Stock markets around the world are booming, and interest in securities among typically risk-averse customer groups has increased sharply in the past year. Young people, in particular, have taken an interest in securities investments. How can banks leverage this trend for sustainable growth?
Interest in securities investment from previously underrepresented customer groups, particularly the younger population, has increased significantly. But where does their fascination for this topic come from? The answer lies in the stock market and investment strategies becoming popular topics on social media platforms, including Instagram, Facebook, and Reddit. This development culminated most recently in the Reddit-driven increase in GameStop stock. Online providers, in particular, are currently benefiting from this trend with record numbers of new securities accounts and trading volumes. Startups such as Trade Republic and Scalable Capital, which offer extremely low-cost transactions similar to Robinhood in the US, are also winning large numbers of new customers in Germany and other European countries. They are conducting business according to the well-known principle of digital business models: First get reach, then get rich.
Traditional banks have benefited too little from the stock market boom
Established banks have also experienced growth in recent months. 2020 was a good year for many banks in terms of securities business. According to our Global Sales Study, 42 percent of banks were able to increase their securities sales despite the global decrease in business, and only 26 percent complained of a decline.
Nevertheless, traditional banks are benefiting comparatively little from the current boom. When it comes to savings, a large proportion of their existing customers still prefer to rely on the certain real loss of assets in checking and savings accounts rather than on uncertain gains on the capital market. This is a heavy burden for banks in the current negative interest environment of the Eurozone. From an earnings perspective, it’s therefore all the more urgent for banks to win over more customers with the advantages of investing in securities.
Four success factors for growth in the securities business
The current momentum and media attention create a unique opportunity for sustainable growth in the securities business. But how can banks make the most of this? We highlight four key success factors that can be applied globally:
1. Customer-focused securities and investment products
Many banks’ existing pricing and product offerings are not aligned with changing customer needs. While low-cost exchange-traded funds (ETFs) are becoming increasingly popular, many banks continue to mainly offer actively managed funds with, in some countries, high front-end loads.
How alluring does an investment that loses four to five percent of its value in the first phase – characterized by a high level of attention – sound to new potential securities customers? How would they react if they were told the fees incurred again if they wanted to trade their fund for another one? These fees hinder the migration of securities into investment funds and, therefore, cost the banks a lot, even if this isn’t obvious at first. For this reason, some institutions have been trying for some time to spread the excessively high purchase fees over several years by means of higher fund management fees to avoid charging front-end loads. However, fund management fees that are higher than two percent per year can weaken the performance of the funds. As a result, relative fund performance and customer satisfaction suffer over the long term. In addition, in the age of ETFs, the fees are also a barrier to purchase for young customers in particular, unless they apply to specialized theme funds in the highest risk/return class, where fees aren’t as significant.
In addition, branch banks often only have one price model for securities accounts, which they developed decades ago and is still somehow supposed to be suitable for all customers. For this reason, banks’ model isn’t the right fit for any customer segment. It’s a catch-all that is supposed to benefit everyone from online brokerage customers and traditional branch customers to private banking customers, even though these customers use completely different services. How appealing is it for new potential young customers interested in online trading to know that their initial deposit will incur an annual fee before their very first trade? If banks make their customers go to a branch in order to open a securities account, the bank loses them, usually forever. Customers get used to an online provider’s platform and never return to their bank, even if they gain assets over the course of their lives.
Young existing customers who don’t have a securities account are particularly price-sensitive, since they are well aware of the low-cost offers from Trade Republic and Scalable Capital from their social media feed. In order not to lose these customers to the competition in the long term, branch banks need apply the “First get reach, then get rich” principle. Offering free models with order prices at the online-provider level combined with a broadly defined age limit enables banks to capture this customer group early on and create potential for sustainable customer development. This kind of measure will also hardly cannibalize existing income, since only very few young customers currently have a securities account with a branch bank.
In our experience, customers who already have a certain amount of capital and maintain high securities balances are interested in innovative all-in fee models. A smart development that could pay off for banks, too, since those models can be offered at attractive prices (e.g. 1 percent per year) and lead to long-term returns, provided the service packages are clearly defined (with regard to included ETF fees, fund fees, stock market orders). Due to their simplicity, these models are very popular with sales teams and customers and are an excellent tool for explicitly and proactively addressing new customer acquisition and growing existing customers’ businesses.
In today’s modern investment landscape, robo-advisors (digital asset managers) and funded trader programs also play an important role in introductory products for the securities business. However, banks often make the mistake of not integrating these offerings into the existing investment landscape and relying on purely online sales. With the right approach, though, robo-advisor-based asset management aimed at newcomers can be very successful in stationary sales.
The “one-size-fits-none” principle also applies to investment products. Having a predefined selection of strategy funds, often described in very technical terms, no longer meets all customer needs. In addition, sustainability has become a more important topic in the securities business, especially among younger customers. They have a strong desire to make a positive impact on the climate and the environment and contribute to social equality through their own investments. Therefore, a growing number of banks are offering green, sustainable, and fair investment alternatives and integrating environment, social, and governance (ESG) criteria to help make these investment options easily identifiable. This gives young investors the opportunity to invest their money with a focus on returns while promoting sustainability on a global scale. Promoting environmental causes and social change through investment is an effective marketing technique that banks should put front and center.
2. Effective sales support
Banks need to win over their customers as well as their sales staff. To mobilize sales, selling needs to be made as easy as possible. Banks can achieve this by optimizing the customer identification process for new customers, implementing an intelligent sales process, and creating a seamless registration process in the banking system.
Potential-oriented customer segmentation can be used to precisely identify customers suspected of having a latent need to invest in securities. For example, a customer who receives a salary increase of at least 200 euros per month could profitably invest 50 of those euros in a securities savings plan per month. If banks can easily and automatically address these customers in the right way at the right time, they are more likely to make a sale, and salespeople who achieve high success rates due to the integrated data intelligence will also want to close even more deals. This dynamic can be further supported by interactive dashboards that visualize salespeople’s securities management performance and display and compare their results with those of other advisors, teams, and business units.
Customers often think that traditional and regional branch banks are lagging behind online providers when it comes to the user-friendliness and usability of their digital applications. However, more and more customers are impressed by their tools’ wide range of application options and ease of use. In order to improve customers’ attitude toward banks in this regard, banks should offer trial accounts that customers can use to become familiar with their tool.
Digital-savvy customers are used to being able to create a securities account online within just a few clicks and using it immediately. In addition to including a clear call-to-action button on the homepage (e.g. “Open an account now”), banks need to implement an effective end-to-end online authentication process in the background that involves video identification and provides direct access to the online platform without the need to provide any paper copies of personal documents.
3. Introduce negative interest rates
Custodial fees being passed on to customers with high securities volumes in the form of negative interest rates by the European Central Bank is currently a highly discussed topic in Europe. Banks can introduce “flat” negative interest for all customers above a certain securities threshold, or they can use intelligent differentiation that takes into account the intensity of the customer relationship, especially in the securities business. We recommend the latter option, as it’s fairer and increases acceptance among customers, the general public, and the bank’s own sales team.
In specific terms, this involves comparing customer securities with the other business volumes consisting of loans, surrender values from insurance policies, and securities account volumes. The opportunity lies in using the impetus provided by the introduction of negative interest rates to actively target customers who can increase their negative interest exemption threshold or reduce negative interest rates by shifting deposits to securities. Innovative strategies, such as reducing the amount above the exemption threshold by ten percent per year as part of a premium securities savings plan, serve as an additional emergency exit for customers and enable banks to continuously refine their securities business.
4. Financial health programs
Introducing negative interest rates isn’t the only way to encourage the shift from deposits to securities. “Financial health” programs using gamified digital platforms analyze each customer’s current coverage level in a holistic manner and present the coverage gaps, e.g. in yield-oriented investments, in a simple, playful way. The programs use behavioral economic effects to nudge customers into wanting to achieve the next level of coverage, similar to a fitness app. The enormous growth rates of over 100 percent in additional sales that these programs achieve, particularly in the areas of securities accounts and savings plans, prove that this approach isn’t merely theoretical.
The time to act is now
In the persistently low interest-rate environment, yield-oriented customers have no alternatives for investing in securities, and investing in securities is an effective way for banks to decrease earnings pressure. Branch banks should take advantage of the momentum of recent months by removing existing hurdles for customers and sales. Offering attractive entry-level products in the securities business and customer-focused investment solutions can successfully pique customers’ interest and convince them to start investing in securities. Traditional banks are losing thousands of potential customers each day, which represents a major risk to the future of these banks’ securities business. Banks need to develop a clear strategy for attracting new young customers and implement it in the very short term in order to prevent customers from migrating to online providers in the long term.
