Countering The Aging Community Bank Customer Base

Banking's Demographic Problem

There was a time when the average community bank customer was the same age as the adult general population. Over time, due to the urbanization of America, immigration and lack of targeted marketing, this has changed.  Now, the average community bank customer is more than 5 years older than the general population and increasing in age at a faster rate. Rural banks and banks with non-Hispanic customers are aging even faster. As of 2015, we are halfway through the Boomer demographic retirement phase and we can start to say goodbye to one of the most profitable age cohorts banking has ever seen. As this cohort leaves community banking at a faster rate, not only is profitability expected to drop, but the very stability of many community banks is in question. To turn back the ticking of father time, read on.

 

The Community Bank Problem

 

First, if you are community bank, it pays to capture a time series of your median customer age off your birthday data in your account system so you can understand if you have a problem. If you target a particular niche market, then likely you have counteracted the trend. So to if you are in a dynamic urban area such as Houston, Austin, Dallas/Ft. Worth, Seattle, San Francisco Bay Area, Charlotte, Phoenix, Salt Lake, Orlando, Cambridge, Oklahoma City, San Diego, Palm Beach or Nashville (in order) or about 24 areas others across the U.S. whose growth in new households and new business formation likely offsets the age entropy at the bank. However, for a majority of community banks there is no escaping a customer base that is aging faster than the US general population. The chart below is from an average community bank (may or may not be representative of your bank) and the data is against US census data projected forward using government estimates.

 

US Median Age At Banks

 

While the green community bank trend line is representative of an average bank, we point out that the variance between community banks is large. It is not uncommon for a rural community bank to have a median customer age in the mid-50’s. While in their peak earning years now, wealth accumulation starts to slow and then drop. Moreover, once past the mid-50’s the use of the number of banking products gets reduced.   

 

While customer age isn’t that relevant, in itself in terms of profitability, it is the aging at a faster rate than the population that is the problem. For example, many community banks are not well positioned for the record wealth transfer that is taking place (and will continue to take place over the next twenty years. As businesses and estates get past on to the younger generation, assets are less and less likely to end up in community banks. For some banks that are at the upper end of the median age spectrum and are in markets whose population is declining, the writing is on the wall. Without an influx of young adults, there is a natural finite life to many community bank institutions.  

 

Banks Can Counteract The Problem

 

Luckily, the problem is fixable and completely in community bank control. Next to getting a handle on customer median age data, banks that have an aging customer problem can take clear and tested steps to stem the tide of age. Here are the top 5 steps that are most likely to produce the fastest results:

 

  1. Target market new businesses and Millennials: The biggest reason community banks don’t get a younger customer set is that they don’t appeal to a younger customer set and they don’t ask for their business. By shifting the brand to appeal to a younger demographic and executing target marketing strategies, banks can quickly drop their median age. Start by updating marketing materials and expanding your social media outreach. Look for ways to increase engagement. Millennials are known for their interest to buy locally and support the independent business. This is perfect for community banks and we just need to work harder to earn their business.
  2. Increase use of customer-facing technology: This much talked about trend is the reality. Community banks must not only employ remote check capture, mobile banking (retail and business), payments and interactive video tellers but take risks and innovate on their own or with a group of banks. There is so much green field opportunity in financial technology that community banks are in an ideal position to experiment on their own or partner to be the first to come up with a variety of applications that makes banking easier, creates new markets or allows a more engaging financial advisory relationship. Banks need to stop investing in branches and start putting resources behind new web applications and then quickly move to mobile development.
  3. Redesigned Products and Offerings: In addition to financial technology, community banks would do well to work on more appealing products. Cleaning up different types of deposits accounts (hint: drop the checks), restructuring overdraft fees, automating lines of credit, introducing companion debit cards, business starter accounts and having debt consolidation products are all proven ways. The concept here is to design simpler and more flexible deposit and loan options. Non-banks are eating our lunch in this area and it is time to up our game.
  4. Educate: Financial and business education is horrible at schools (for non-business-type majors) and banks can step in to fill the gap for both retail and business accounts. Providing a layer of financial advice will go far to capture a younger demographic.
  5. Expand Geography / Niche Markets: The best way to diversify away from the faltering demographic trends of an area is to change the area. Casting a wider net and targeting certain profitable customer niches assures that your bank mitigates the risk of aging customer demographics.

 

Conclusion

 

This is another case where banks need to build survival strategies into their strategic plan. Devoting resources to brand, culture, products and new delivery will all be steps in the right direction in lowering your median customer age. The key to success is to increase both relevance and engagement and a younger demographic will follow. Layer niche customer segments and expanded geography and you can reduce your median age by 20%. The time to move is now while you still have a profitable customer base. For each passing year it will get harder and harder to reach the bar of relevance that is needed to move a 32-year old established business owner to move their professional and consumer accounts over. Before the large banks and non-banks get too entrenched, community banks need to turn back the hands of time.