LOMBARD, Ill.—With “reasonably good results” from 2014 behind them, financial institutions in 2015 will need to watch several ongoing issues, such as regulatory burden and the changing role of the branch, and pay attention to escalating challenges—declining income from overdrafts and debit cards.
Bill Handel, VP of research at the Raddon Financial Group, shared insights on what’s ahead for banks and credit unions in 2015 in a recent issue of the The Raddon Report.
“The major concerns in 2014 centered on the changing role of the branch, and the rapid adoption of new channel technology and payments, especially with the announcement of Apple Pay,” said Handel.
Handel does not expect those issues to change substantially in 2015. “Additional concerns are how to remain relevant for Gen Y; the concerns consumers have regarding their debt and declining income from some very important income sources – overdrafts and debit cards.”
Handel’s predictions:
-
Big bank primary status among Gen Y will increase. The six largest U.S. banks control about 40% of primary financial institution relationships but among Gen Y, it is 49%, noted Handel. “Expect this PFI share among Gen Y to continue to grow beyond 50%. The reasons are simple – big banks have more locations and are perceived to have the best technology – two factors critically important to this group.”
Bill Handel
- Credit card balances per household will modestly decline. Aggregate credit card balances in the U.S. began growing again in 2011, but growth has been anemic, averaging about 1.5% per year, explained Handel. “The more startling number is that credit card balances per household in inflation-adjusted dollars are 24% lower in 2014 than in 2007. While much of the decline was default and refinance induced, we expect real card balances per household to remain flat or slightly decline in 2015.
- Mobile payments usage will grow but remain modest. The introduction of Apple Pay created major headlines in 2014, because of its potential impact on mobile point-of-sale payments, observed Handel. “In 2014, 5% of consumers indicated they use mobile payments, and The Raddon Report expects that number to grow to between 8% and 10% in 2015. This is not to suggest that mobile payments are irrelevant. Indeed, two out of three Americans have a smartphone and those phones are increasingly equipped to enable payments.
- A more important factor in the modest growth rate is that U.S. consumers are by and large happy with the current way they pay for goods and services, said Handel. “Until given a very good reason to change behavior, such as better security or a robust rewards program, consumers are likely to stick with what they know with regard to payments.”
- Mobile deposit capture will increase. In 2014, 12% of consumers made a deposit to a bank account using their smartphone. Expect that number to increase to between 15% and 17% in 2015, predicted Handel. “Again, this modest projected increase is not indicative of a failed technology, but rather is because the number of paper checks in the U.S. continues to decline year over year by about 7%. Paradoxically, mobile deposit is becoming a table-stakes issue, especially for the younger consumer – if you don’t offer mobile deposit capture you may no longer be relevant to this demographic.”
- Overdraft income will continue its downward trend. Overdraft income has been on the decline since 2008 and the amount per checking account is down by between 20% and 25% since that time, said Handel. “If a financial institution has grown checking accounts over that period, the decline in aggregate overdraft income may not be as apparent, but many banks and credit unions are experiencing this level of decline. Expect overdraft income per account to decline by $8 to $10 per account per year in 2015. Contributing factors include consumer awareness, technology such as alerts, and pressure from the Consumer Financial Protection Bureau (CFPB) to reduce the incidence of overdraft charges.”
- Debit card interchange income. The recent decision by the Supreme Court not to revisit the Durbin Amendment set in motion an action on the part of major retailers that will have a long-term impact on debit card interchange, said Handel. “These retailers are now pushing low-dollar signature transactions through the PIN network, thus reducing interchange expense. This is simply a continuation of the long-standing battle over interchange. Between 2004 and 2014, the average interchange income per debit card increased by $4 per year. The Raddon Report expects that growth rate to slow in 2015 to about $2 per card per year, and many institutions may see it flatten.”
- Deposit acquisition and retention. The final significant trend we for 2015, said Handel, is a dramatic increase in competition for deposits. “Leading the charge will be online deposit institutions, such as Ally Bank and Discover, which will be looking to grow their deposit base at the expense of financial institutions. The rapid growth of loans in many markets is also likely to result in dramatically higher levels of competition for deposits.”