Only? 'Silent Churn' Is A Profit Killer For Small FIs

Many community banks and credit unions have become primary FIs in name only as a significant number of their customers turn to secondary FIs for credit cards, mortgages and other loans. This 'silent churn' —where customers open up a checking account with their primary FI but buy other banking products elsewhere — is a profit killer that poses an 'existential threat' to community banks and credit unions. Javelin presents these findings in its latest report, Bank Switching: Combating 'Silent Churn' To Maximize Primary FI Status. 'In a way, it could be said that consumers are 'cheating' on their smaller FI primary relationships with secondary relationships that are transactional and commoditized,' writes Javelin. 'Unfortunately, this behavior is centered  on the most profitable loan products.'

Last month attendees of MX's Fintech Festival received a preview of this report from Ian Benton, a research specialist in Javelin's Omnichannel Financial Services practice. Benton noted that giant (45 percent) and regional banks (21 percent) control 66 percent of primary relationships but their share grows to 80 percent for secondary relationships. Conversely, community banks (21 percent) and credit unions (13 percent) control 34 percent of primary relationships but their share of secondary relationships diminishes to 20 percent. This is further reflected in product concentration, as small FIs control 35 percent of checking accounts but only 15 percent of credit cards and 19 percent of mortgages.

Silent churn is a profit killer that is costing small FIs precious business with Moneyhawks, their most profitable account holders. Moneyhawks, who own an average of 14.1 products spread across 3.2 FIs, pose the biggest risk of purchasing products from secondary FIs. 'And while most consumers would jump to a new FI if they switched (FIs), 62% of Moneyhawks would shift primary status to a secondary FI with which they already do business,' notes Javelin. The key to retaining and satisfying Moneyhawks is meeting their demand for 'innovation in personal finance management, alerts, digital account opening and mobile bill pay.'

Unfortunately, Javelin notes that the digital capabilities of community banks and credit unions often lag larger peers. To maximize their primary status small FIs will have to leverage 'digital capabilities that redefine personal banking, such as contextual alerts, personal finance insight and advice, account aggregation and spending categorization. FIs must convince their most profitable customers that they will have greater control and insight over their finances if they buy and manage more products under one roof.' Javelin encourages FIs to to counter commoditization by rolling out digital banking services that are truly personalized and address each customer's distinct needs. '(Initiating) conversations with customers in digital channels will require anticipating their individual needs by aggregating and mining data, reaching out at a relevant time with predictive analytics, delivering insight and advice with personal finance management and gamification, and engaging them in an actionable, coordinated omnichannel fashion.'

Beyond the build out of digital capabilities, another key success factor will be the courting of Gen Y from their first paychecks. As these consumers struggle with student loan repayment and how to plan for retirement they'll be looking to their FI for proactive advice that helps them navigate the journey.  Those FIs that serve as a capable guide will be able to counter silent churn and 'place themselves at the front of the line when customers shop for credit cards, auto and home loans, retirement accounts, investment accounts, insurance coverage and wealth management.'

While coaching of young customers and enhanced digital offerings can make a huge impression, bank switching trends still suggest that small FIs are facing an uphill battle. When customers of large FIs consider switching banks they typically turn to another top 20 FI, limiting the customer acquisition upside for credit unions and community banks. 'For every vulnerable customer who intends to switch from a large FI to a smaller one, there is one who intends to make the opposite move, abandoning a small FI for a large one,' writes Javelin. Posing an even greater challenge for small institutions, Moneyhawks gravitate to large banks, with 86 percent identifying a top 20 bank as their primary FI and 63 percent banking with one of the big four — Bank of America, Chase, Citibank and Wells Fargo. Only 9 percent of Moneyhawks intend to move to a community bank or credit union.

For small FIs the key in mounting a counterattack will ultimately be improving their digital services. 'Instead of just making transactions convenient and easy, smaller FIs must position digital banking as a means to proactively deliver insight and advice that fortifies the personal connection to the FI,' writes Javelin.