Customer mindshare: The new battleground in US retail banking

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Until a few years ago, US regional banks enjoyed comfortable incumbency in their regional markets, with modest expectations from customers in terms of their banking experience and loyalty based on a relationship-banking model. Mega banks, on the other hand—the few institutions that have more than $1 trillion in assets—reaped the benefits of their extensive physical scale, significant national brand recognition, and large stockpiles of capital to invest in growth initiatives.

In the last few years, however, this balance, in which regional banks and megabanks could succeed on their own terms, has started to shift under the pressure of changing customer preferences. (New entrants, in the form of fintechs and nonbank firms, are also pushing the boundaries of customer experience.) Customers increasingly expect interactions with their bank to be as sophisticated and personalized as their experiences with other services. It is our view that banks need to think beyond customer experience to a broader measure that we call “customer mindshare.” Customer mindshare is an aggregate of four components that includes customer experience but also takes a bank’s physical footprint, digital sophistication, and marketing presence into account. Along with a bank’s products and services, these factors are what differentiate banks from the customer perspective. In bank-to-bank comparisons, customer mindshare is an effective predictor of a bank’s ability to acquire new customers and expand share of wallet with existing customers.

New customer expectations

US banking customers are expressing new demands and expectations from their banks. Three in particular stand out:

  • More—and better—digital functionality from financial-service providers. McKinsey’s Retail Consumer Banking Survey shows that the percentage of US banking customers that prefer transacting through branches and the old, familiar forms of payment is declining precipitously. These “traditional” customers make up just 26 percent of US bank customers, down from 38 percent only two years ago (Exhibit 1).
  • Significantly better levels of banking experience. Accustomed now to the high service levels of digital-first lifestyle merchants such as Amazon, Netflix, and Spotify, customers fully expect the same sophistication in service from their financial providers. While this has been true for some time, there are increasingly new providers (for example, fintechs and ecosystem firms) ready to step into the breach.
  • Beyond digital. A majority of customers clearly do want digital options—to varying degrees. Just as important, they want a bank’s multiple channels to work together seamlessly. Furthermore, even in a digital age, research shows that a significant percentage of customers continue to value face-to-face interaction for more complex needs. As an example, for transactions such as opening new accounts, customers overwhelmingly prefer the personal attention of branch service (Exhibit 2).
The percentage of traditional banking customers is declining.
Digital continues to grow for transactions, but consumers still prefer the branch for more complex needs.

The challenge for many US banks is that their current distribution models are not equipped to meet these changing expectations. Most US banks serve multiple markets with diverse customers and regulations, and accordingly have evolved into highly complex organizations with matrices of management, departments, products, distribution channels, and IT systems. This complexity challenges their ability to deliver high-quality and seamless service across traditional and digital channels.

New customer needs call for a new retail-banking distribution model. Many banks are aware of this imperative. With wider interest-rate spreads coming into view, and less overwhelming regulation and capital requirements to contend with, bankers have turned their focus to long-term institutional growth and sustainability, redesigning their distribution footprints and adopting new digital technologies. These are important steps, but we believe that building a new distribution model requires a new way of measuring success.

From share of wallet, to share of mind

We define customer mindshare as the combination of products, services, functions, and access that creates an environment that encourages greater engagement between a bank and its customers. It is an aggregate metric that includes four factors:

  • physical footprint: a bank’s branches, ATMs, and other physical points of presence
  • digital maturity: the extent and sophistication of a bank’s web and mobile capabilities
  • share of voice: the level of a bank’s representation in advertising and marketing in specific markets
  • customer experience: a bank’s ability to fulfill customers’ expectations of service, within and across all channels

These four components, in aggregate, and in relative measures of weighting by market, provide a metric that correlates with a bank’s ability to acquire new customers and win share.

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1. Physical footprint

Historically, banks have relied heavily on their branch networks to grow their share of deposits in any particular market. Branches are indeed still an important part of the distribution equation, but their impact is more nuanced.

Branch and deposit share are strongly correlated across four defined market sizes and growth levels, but the relationship is not as tightly aligned as it once was. Some banks fail to achieve the share that might be expected given their branch footprint, while others overperform—indicating that sheer scale does not determine the effectiveness of a branch strategy. For example, our research shows that in small, high-growth markets, the correlation between branch density or scale and deposit share only holds to a point, beyond which it decays. As the correlation between branch scale and deposit growth weakens, banks will need to rethink their distribution strategies (Exhibit 3).

For regional banks, the declining impact of the branch footprint is more immediate. Our models indicate that in large markets, megabanks consistently overperform, and that regional banks are losing significant ground in higher-growth markets (Exhibit 4).

2. Digital maturity

Our research shows, not surprisingly, that a bank’s “digital maturity” is a reliable indicator of its ability to gain digital current account volume through digital channels. McKinsey’s Digital Maturity Index (DMI) measures a combination of recent mobile and web adoption, a rating of a bank’s mobile apps, and digital sales, among other factors. The index is correlated with a bank’s performance in gaining digital current account customers. Interestingly, a bank’s performance in mobile channels is quickly gaining ground over other channels—the web, in particular—as a differentiator (Exhibit 5).

Digital maturity is strongly correlated with digital checking-account sales.

Digitally mature banks recognize that the impact of digitization is not always directly measurable; they invest in digitizing features that increase adoption and engagement—such as mobile—even if the deposits are not necessarily being made through that channel. In other words, digital maturity bestows a kind of “halo effect” that draws deposits to the bank across all its channels, digital and nondigital.

3. Share of voice

Share of voice, or the reach and presence of advertising and marketing, carries great importance in increasing deposits (Exhibit 6). This is particularly true online, where the level of digital advertising and marketing is highly correlated with deposit share. Conversely, outdoor advertising, print, and mass media are losing impact.

Perceived share of voice is strongly correlated with deposit share.

Share of voice is particularly important for banks entering new markets. The size of the branch network is only a part of the equation. It must be complemented by digital advertising and marketing.

4. Customer experience

Our research shows that superior customer experience raises the likelihood that a customer will increase deposit balances and open new accounts and products at a bank (Exhibit 7). Highly satisfied customers are 2.0 to 3.0 times more likely than less-satisfied customers to express the intent to increase deposits at a bank, and 2.5 to 5.0 times more likely to open a new account or sign up for a new product.

Superior customer experience in retail banking leads to increased cross-sales and growth in deposits.

Banks that deliver on customer experience and receive the highest marks for deposit-related customer satisfaction grow deposits faster than lower-rated competitors.

How can banks win?

Our analyses underscore the fact that the size of a bank’s branch footprint is no longer the overwhelming factor in deposit share it once was. Other components of customer mindshare—digital maturity, share of voice, and customer experience—are growing in importance. Accordingly, strategic reviews should be informed by customer-mindshare variables. Moreover, the industry has reached an inflection point where quick experimentation, agile delivery, and fast-paced evolution are becoming the norm for product development, and banks should embrace these methods for testing and carrying out their strategies.

The balancing act: Omnichannel excellence in retail banking

The balancing act: Omnichannel excellence in retail banking

How banks should proceed depends on their current capabilities and the mix of markets in which they compete (small versus large, low growth versus high growth). Exhibit 8 illustrates a current-state customer-mindshare analysis—across the four measures—for megabanks and regional banks respective to these market archetypes. This analysis provides context for each bank archetype’s relative strengths and weaknesses, which are critical to informing strategic next steps.

Implications for megabanks and regional banks.

Implications for megabanks

Given the extent of their overperformance in terms of branch effectiveness, especially in large markets, megabanks can consider reducing their branch presence where it makes sense to do so. They can then reinvest the cost savings to raise their customer-experience levels (where they tend to trail regional banks) and develop truly sophisticated omnichannel experiences. Megabanks should also continue to build on their high share of voice, increasing their emphasis on digital channels and going even further with respect to personalization and targeting of marketing messaging. As customer expectations continue to rise, winning on digital sophistication and customer experience will be key for megabanks.

Implications for regional banks

Applying a customer-mindshare lens to performance can clarify strategy for regional banks and enable them to make informed decisions about where to increase their branch footprint (large, high-growth alternatives) and where to shrink it (small, low-growth markets). Regional banks have always needed to be more selective and thoughtful than their megabank peers in deploying marketing dollars—after all, they cannot compete in terms of brute investments—but we believe that new research can help make these difficult investment choices clearer. Building capabilities in areas such as digital marketing and using analytics to drive marketing ROI will allow regional banks to compete for share of voice in their selected markets. Regional banks should invest to enhance their digital capabilities, especially in mobile, to match the basic digital value propositions provided by the megabanks and to meet customer demands. Prioritizing what capabilities are most valued by their customers will be key to making these strategic capital decisions.

Retail banking in the United States is undergoing significant change, as the relevance of traditional branches becomes less clear cut and as customer preferences evolve. In this environment, the comparative performance of individual banks is becoming more pronounced. While the current moment presents challenges, it also represents an opportunity for forward-looking banks to build value and increase their customer mindshare.

In the next five years, the most creative and opportunistic banks will strengthen their relationships—or mindshare—with customers, and they will establish the next set of best practices for the industry.

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