Large vs. Community Bank Customer Demographics and Rewards Program Participation

By Paul McAdam, SVP, Research and Thought Leadership

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In my past two articles I’ve discussed challenges and opportunities associated with community banks and credit unions that are driven by the characteristics of their retail customer bases. Although community bank customers and credit union members are more loyal to the financial institutions where they have their primary checking account relationships, they are not as profitable to their institutions as the average bank customer. The affluence gap between community bank customers and the average bank customer limits opportunities. In contrast, the level of affluence of the credit union member base is consistent with the average bank customer, but credit unions capture a smaller share of the financial wallet from their members.

This month’s article analyzes the characteristics of the U.S. “large bank” customer base. Our analysis defines large banks as the 12 institutions that have more than 1,000 branches. In particular, I’ll talk about differences between community bank and large bank customers, differences in loyalty program participation, and how these factors drive variations in consumers’ financial behaviors.

Analyses cited in this article are generated from primary research conducted with a sample of 3,345 adults with checking accounts conducted by FIS™ in August 2011. Large bank customers account for 52 percent of the representative sample. And, because they are such a large percentage of the bank customer population, their characteristics are often similar to the norm.

Demographic Differences

One big difference between large bank and community bank customers is their place of residence (Figure 1). Large bank customers are less than half as likely to live in small town/rural areas while community bank customers are concentrated in small town/rural and small metro markets. Large bank customers tend to reside in mid-size/large metro areas – areas where growth tends to be faster, job opportunities more plentiful and incomes higher.

Another significant demographic difference between large bank and community bank customers is lifestage (Figure 2). On average, large bank customers are younger than community bank customers. Lifestages of large bank customers tilt toward Gen Y (20- and early 30-somethings) and, to a lesser extent, Gen X (mid-30s to late 40s) while community bank customers are older and particularly concentrated in the Mature lifestage, which is composed of consumers who are more than 65 years old. Differences in lifestage drive a large part of financial behavior as younger lifestages are nest-building and accumulating and older lifestages are clearing out their nests and preparing for retirement, if not already retired.

The geographical and age differences between large bank and community bank customers influence other demographics, which affects financial behaviors. Large bank customers are:

A little more likely than the national average to be employed while community bank customers are much more likely to be retired;
Seven percent more likely than the national average and 28 percent more likely than community bank customers to be college graduates;
About as likely as the national average but 15 percent less likely than community bank customers to be married/living with a partner;
Above the national household income average by about five percent but well above (18 percent higher) the average household income for community bank customers.

The favorable demographics of large bank customers help these financial institutions capture higher deposit and investment balances as well as higher loan and credit card balances on average (Figure 3). Among customers who have their primary checking account relationships with large banks, they hold an average of nearly $36,000 in deposits and investments and about $31,000 in loans and credit card debt with their institutions. Community banks are able to capture about $32,200 in deposits and investments but, at about $16,300, fall well short of the amount of loans and credit card debt that large bank customers have with their institutions.

Because older customers tend to hold higher deposit balances, the older community bank customer base’s deposit balances are relatively high given their earning power. Older demographics are a double-edged sword, however, because they also dampen the need for loans. The biggest difference between large bank and community bank customers in lending behaviors is found in the category of first mortgages on the primary residence. We see significantly greater dollar amounts in first mortgages held by large bank customers with their primary financial institutions, which is reflective of their younger, more accumulative lifestages as well as higher real estate costs in the more urban areas where these customers tend to reside.

Demographic differences between the two customer bases contribute to large bank customers’ greater likelihood of being profitable compared with community bank customers (Figure 4). An estimated 41 percent of the primary checking account relationships of large bank customers are profitable compared with only 34 percent of community bank customers. Our research took several factors into account in computing estimated profitability including fees, interest income and payment and channel usage. Other factors that contribute to the higher profitability of large bank customers are higher fees charged by large banks and usage of lower-cost channels by their customers.

The Loyalty Advantage

Although large bank customers are more likely to be profitable, community banks hold the edge on the issue of customer loyalty. Only 39 percent of large bank customers exhibit some degree of loyalty, but 54 percent of community bank customers are loyal. Our research scored customers’ loyalty to their primary checking account providers based on several factors, including: trust in their institutions and willingness to recommend; willingness to make a repeat purchase and consolidate funds; and identification with the institutions’ brand values.

The gaps between customer profitability and loyalty highlight the key challenges faced by both large and community banks.

Large banks have a higher portion of primary checking account relationships that are profitable, but could perform even better if they increased the portion of loyal customers.
Community banks generate strong loyalty, but capture lower profitability due to customer demographics and lower cross-sell of loans to existing checking account relationships (particularly first mortgages and credit cards).

Our research also reveals significant differences in rewards program usage among customers of large and community banks and suggests how these programs can provide remedies for both types of institutions.

When comparing the customer bases of large and community banks, a much higher portion of large bank customers participate in their providers’ loyalty programs (Figure 5). Twenty-three percent of large bank customers participate in their primary checking providers’ checking account rewards programs, 31 percent participate in their providers’ debit card rewards programs, and 26 percent participate in the rewards programs of the credit cards offered by their primary checking account providers. Participation rates in these same rewards programs by customers of community banks are significantly lower (ranging from 10 − 13 percent).

These rewards program participation rates contribute significantly to the customer profitability differential between large and community bank customers because:

Banking customers who participate in any of these three rewards programs (regardless of the size of the institutions’ offering the programs) are 100 percent more profitable than customers who do not. Large banks realize rewards program participation rates 2 − 3 times higher than community banks.
Among all primary checking account customers who participate in any these three varieties of rewards programs, large banks generate higher levels of profitability than community banks.

Drilling deeper into this second point on the profitability gap between large and community banks, our data reveals the following:

Among large and community bank customers who participate in their primary providers’ checking account rewards programs (the 23 percent and 13 percent in Figure 5), large banks generate average customer profitability 48 percent higher than the profitability attained by community banks.
For debit card rewards programs, the average profitability differential between the participating customers of large and community banks expands to 199 percent − three times the profitability.
Among large and community bank customers who participate in the credit card rewards programs offered by their primary checking providers the average customer profitability gap narrows to a four percent difference in favor of large banks.

So clearly the large banks have a rock solid business case for driving customer utilization of rewards programs. In addition, there’s strong evidence that rewards programs are the secret sauce that encourages some large bank customers to consolidate balances and keep the bank’s payment card top-of-wallet. In other words, while these consumers may not feel a particularly strong sense of “loyalty” toward the large bank, they value receiving competitive products and the benefits associated with rewards programs. Thus in the expansive, mass-market distribution networks of the large banks − where achieving high levels of sales and service consistency will always be a challenge − rewards programs are the glue that encourages some customers to expand and maintain their relationships.

Community banks face a different challenge. While it’s true that some community banks do not place a high degree of strategic emphasis on retail credit card programs and residential mortgage lending, there is evidence that card-based and relationship rewards programs can boost profitability. Recall from Figure 4 that although community banks have a large loyalty advantage relative to large banks, this doesn’t necessarily lead to wallet share and customer profitability advantages. As this article points out, customer demographics certainly influence this, but there’s no reason to believe that community banks cannot also use rewards programs to their advantage to significantly increase wallet share and profitability. Community banks excel at a model of providing high service levels through local presence and decision making. Driving customer rewards program participation beyond the current levels of 10 to 13 percent of primary checking account relationships can fortify the community banking business model and help attract younger customers.

I’d be interested in your perspectives and experiences on the impacts that customer rewards programs have had at your institution. Feel free to contact me at paul.mcadam@fisglobal.com with your comments or questions.