At the beginning of each year, every trade organization, Association and Think Tank issues its predictions and forecasts for the coming year. The team here at Galapagos has reviewed the collective punditry to identify the likely key issues that will shape marketing opportunities and challenges in 2020.
From the ABA to BlackRock, Gallup to the Federal Reserve, the consensus is that we can expect continued strong performance across all sectors of the industry as unemployment and inflation remain low and economic growth, while slowing, will remain close to 2%. Before looking at how each business line may be affected, what about the macro trends that will influence the business climate?
Macro trends that will dominate in 2020:
Personal fiscal responsibility
In 2019, Americans saved -- and spent -- more. As wages increased, the average amount Americans saved rose to $6,017 and 401(k) balances, now averaging $306,500, have never looked so rosy (Fidelity Investments 2020 Projections). But consumer debt rose at a faster rate to $4 Trillion with 40% of households admitting to having too much debt. Not surprisingly then, the top two consumer goals for 2020 are: Saving more and Reducing debt (Gallup: Americans’ Big Debt Burden growing, 2019).Financial literacy
People are more motivated than ever to take charge of their finances and to make smarter money decisions. But a 2019 Pew Research Center study of financial literacy shows that consumers lack a good understanding of even the basics. This is particularly true of Millennials, whose scores were lower than any other demographic segment. Consumers are eager to take control and hungry for help.Financial ecosystems
According to Accenture’s 2019 Global Financial Services Consumer Study, consumers want their financial solutions personalized to their needs and informed by their behaviors. Several companies such as State Farm and Drive Box, for example, have tied insurance premiums to a customer’s driving behavior. Expect to see rapid innovation in this space as consumers grow more comfortable with the sharing of their personal data to create “financial ecosystems” that present integrated propositions addressing core life needs, like home buying, wellness, or mobility. German company Ergo, for example, provides bundled home insurance, home security, and property management solutions and is linking this service to property search, mortgage and home improvement loan financing, remodeling, and interior design services to provide a single contact point for consumers.Personalization of advice
While the focus for most community based FIs in the U.S. is on protecting customer data, the push in Europe and Asia is the sharing of customer data to increase the personalization and value of financial services. Over half of U.S. banking customers state they are comfortable with their personal data being shared IF it is used to deliver better deals and better advice tailored to their situation. For example, look at ChasePay or Intuit’s QuickBooks.Responding to global issues
Several major issues, most notably climate change, are close to reaching a tipping point in the public consciousness and, as a result, are beginning to influence business strategy. The World Economic Forum in its Global Risks Report cited climate change as the biggest risk of the 2020s. BlackRock, the world’s largest asset manager, announced in January that it is making climate change a central part of its investment process and portfolio construction. There is already a growing movement that sees corporations tying their respective missions to these global issues because of how they are influencing consumers’ brand choices and spending.The commoditization of wealth management
The influence of Baby Boomers retiring by the millions has promoted retirement and investment services to a starting role in all FIs. As consumers of all ages take more personal responsibility for their financial wellbeing, they want solutions that are easy understand and buy. Given the fact that 77% of consumers trust their bank to look after their long-term financial wellbeing, this represents a huge opportunity for community institutions, in particular, to deliver a valuable solution.Customer experience
55% of customers cite a better omnichannel experience as their number one criterion in bank selection. So yes, you will need excellent mobile and online banking; yes, you’ll need branches; yes, you’ll need mobile payment options, and yes, all of these have to be supported by a knowledgeable, professional staff focused on finding better solutions for their customers. Pulling this together continues to be an immense challenge for community institutions. According to recent Galapagos research, in spite of having almost 40% of customers, on average, interacting with them purely via remote channels, the vast majority of community banks and credit unions still cannot replicate branch functions on their mobile or online channels. For a peek into one intriguing solution, look at PNBMetLife India and their virtual branch.
So let’s bring out the crystal ball. As you can imagine, there will be a lot happening this year. Let’s review the outlook for each individual line of business.
Mortgage Banking
Total originations in 2019 were $2.06 Trillion, the highest since 2007
Home prices rose 3.3%, with the median home price increasing to an all-time high of $316,000
Rates, expected to stay low in 2020, and incomes remaining steady will fuel an increase in new purchases of 1.6%
With increasing home values and limited inventory in many markets, home improvement will remain a high priority for many homeowners• Refinance activity is projected to drop by 24%
Rising costs, together with a decline in loan volume and increased competition, will force increased margin pressure
Continued adoption of streamlined and online lending processes will challenge traditional FIs
Thirty-five percent of new purchases are expected to be from first-time homebuyers, with a median down payment of 7%. Providing personalized advice and guidance will be a lifeline for FIs who cannot compete on the technology front
Consumer Lending
Delinquency rates are likely to remain low as unemployment and wages remain steady
Credit card originations are projected to slow, according to Transunion, in spite of consumer spending increasing at a 2% annual rate. However, balances will remain high
Personal loans are expected to increase 6% as consumers focus more on debt consolidation
Similarly, home equity loans are projected to rise because of rising home values and a consumer focus on debt consolidation
Auto loans are projected to show the weakest growth potential because of higher auto prices and threats of tariffs affecting affordability
Retail Deposits
Consumers will continue to select FIs based on convenience and access, which are determined by both branch availability and digital functionality. Because of the commoditized nature of this experience, the churn rate of checking relationships will drop to a projected annual rate of 7%, making checking account acquisition tougher than ever
Consumer demand for savings accounts is likely to increase. The personal savings rate is projected to increase to 8.2% in 2020. In spite of an increased focus on savings, consumers still require help acquiring the discipline and are looking for ways to make the act of saving easier with automatic payments or round-up features
Expect some return of investment assets from the market to more secure accounts, especially if the leading economic indicators point to a slowing economy and encourage investors to protect some of their gains from 2019
Business Banking
In spite of a boom year for CRE lending, the commercial banking market is showing signs of preparing for the next downturn. Over 10% of lenders reported a tightening of credit standards in Q3 and Q4, 2019
Other signs point to a commercial slow down: GDP fell; charge offs remain low, but recovery rates fell 8% in Q4, 2019; commercial line utilization dropped by 2%, and the percentage of originations that came from new loan applications fell to 25%
Commercial and multifamily mortgages topped $650 billion in 2019. This record production is projected to increase by 7% in 2020
In 2019, small business revenues grew 18% but business owners will face several issues, including higher wages and healthcare costs which, together with a tight labor market and ongoing fears of the trade war with China, may lead to a slowdown in investment
Pricing pressure is projected to tighten but there is more flexibility in smaller credits
The FDIC expects increasing competition for commercial deposits, with average rates for interest-bearing checking accounts and Money Markets rising above the 2019 averages of 1.3% and 1.72%, respectively
Small and middle market companies are more likely to focus on improving performance within their current structure than to fund expansion in 2020, according to the Federal Reserve. Watch for cash management services and employee benefit plans to see increased demand
Investment services
After a stellar 2019, the stock market is projected to slow in 2020
Retirement saving remains a top priority for customers across all age groups and several changes are in place to allow investors to save more, including increased contribution limits, increased access to 401(k) plans, and more favorable IRA distribution rules
According to Bureau of Labor Statistics, the average U.S. household saved $6,017 last year, a number projected to increase slightly in 2020
Peering into the crystal ball, the vision is often murky and even the most considered projections can be derailed by unforeseen events in the long year ahead, but one could say that this year, at least, we have the benefit of 20/20 vision. For a list of specific marketing ideas that address 2020’s most pressing challenges, click here.
Are your sights set on the right opportunities? Are you setting attainable goals? Do you have a clear roadmap for the year ahead? Whether your immediate needs call for a full, data-driven marketing plan, a neutral party for planning moderation, or simply a resource to run ideas by, let’s talk.