THE CHANGING CONSUMER

Adding to the checking account turmoil is a major change in consumer spending and saving behavior resulting from the current economic meltdown.

There's been a head-on collision between customers seeking value and the high fees and interest rates being charged by banks – especially the big banks.

It's no longer "business as usual" in the bank marketing department.

Consumers' use of debt has peaked. They are maxed out on credit cards, mortgage loans, and home equity loans. Instead of borrowing money, most consumers are busy paying down their debt loads at a pace not seen since the 1950s. The chart in the sidebar shows the year over year decline in total consumer credit.

At the same time, to the extent possible, these same consumers are trying to save money. In spite of the government's low rate policy, the personal savings rate has risen from zero to around 5% in the last couple of years. The exact number varies depending on the calculation and who's doing the reporting. The chart in the sidebar shows the change in personal savings over the past several years.

We first wrote about this change in consumer behavior in the October issue of the newsletter. Available in the newsletter archives, you'll discover seven actions you can take to adjust your marketing.

Here's a repeat of our comments in the October issue.

What we are experiencing today is not the garden-variety recession lasting 12 to 18 months and then it's a return to normal. Today, we are experiencing a major adjustment in the way consumers spend and save and companies do business. It's going to last much longer than a recession and when it's over, there will be a new normal. Some experts are calling it a major structural change.

Michael Duke, president and CEO of Walmart, had this to say in the August 23, 2009 issue of Parade magazine. "This difficult economy has caused families across America to change their spending patterns. We're also seeing many people who might not have shopped with us before. We believe that consumer behavior has shifted permanently. Everyone wants to be smart about how they spend."

An excellent article on this topic appeared in the July-August 2009 issue of the Harvard Business Review. Eric Janszen's article, "Selling to the Debt-Averse Consumer," makes several recommendations on how, moving forward, companies need to alter the way they market to consumers.

Janszen writes, "Now that the credit and housing bubbles have collapsed in the United States and around the globe, the era of unbridled, debt-financed consumer spending is over, and the monthly payer is out of action.

"To win over newly tightfisted, debt averse consumers, companies will need to follow the path of firms that succeeded in previous downturns by promoting value and utility over luxury and brand. Consumers won't be able to buy as many goods as before, but they'll react positively to marketing that allows them to feel their newfound thriftiness is a lifestyle choice rather than a constraint imposed by the economy.

"Messages that center on family, life simplification, and getting back to basics will appeal."

Janszen believes that consumers' over-reliance on credit card debt, home equity lines and loans, and other forms of consumer credit is over for good. His one-page article is available here for a fee.

Janszen is the cofounder and president of the economic and finance advisory firm iTulip and the former CEO of two venture-backed companies. He's also written two books on the bubble economy.

An article in the August issue of Sacramento's Comstock's business magazine began: "Most economic prognosticators agree: America's business environment has been altered, perhaps for good. To succeed in the post-subprime world, the way everyone does business must change."

Bond king Bill Gross, of the PIMCO funds, calls it the "New Normal." In the September 4, 2009 issue of Agora Financial's 5 Min. Forecast, Gross states, "We are heading into what we call the New Normal, which is a period in which the consumer stops shopping until he drops and begins saving as they do in Japan."

These comments are consistent with many more encountered over the past few months in various magazines and online articles.

Bottom line, there are an overwhelming number of experts, articles, studies, and data reinforcing the changes being observed in consumer purchase behavior.

This dramatic change in behavior has major implications for bank marketing – especially checking account marketing.

The way consumers make purchasing decisions and react to your bank's marketing is undergoing a major transformation.

Combine this with the turmoil in the checking account market and you have an opportunity to grow your market share by following these next recommendations.

FIVE WAYS TO CAPITALIZE ON THE TURMOIL

The ACTON Marketing team has identified five ways to capitalized on this turmoil.

1. Realize that the checking account is your only remaining franchise.
   
2. Ensure your bank or credit union offers a simplified checking product line.
   
3. Avoid following the competition.
   
4. Identify your bank's or credit union's unique advantage.
   
5. Market checking consistently to the market place.

Each of these marketing strategies is covered in more detail below.

CHECKING IS YOUR ONLY REMAINING FRANCHISE

You must come to this important realization and have a willingness to protect it at all costs.

Historically, banks have enjoyed very little, if any, competition from non-banks on the variety of deposit and loan products offered. This began to change with the advent of the captive finance companies owned by GM, Ford, and Chrysler.

This was followed by the creation of the credit card and the ultimate entry into this business of the non-bank holding companies.

In 1977, Merrill Lynch rocked the banking world when it introduced its famous Cash Management Account (CMA) which included a checking account arrangement with BankOne. This move opened the doors for Wall Street companies to enter the banking business through the back door.

Of course, now Merrill Lynch is owned by Bank of America. And in September, 2008, Goldman Sachs and Morgan Stanley, the last two independent investment banks, became bank holding companies.

By the 1980s, consumers could get auto loans, credit cards, equity lines and loans, mortgages, personal loans, and certificates of deposit from any number of non-bank companies entering the financial services business.

By this time, banks and credit unions were facing a slew of new competitors beyond their traditional competitors which, to this point, had consisted of savings & loans and credit unions. Now banks found they were competing with a variety of non-banks.

Today, this growing number of non-banks includes mega-competitors like Walmart, Target, and General Motors.

Fortunately, there is one very important product that remains the sole province of banks and credit unions – it's the checking account.

And yet, the wolves are busy circling the branches. Walmart would love nothing more than to get government approval to introduce consumer checking accounts. It already owns a bank that it uses for its credit card business.

As for offering checking accounts, it's not a question of if, only when.

Bottom line – it is extremely important that today's bankers understand the importance of their checking account franchise and protect it at all costs.

SIMPLIFY YOUR PRODUCT LINE

Drastic times call for drastic measures.

If management guru Peter Drucker were alive today and consulting with community bankers, his advice would likely end in a series of questions, one of which is, "What should you stop doing?"

The likely answer he would be seeking when it comes to checking accounts is: Stop adding more and more fees, adding minimum balance requirements, and loading on the features in an attempt to recover the fee income that will be lost as a result of the new overdraft opt-in legislation.

And perhaps, to go in the opposite direction by simplifying your checking product line.

As consumers look to simplify their lives and seek value in products they purchase as they pay down debt and begin saving, the last thing they want from their financial institution is a choice of feature-laden checking accounts bearing minimum balance requirements and an assortment of fees.

Yet, this seems to be the path chosen by an increasing number of financial institutions – including small and medium-sized banks and credit unions.

Now is the time for senior management, including the marketing folks, to familiarize themselves with what Ad Age columnist Bob Garfield calls "Listenomics."

Garfield introduced the marketing world to "Listenomics" in his October 11, 2005, Advertising Age article, "Inside the New World of Listenomics." And it’s the focus of his newly released book, The Chaos Scenario.

Thanks to the Internet, more and more consumers are going online and to social networking sites to determine what to buy and from whom. This trading of product information occurs on a daily basis.

According to Garfield, the successful companies moving forward will be those that tap into the ongoing consumer conversations available online and use this wealth of information to make product and pricing decisions.

Basically, you are tapping into the wisdom of crowds and using this timely and valuable information to make better product design, pricing, and marketing decisions.

According to Seth Godin, "The inept marketers are the ones who fold their arms and insist that you listen to their story and tell your story the way they want it told."

If we can believe what's being reported today about changing consumer behavior, we're experiencing a dramatic shift towards simplicity.

This not only impacts product design and pricing but marketing messages.

AVOID FOLLOWING THE BANKING CROWD

While the big mega-banks are busy announcing new products, product line realignments, pricing changes, and spending millions of dollars on expensive branding ads, now is not the time to look to them for direction.

They are being hammered by everyone from congress to Arianna Huffington to the millions of aggravated consumers venting their frustrations on the Internet.

Community banks and credit unions have been handed a golden opportunity to break away from the crowd and more closely align themselves with the needs and desires of consumers living and working near their branches.

Before making knee-jerk reactions to what your competitors are doing and the suggestions being made by all the consultants and vendors writing "advice" articles, follow the sage advice of Bob Garfield and "listen" to what your customers and prospects in your market area are saying about their overall banking needs and the ideal checking accounts.

If conducting your own primary research is too costly and time consuming, consider talking to the folks at ACTON Marketing about their current primary research reports from ACTON Market Intelligence.

One of the major controversies brewing today is the fate of free checking. There have been a number of articles suggesting the demise of free checking as a result of the recent overdraft opt-in legislation and its impact on NSF fees.

What we have here is a classic example of the tail wagging the dog. We are talking about something in the area of 10% -15% of checking customers providing 90% of all NSF fee income. What about the other 85% to 90% of free checking customers who love their product and never overdraft? Are we to punish them for the sins of the few?

While it is true financial institutions are going to have to look for other ways to make up for lost fee income, throwing free checking under the bus seems like a bad idea.

Free checking is the epitome of a simple product with simple pricing that delivers maximum value for the cost.

While the banking and consultant crowd might think it’s a good decision to abandon free checking, you might want to think long and hard before doing so.

Free checking is never going away. There will always be banks and credit unions offering this product – there'll just be fewer of them.

IDENTIFY YOUR UNIQUE ADVANTAGE

You must provide a compelling reason why consumers should choose your bank or credit union over the competition.

For years, the general thinking has been that consumers choose where they bank based almost exclusively on locational convenience. While still the case in some instances, thanks first to ATMs and now online banking, more consumers are ranking other attributes as the reason for choosing a bank.

And surprisingly, the ranking of these attributes vary by region as discovered in the second quarter 2009 primary research conducted by ACTON Market Intelligence (AMI).

Looking at checking accounts, a customer's core banking relationship, the attributes, by region, ranked as follows:

Northeast

50% Paid better interest
39% Had products and services I need
35% Convenience
22% Recommendation from others
21% Better customer service
18% No or low fees
5% Reputation

South

30% Convenience
25% Financial stability
24% Better customer service
10% Recommendation from others
9% No or low fees
8% Paid better interest
7% Had products and services I need

Midwest

37% Better customer service
37% Reputation
34% Paid better interest
28% No or low fees
25% Convenience
15% Other
10% Free gift or cash to open
7% Recommendation from others

West

30% Low or no fees
28% Paid better interest
25% Already had account at the bank
24% Free gift or cash to open
20% Financial stability
19% Convenience
15% Had products and services I need

You'll find more information about this study and how to obtain your copy in the sidebar to the right.

While the research data provide direction, it's still incumbent on you to come up with your own meaningful and deliverable point of differentiation (differential advantage) or USP or unique selling proposition.

Some examples include:

• Most convenient hours seven days a week
  
• Most ATMs in the market area (locational convenience)
  
• Pay highest rates on checking account balances (Rewards Checking clients)
  
• Fastest loan approvals in the area
  
• Fastest and easiest place to conduct banking business
  
• Locally owned with knowledgeable, long-time staff
  
• Known for best, friendliest service in the market (testimonials and word-of-mouth)
  
• Leader in supporting local businesses of all sizes

Without such a differential advantage, you can expect your market share to be based solely on locational convenience, the number and size of competitors in the area, and marketing spending by your competitors.

The only way you can grow market share at the expense of one or more of your competitors is with a combination of meaningful differential advantage and marketing spending.

It's one thing to identify your point of differentiation or unique selling proposition. It's quite another to be willing to build your ongoing marketing efforts to support this positioning.

Finally, you should do some primary research to determine if your perceived point of differentiation already exists in the minds of consumers living around your branches.

For example, if you believe that your bank's point of differentiation is friendliest service in the market yet in a survey consumers rank a competitor as owning this position, then it's unlikely you can be successful trying to capture the number one position.

It is very, very difficult to change consumers' minds.

You'll simply have to seek another point of differentiation – one that is available in the minds of consumers.

MARKET CONSISTENTLY TO OWN THE MARKET

As soon as possible, re-work your marketing budget to refocus spending your marketing dollars on acquiring new checking customers and continue doing so consistently, year after year.

Unfortunately, too often banks and credit unions hit the IRA marketing trail in the first quarter – running newspaper rate ads and holding IRA workshops.

Come second quarter, it's equity line and loan marketing time. And perhaps throw in a few auto loan ads as well.

The first two months of the third quarter are always the toughest. It's the hot summer, kids are out of school, and many people are on vacation. A lot of financial institutions go blank during these months – or perhaps run some mortgage rate ads.

Labor Day in early September marks the beginning of the fall marketing season with its focus on back to work and back to school. Summer is over and it's time to get serious again. This is the season when financial institutions spend marketing dollars promoting everything from auto loans, equity lines and loans, to checking accounts, and savings products.

These campaigns roll over into the fourth quarter – generally ending just before the Thanksgiving holiday. Very little happens the remainder of the year as consumers are too busy focusing on the protracted holiday season.

And so it goes year after year.

For some odd reason bank marketers feel they must allocate their precious marketing dollars across every product line, for both acquisition and retention, for cross-sell efforts, and assorted other programs.

The net effect is that no one product receives enough marketing money to make a significant impact in the marketplace during the year.

Since the checking account is your bank's or credit union's only remaining, exclusive franchise, it would seem only logical to concentrate your annual marketing budget on promoting checking accounts.

After all, the checking account is your financial institution's core account relationship with its customer base. Share of wallet, cross-sell ratios, retention, and lifetime customer value all derive their importance from the checking account.

Imagine the impact you could have in your market if you concentrated the bulk of your marketing dollars to promoting your checking accounts continuously – not only in direct mail but in newspaper ads, on the radio, on billboards, and transit signs.

As a reminder, in the January issue of this newsletter you read about the seven reasons why your financial institution needs to offer checking accounts:

1. It's the core account to establish a long-term customer relationship with your financial institution.
2. Unlike other bank accounts, the checking account is sticky which means it stays with you a long time.
3. The checking account provides your institution with ongoing cross-sell opportunities.
4. The checking account balances enable your bank to increase its loan volume.
5. They are a reliable source of funds for your institution.
6. They provide a source of fee income from a variety of fees.
7. They provide an ongoing branding opportunity both on checks and the debit card.

This marketing focus on checking accounts doesn't impact the selection of your differential advantage or unique selling proposition. Your goal is to meld them into a cohesive marketing strategy that is maintained over time with a supporting list of marketing tactics.

MOVING FORWARD

While the pressure is on to make changes and do so quickly to get out in front of the competition, remember the old axiom – "Haste makes waste."

Hopefully, this issue of the newsletter along with the information provided in the daily ACTON Marketing blogs will provide some of the information you need to make informed product and marketing decisions in the months to come.