‘If you can get Gen Z right, it’s going to build your bank for the future’: Citizens Bank’s Vice Chair, Brendan Coughlin

On today's episode, we have Brendan Coughlin, Vice Chair and Head of Consumer Banking at Citizens Bank, guiding us through the intricate world of banking transformations and how they're catering to the evolving needs of customers, including the Gen Z demographic.

The conversation unfolds as Brendan shares invaluable insights into the big shifts within the banking sector, accelerated by the pandemic's digital thrust. He delves into how Citizens Bank navigated this change, emphasizing the critical role of digital while recognizing the enduring significance of in-person interactions, especially for Gen Z, the true digital natives.

We explore the profound evolution of customer expectations, moving beyond mere convenience towards value creation and personalized experiences. Brendan sheds light on Citizens Bank's strategies, like the bank’s "Citizens Plus" rewards platform and its proactive approach to financial advice, leveraging data and analytics to enhance customer financial confidence.

The discussion extends beyond products and services to encompass broader economic environments, unveiling Citizens Bank's strategies in navigating economic challenges, their differentiation in the highly competitive landscape, and its concerted efforts to provide a holistic view of customers for personalized offerings while maintaining data privacy and customer trust.

Here’s my conversation with Brendan.

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The following excerpts were edited for clarity.

Adapting to changing consumer expectations

It's no secret the banking industry, and for that matter, retailing in general, was in the process of a pretty broad-based business model transformation led by advancements in technology and digital. And when COVID hit, it was a bit of a forcing function, out of necessity of life that customers that may have been more reticent to engage in digital were forced to go there. And it really accelerated the world's transformation into being a digitally fueled economy by at least five or seven years. There's no doubt that that happened in banking.

What's interesting, and what's emerging, is a banking industry post-COVID that is very much accelerated from a digital perspective. But brick and mortar and human interaction still is very critical to the ecosystem of how consumers want to bank and how they want to do their banking. That is a transformation that's going to naturally happen over the course of the next handful of years and continue to accelerate. If you look at Gen Z, which is really the the world's first truly digital native audience, that's where the world is going. I think it can be a bit of a beacon for how banks need to run themselves long term.

Targeting Gen Z

If you can get Gen Z right, it's going to benefit your other segments, but it's also going to build the bank for the future. And now what we see from Gen Z is an audience that prefers to do all of their day to day banking in a simple, frictionless, no nonsense way. And that's led by digital -- everything needs to be one click, simple, easy, don't make me call, don't make me walk into the branch for the basics.

But when you move from basic banking, move money, see my balance, make a deposit, when you move from that to help me understand how to pay for school, help me understand if I should buy my first home, help me understand how to think about starting my retirement savings, they actually are asking for that to be in person. So it's actually stimulating a fairly broad-based transformation in how banks work from the inside out, that we have to think very differently about the role of physical channels and the type of people that we stack them with, how many we have, the type of technology that we invest in, and how to deliver digital advice to various different segments.

Advice helps clients feel more financially secure

People think about digital and the natural first reaction is, it's all about technology and what's in the palm of your hand. While that's true, that's an incomplete way to think about digital. I'll rewind you back 20 years ago, and one of the truths in financial services is that customers of all fluency would tell us that they don't feel financially confident and financially empowered. The reason for that is that to be close to your money, you are manually balancing a checkbook -- you need to do a lot of work to be able to stay close to it. And honestly, it is too much work. So customers just didn't do it, whether you are high net worth or whether you are living paycheck to paycheck. So the advancements of digital actually now put all that data in the palm of your hand.

Digital is not just about simple transactional banking in a self serve way. It's about making your customers feel more financially confident and empowered. So you know, you have a gym payment coming on Friday, but you don't have enough money. Let's alert the customer and tell them they need to move money into their account or more strategic things like, you spent a lot more money this month on restaurants than you did last month. Was that intentional? Here's how that works with your free cash flow. Let us help you and provide you advice.

All of these things lead to a client feeling more financially confident, and that's without human interaction, but then that makes the human interaction that much more impactful for the client when you can get insight at scale and help people feel better about their money. They feel better about the brand and then they want to trust you more and want to interact with you on things like buying their first house or retirement.

Proactive advice vs. alerts

I'll remind you back to banking of yesteryear. When we surveyed customers why they would pick a bank, it was for one reason really and that was convenience. To them convenience was defined by the proximity of your physical network, how closely your branches are, your ATMs -- essentially, all banks are the same other than that. So if you win the convenience game, you win the relationship and market share.

Now, when you ask customers about that, you're getting different answers. They're picking banks based on value creation, the value prop you bring to them. Yes, indeed, convenience. But convenience is now defined by the simplicity of digital versus physical. And it's become table stakes versus a differentiator. So banks need to win on advice, on products and services, on differentiation, on value creation, not on convenience and proximity to your home.

So it's forcing a very different model for banks to win long term. And to your question, a big part of that is personalized digital experiences -- that's a big value creation for the client. And it's got to be proactive. Banks need to view themselves as a real adviser to their clients and really help them through life's journey in a seamless way, whether it's day to day banking, or big life events.

To be honest, our industry really viewed itself as a more transactional way for the customer to come to us. And then we'll do a great job serving them, and we don't really have our arms around the data and information, we don't really have a great way to reach out to them until they walk into us. And so it's a very reactive model. So you've got to win on value creation, and you got to win on proactiveness. And, if you look at our industry, there were 7000 banks a couple years ago. There's 5000 now, and there's going to be a lot less than 5000. It's impossible to have 5000 truly differentiated value propositions across the United States.

So this dynamic is going to also force the industry to consolidate and provide more scale offerings on tech and brand and products to customers. So this digital movement really is much more than widget technology. It's really a revolution over time, around what banks do, how they serve their customers, how many will there be, and what customers really value out of banks.

Banking's biggest challenges and opportunities

It's an arms race on speed on some of this stuff -- how quickly you can actually make your experience really frictionless and be a digital first bank. It's table stakes. If you're running a customer experience that requires you to fax stuff in, send paperwork, sign with a pen and paper, you lost the game right there. So banks first need to think about just taking away the potential negative images, really making the bank work in a much more seamless way. It's easy to say, but it's really hard to do, to change the way an organization works from the inside out. But then you really have to look in the mirror and say, What is differentiated about this firm? How do I create value for my customer that's truly different than the bank next door?

Things that we've done, as an example, on our everyday products and services -- we introduced early pay. So your your employer wants to pay you on Friday. We took it upon ourselves to pay you on Wednesday, because we know the money's coming. That's a great benefit for some clients that live paycheck to paycheck. But even for folks that don't need the money two days earlier, what a brand message it sends, to say your employer is going to pay you on Friday, but we, your bank, took it upon ourselves to give you the money early. That builds trust.

We dramatically overhauled our overdraft practices, eliminating almost 90% of our overdraft income over the last couple years. That's taking away a negative but those are things that, disappointingly, have been unexpected from the banking industry over the last bunch of years.

We've innovated around student lending, around payments and our Citizens Pay business. I don't mean this to be just a hit list of all the wins that Citizens has had, but it gives insight into the types of things that banks need to do now to position themselves to be differentiated and when it's those types of things versus what they've done in the past, I'm not sure banks had that innovation edge. But honestly, they didn't need it. You could be the most innovative bank in the world, but the bank next door was going to win because they had a better branch location. It just didn't matter as much. And now it does. It's just not the muscle that banks have historically built.

How regional banks compete today

Look, in some ways, it's a normal cycle. In some ways, there are a couple of elements that there's nothing normal about it with higher rates of potential pending recession. These are things that banks deal with: cyclical. But the pace of rates and how fast they went up, the unnatural level of stimulus that came into the economy during COVID, I think, in hindsight, clearly overstimulated the economy. There's no model that really can accurately predict the knock-on implications around things like inflation, how sticky and how persistent it is going to be. The Fed made no secret about it: mission number one is killing inflation. And so they're going to do everything in their power to do that and they are, with the pace and speed of raising rates, with pulling deposits out of the banking system and into the Fed, all these things are putting pressure on banks.

Then you add the bank failures of March with SVB, First Republic, Signature Bank, and so on, it's really creating a bit of a stressful ecosystem.

The solution is actually simple, but quite hard to execute. At the same time. If you take care of your customers, and they're highly engaged, and they trust you, you have nothing to worry about. If you've got a diversified business model that has stood the test of time, you have nothing to worry about. And so when the bank failures happened in in March, actually, we had to open up our branches for longer hours, because we were viewed as a flight to safety in the market. We had literally lines down the streets of SVB and First Republic customers that were pulling money and coming into Citizens -- a lot like they were doing at the big banks.

The Citizens turnaround story

We've navigated it quite well. I think we benefit from the fact that our business model at Citizens is heavier consumer banking on the deposit side than commercial banking. When you look at our business, 70% of our deposits are consumer. 70% of them are FDIC insured. And so the volatility that some other banks saw just didn't exist in the Citizens business model. So we're able to play a lot of offense. And in fact, you may have seen that we went out and actually hired a lot of First Republic bankers and started to build a private bank inside of citizens.

We took the opportunity to say, with the disruption in the market, this is moving day, this is when brands separate themselves, your job number one is manage the crisis well, but if you can play some offense at the same time, you can emerge from this in a much better spot.

We went public in 2014, and we've been a big transformation turnaround story. What we've been saying is that we have out-innovated our peers. At a minimum, the structure of this bank now looks similar to other banks, and we're on a path to be very differentiated. That's how we're performing. Our credit has been exceptionally well behaved. The health of the consumer is still really strong. They have more deposits on average than they did even pre COVID, despite them starting to pay it down a little bit more. And our deposit book has been in growth mode, more so than other peers.

So we know we're winning the market share gain, and we're doing things like the private bank. We bought a couple of banks, and we're entering New York City and New Jersey with some real muscle. We're excited about how we're performing. Nobody wishes an economic crisis or a recession on the economy. But from a business standpoint, sometimes that provides the greatest opportunity to differentiate yourself and take share. That's how we're looking at it.

Differentiating banking in a competitive market

We have a lot that's very different than other banks. If you think about it first, from a products and services standpoint, we've got a top three student loan business in the US. There's not really any other significant regional player that has the share we have. So we think about attracting Gen Z, attracting the HENRY audience, doing student loan refi is allowing and helping people get to school, that's a very big differentiator.

Our consumer lending platform, overall, is incredibly differentiated. We're the number one home equity originator in the US right now. We're leveraging that to go attract mass affluent customers. There's never been more equity in folks' homes than there is right now across the US. And folks financed mortgages at 3% rates that they're never going to touch. The only way to tap into it is a HELOC. And the good news is consumers are using it in a much more responsible way than they were in 2005, 2006, and 2007. You're seeing a bit of a home equity boomlet, and we're leveraging that product to actually drive household growth.

I mentioned some of the transformation we've had in our deposit business on really simplifying the offerings. Doing early pay, doing a 24 hour peace of mind grace period on overdraft -- we also launched a product called Citizens Plus. Many banks are very siloed in the way they think about their products. Citizens Plus is a rewards platform that cuts across all of our products and services. The mindset is if you do more with us, you're going to get more. As you do more of your banking with us, your credit card rewards go up, your discounts on loans go up, your deposit rates go up. We're really trying to bring a proposition to the market that rewards customers and incent them to do more with us. So that's very differentiating. And a lot of banks have a hard time doing that, because they've got individual businesses that don't work as closely together as you'd like.

Our wealth management practices are growing and then certainly this move in the private bank has been very distinctive for us on building out an offering for high net worth and ultra high net worth. Taking a play in the innovation economy, a lot of the bankers we brought over are expert in venture banking, private equity banking, and we use it for an end to end ecosystem of bank the fund, and then go bank the GPs and the LPs to bring private bank to them and bank them personally and bank and get their wealth management.

De-siloing behind Citizens Plus

You have to start with a team oriented culture inside the bank to get the organization realizing we're here for one mission, one mission only, which is to serve a customer end to end. Legacy banks, organizational constructs, in some cases, unintentionally had banks lose their way in that regard as folks are more focused on the product that they're offering and the way regulation is written and the way technology is built in the country. It's all by product. And so it's natural to get buried in your silo.

We've been on a mission to break that down. We've created the right incentive system inside the company, the right technology linkages to say we're all here for one reason. The customer has no idea that we have a home equity lending division, or even more systems like that, and they shouldn't care. That's the sweet spot that a bank like Citizens is in -- we're big enough to matter for the US economy with a top 10 retail and commercial bank. We've got the scale, we've got the offerings that are sophisticated, that can compete with the smaller banks. But we're small enough that we can do those types of things so that it's easier for me to bring that together than it might be at a money center bank, a top three bank where their businesses are so big, so massive, that bringing it together in that way is just a bit more challenging.

We looked at the financial implications. We looked at the customer benefit. And we said, okay, you know, credit card team, you're going to give away more rewards, and that's okay, because we're going to get more deposits, more wealth, and the customer is going to be happier. They're going to stay with us for longer. Let's bring this all together with a look at the top of the organization. Easier said than done, but we successfully did it. And I think it's going to ultimately pay a lot of dividends, not just for the bank, but most importantly for our clients.

Putting the customer at the center with data

We've made a lot of investments in data and analytics. From a marketing perspective, we've got really good predictive modeling that says, okay, here's what the customer may likely need. Here's how we want to arbitrate -- do we offer them a mortgage versus a credit card versus the deposit relationship so we're doing the right thing based on the customer and based on what they need?

But, you know, in general, I think banks are just scratching the surface on their full potential in how to leverage data and information and behavioral trends. Not just from a marketing and revenue capture standpoint, but from an advisory standpoint, to be that trusted advisor, that you can look at their free cash flow and say, Oh, geez, you could spend three or four months in a row that you've been living paycheck to paycheck. That's out of the norm. Do we need to talk and sit down and think about whether it's spending behavior? Do we need to think about offering capital to help restructure some of your debt to free up?

Those are things that I think are uncommon for banks to do really well. We've started down that path and you have to be able to deliver it digitally. You got to be able to deliver it in a human way. So connecting in those insights into the distribution channels to do it in a seamless way is important. And we've done that. But like I said, I think banks have just started scratching the surface. Put on top of that things like some of the machine learning, AI kind of technologies that are emerging now, and the potential to be able to step up and be an even more helpful partner to our customers is very real.

We have so much data that there's a trick of not trying to scare anybody with big brother information either. So we're threading that needle on what our customer's ready for in terms of the advice that they want, and us using the data to try to be helpful to them to make them more financially confident.

The potential of AI in banking

There's huge potential in AI long term. But I say that also with a word of caution. I think banks and industry in general needs to be really careful that they understand what they're doing, how to manage it, that it's delivered well to customers. ChatGPT can scan a lot of information. I guess the industry word that people are using is the models can hallucinate a little. You can Google anything you want on the internet and find bad information. So you have to be really careful.

As an example, this is public information, so I don't mind talking about a competitor. When Goldman Sachs launched the Apple Card, they got in a lot of hot water for using black box AI models for underwriting. It turns out it mis-underwrote women, and had a disparate impact. They're too unintended. So you have to be careful about those consequences and really make sure that you've thought it all the way through that when you add something like that, it's helpful, but also controlled, and you're protecting against unintended consequences.

There's huge benefits on basic use cases here. Here's an example. So in a call center context, today agents take a call, they hang up the call, they put it on hold, they take some notes to make sure that we're following up with the customer. With generative AI, we can listen to the call and have generative AI transcribe those notes right there in the system, so the agent doesn't have to do it. And they can, instead of taking five minutes, they can take 10 seconds to scan it to make sure it's accurate, and then get on the next call. So we can dramatically improve productivity by taking out some of these tasks. There's some basic stuff like that, maybe that's not transformational, but if you add up a bunch of those use cases, there's a lot of value that can be created to run the bank better, to add customer value.

With these new technologies, people usually get very excited before there's like an excitement curve -- a lot of excitement then a lot of fear. And then you find center. You've just got to be rational and understand both of those dynamics.

The evolution of the bank branch

I believe location -- physical location -- is a strategic imperative to be successful as a retail bank long term. If we think about our marketing we do, as an example, whether it's digital marketing or direct mail, the responsiveness of prospective customers falls off a cliff when you exit a trade area where we don't have physical presence. That tells you customers, while they might not want to come to the branch all the time, they do not want to bank with a bank that does not at least have that option for them, should they need it. So it's a safety net, peace of mind thing. So if you don't have physical presence, you're really out of luck. I start with that -- that you need physical presence. I really don't see that changing at scale.

There haven't been very many pure play digital banks that have been wildly successful. Now, they have been point to point on a product, on unsecured lending, high high yield savings, or a mortgage. But in terms of being your primary bank, there's really not a lot of pure challenger. There is just Ally and you could argue USAA, but they're such a unicorn that it's not really good comparable for most banks. So if you take that as a given, that you need some level of physical presence, what banks like Citizens are doing is saying, okay, we have almost 1200 branches. And you know, in the past, they were kind of one size fits all, they all did the same thing. You had to have them in every neighborhood, you had to be close to where they live, close to where they work. It's okay to not be like that anymore. So we're spreading out, we're shutting some redundant branches down.

And then instead of having one size fits all, all over the place, what's emerging now is the needs of clients are so diversified, so different, and the frequency is very different. So I can have a big hub branch in a very strong community that has wealth managers and mortgage loan officers, and business and retail bankers. It's a full service giant branch. And then around it and surrounding communities, I can have various different formats of satellite, hub and spoke, and the spokes can be cashless, advisory based, automated teller.

We have 100 branches that don't have teller lines, and they have video tellers, and we take the cash out of them, allow people to do basic transactions. But if they need to have a cash transaction or foreign exchange, it's a mile and a half down the road. And the frequency of those transactions are happening in a diminishing pace -- customers are accepting the need to drive, not drive forever, but drive in a reasonable area.

So the whole format is changing. The level of innovation on the types of formats is changing, the density is changing, but you do need them. And then what that also forces me to do, it's not just about the physical presence, because the day to day banking is happening on your phone, the type of people that I need in the branches are different. So when you do walk in, the likelihood that you're coming in to talk to me about something much more important is much higher. So we're training people, we're hiring higher end people to really move much more to an advisory model in the branches. Because I don't need as many folks that are just there to turn the crank and process widgets, customers in a lot of ways they're doing that on their own.

We put all kinds of development programs in place for our retail colleagues and branch colleagues to step up to the plate, learn how to be more advisory, learn the more sophisticated conversation. So it's really a sea change on how you weave those two thoughts together. Yes, you do need branches. It's a critical imperative. But yes, also, they will be fundamentally different in terms of the use and the type of people that are in them.

2024 priorities

I'd bucket it in two camps. One is just the macro economic backdrop and the state of consumer confidence is challenging. In the short term, it's run the bank. Make sure we have our arms around credit risk. Make sure we're managing our deposit strategy well, and being there for our customers. With mortgage rates at 7%, it's challenging for our customers and their deposits. Before COVID, our customers had $17,000 on average and deposits. At the peak of COVID, they had $24,000. Now they have $20,000. So they still have more deposits than they did before iCOVID, but it's starting to burn down. The stimulus is starting to burn down. We're on a path of normalization -- there's a chance that there's some financial distress in the market. So mission number one, being a trusted adviser, is run the bank well, and take care of our clients and make sure we recognize the stress that they potentially are under, and we're there to help.

Then two is just this dramatic transformation happening in our industry. We're marrying that macro backdrop with an industry that's transforming faster than it has in the last three decades. And so how do you play offense selectively? How do we build the right technology stack? How do we really digitize this bank? How do we build up wealth management? How do we build this new private bank? How do we bring our products and services to life for our customers, build personalized experiences, really reframe the physical network like we just talked about?

So there's a lot of strategic stuff we're doing. That's the challenge of any bank right now: balancing all of those things is somewhat overwhelming and figuring out which bets to make. The first piece is really important. But speed also matters. The faster banks can get to the other side of the transformation, the more likely they're going to be in the winner's circle to take market share. So it's a tricky time, but it's exciting. Certainly financial services right now is not a Steady Eddy, sleepy business. There's a lot of complexity and depth to what needs to happen right now in our industry to separate the winners and losers.