The economic principle of replacing existing business
processes and models with innovative and more efficient ones is nothing new. In
banking, it’s more recently become a burning issue, as banks’ customers and the
competition have accelerated the need to think that way: a model that moves
banks from an invisible utility that enables banking and payments services to a
central player in how customers will enable and experience banking and payments
services as part of the connected economy.
In this new model, the competition isn’t the bank down the
street or the one with the most convenient branches. In fact, recent PYMNTS
studies now show that for the first time, consumers no longer regard physical
branches as the criteria for choosing their primary bank. They’re less
important than they used to be – at least in terms of how consumers know and
use those banking storefronts today.
The competition is the FinTech, the neobank, the
mobile-first banking services provider with the slick user experience that
consumers are not used to seeing in much of what they do digitally with their
bank.
It’s the savings app that offers DDA-like services. It’s the
telco that offers a mobile banking-like account for families to use.
It’s the FinTech with an app for teens that teaches
financial and money management skills with checking-like and savings
functionality. It’s the data aggregator that becomes a data and payments
enabler and the next mobile-only bank.
It’s the personal loan platform that buys or builds but
otherwise integrates mobile banking capabilities into their platform. It’s the
prepaid card that functions as a mobile bank account with bill pay
capabilities.
It’s the BNPL provider that adds debit cards and savings
account capabilities to their app.
It’s the collective competition that becomes death by a
thousand FinTech cuts that chip away at the core business of the bank:
attracting deposits, providing services that generate fees and lending money.
The First-Gen Neobanks
In reality, the notion of a “neobank” as a challenger to the
existing bank model is nothing new. Neither is the phone or the PC as an
enabler of banking services innovation.
The difference today, like so many other early incarnations
of technology and new models across banking and payments and the connected
economy, is the evolution of technology, software and devices that provide a
better user experience and can scale, often globally.
The 1980s landline push-button phone was all a consumer
needed back then to do business with a brand-new type of bank that didn’t have
branches. Patented technology encrypted account details and other personal data
so that consumers and these direct banks could do business securely via call
centers. Consumers could use the ubiquitous device on their desk at work or
their living room table at home to manage their accounts. Most of these direct
banks – and there weren’t many – offered a single banking service, usually
high-interest savings accounts, given the newness of this banking concept and
the friction for both the bank and the customer in managing more complex
banking services using only a landline phone.
Bank-by-phone gave way to banking on the internet in the
late 1990s and early aughts. Virtual banks swapped people and call centers with
online engagement and a PC. But it didn’t catch on like wildfire, not even
after most people had PCs and fast broadband. It would take a good 15 years –
until 2015 – before 85 percent of U.S. banks had online banking up and running
and 51 percent of consumers were using it.
In 2021, six years hence and 13 years since the birth of the
smartphone and app stores, once again it’s the near-ubiquitous availability and
accessibility of the phone – this time the one in the consumer’s hand – that
connects nearly all consumers to banking services.
And it has fast-tracked the rise of FinTechs to provide
them.
Today, 86 percent of U.S. consumers say they engage
frequently with a variety of banking services using digital channels, although
the frequency of use – and the intensity of their engagement – may vary by age,
income and other factors. This finding is from a national study of 15,094 U.S.
consumers between April 14 and May 19 that PYMNTS conducted as part of the How
Consumers Live in the Connected Economy research released last week.
But unlike the neobanks of old, where going digital had its
constraints and built-in frictions, tech and connected devices have leveled the
banking services playing field for consumers who aren’t always engaging with a
traditional bank when accessing banking services – particularly the stickiest
and most strategic services.
Oh no – it’s the neobank.
Jamie Dimon has been using the occasion of his annual letter
to shareholders to sound the alarm about the threat of FinTechs to traditional
banks since 2015.
In 2015, the same year that online banking penetration by
U.S. banks hit 85 percent, neobanks Atom, Chime and Go Bank were celebrating
the second birthday of their mobile banking apps, and Revolut, Monzo and Varo
were newborns.
Three years later, in 2018, SoFi would add banking services
to its personal lending platform and Acorns would do the same to its savings
app. J.P. Morgan would launch its own neobank, the mobile banking app Finn,
that same year – only to shutter it a year later.
In 2019, Walmart would announce the launch of a FinTech
accelerator focused on digital financial services innovation for its customers.
In 2020, LendingClub bought a mobile bank, Radius, and Step launched its mobile
banking app for teens.
The common denominator across all of these is the use of
mobile apps and smartphones to enable access to banking-like services. These
FinTechs are not banks, but they function like them, with banks and card
networks in the background to power the services they provide.
Those who keep count report that there are now more than two
dozen pureplay neobanks in the U.S., and many dozens more that are – or will
likely soon – embed banking services into their savings, investment, credit and
P2P platforms. FinTechs that provide Banking-as-a-Platform services help
businesses simplify the extension of banking services to their end users –
consumers and corporates.
Like their 1980s predecessors, the digital-only connection
and a discrete set of services get consumers on board. Their banking services playbook
is fairly straightforward: Get eyeballs with one basic banking service, and
then add more mobile-native features and functions over time.
For those whose app is a prepaid card with a slick mobile
UX, their business models are highly dependent upon interchange fee arbitrage
on prepaid card transactions via a Durbin amendment loophole, and it is that
carve-out (plus venture money) that supports the payment of higher interest
rates on deposits stored on those cards.
Regardless, unlike their traditional banking counterparts,
digital-first wasn’t a shift they needed to scramble to engineer over the last
18 months – it’s how they were born. And it’s how they have scaled their own
growth and captured accounts over that same period of time.
How Consumers View Their Banks
The U.S. consumer and her bank have an interesting dynamic.
First, she trusts her bank. PYMNTS has been doing studies of
consumers and their attitudes toward traditional banks for more than five
years. Nearly all – 90 percent – of consumers say they trust their bank to keep
their money safe, their transactions secure and their information private. The
headlines that report how little consumers trust their banks are inconsistent
with everything PYMNTS has seen for the vast majority of Americans.
At the same time, she doesn’t think of her bank as
particularly innovative.
As we have also consistently seen in our research, consumers
and FIs don’t always see eye to eye on what’s innovative and what might have
been at one time, but is now expected as table stakes. That perception of
innovation has only grown sharper over the last 18 months, as nearly all
consumers have become highly knowledgeable critics of their digital and mobile
user experiences.
Perhaps for that reason, PYMNTS’ recent Connected Economy
research finds that more consumers used mobile wallets for P2P than for paying
merchants over the last 12 months. Those who did use P2P opted for third-party
P2P apps, Venmo and PayPal more often than bank P2P rails, such as Zelle.
Both Venmo and PayPal have invested in a user experience
that is easy, ubiquitous and instant, if that is the desire. Both have invested
in QR technology that simplifies the sender experience and extends P2P and
merchant payment use cases in-store. For consumers, it’s become a valuable
enough experience for both senders and receivers to build the P2P network
flywheel and expand the P2P use cases for both sides.
Then there’s bill pay.
According to PYMNTS research, 86 percent of consumers have
gone online or used a mobile app to pay bills at least once in the last 12
months, and 70 percent do so several times a month. Just because they do,
doesn’t mean they’re using their bank’s online or mobile bill pay function.
More broadly, the consumer’s use of bank bill pay channels
has declined over the last several years, even as more consumers pay their bills
online. Consumers are using old tech and biller direct channels because
suitable options –either online or via mobile from their bank – aren’t
available.
PYMNTS’ Connected Economy research also found that 90
percent of average consumers use the bank’s website or mobile app when
conducting banking services. But more of them use the bank’s website and not
the mobile app – a data point we also see when banks report the number of
mobile users. (It’s also hard to tell in many cases, since not all of them report
online and mobile separately.)
It’s also not because customers want it that way.
PYMNTS has also observed in other consumer banking studies
that consumers consistently report using bank websites to conduct banking
activities because they have to.
They report that the functionality on the mobile app is too
limited or not available at all for the banking services they want and need to
complete. If available via the app, they report a clunky user experience that
makes it too difficult to conduct more complicated banking activities via the
bank’s mobile app.
The Known Knowns
None of this is news to the banks. What may be, is the
diversity and intensity of threats now to their core business – and all at the
same time.
Mobile is an area that until recently, banks have
undervalued and underinvested in because they didn’t think that neobanks with
their mobile apps were much of a threat and particularly, not a threat to the
customers that represent their core business.
It’s also largely the case that that the prepaid cards with
a better mobile app won’t today pose much of a threat to the bank’s primary
customer base.
But there’s the risk that these neobanks will add P2P, bill
payment capabilities and BNPL options as part of their already pretty slick
mobile experience. Even before that, there’s the risk that more consumers will
open accounts with them for specific use cases rather than using their existing
bank account or opening one with their bank account because the account
onboarding process is too hard. Or they might establish relationships with
purpose-built mobile banks that build services around the needs of a particular
cohort of consumers, and who have traded a product-first focus for an
experience-based, outcomes-driven value proposition.
It’s the risk that more consumers – particularly younger and
more affluent 33 to 43-year-old bridge millennials, most of whom have and use
credit cards today – will increase their use of BNPL options, cutting into
credit card fee income even as banks sweeten the rewards pot.
And there’s the desire on the part of all consumers – in
particular, the highly connected, younger and more affluent consumers – to use
mobile devices to perform banking services, and who might be willing to build a
relationship with a FinTech brand they trust and evolve it over time.
This is also a tough transition for banks, since even moving
from batch to real-time clearing and settlement remains a work in progress for
many banks. According to The Clearing House, the availability and use of
real-time payments remains inconsistent, even as large banks and core banking
platforms are now connected. Use cases and applications that ride those rails
will drive innovation at scale over time.
In many ways, banks face the same tough transition that
millions of traditional brick-and-mortar retailers – with legacy point of sale
systems with integrated custom software and a myriad of customer databases –
now face, as they, too, suddenly shift digital and mobile. And to deliver one
with a user experience that’s on par with established digital and mobile
players like Amazon, and mobile- and digital-native innovators at scale.
Like physical retail, the largest of the large have or will
invest in making their mobile app best-in-class, and they will consider new
tech, platforms and business models to accelerate that path. Grocery stores
outsourced eCommerce to Instacart out of necessity, growing sales and acquiring
new customers as a result – while at the same time giving customers the option
to deal directly with their store. Banks may need to think outside of the box,
too, as they contemplate serving a more demanding mobile-first consumer and the
need to move faster in delivering on their requirements.
What’s Next
PYMNTS’ Connected Economy research shows that consumers want
to live in the connected economy, make their interactions within the pillars
that define it more efficient, and even streamline their interactions across
many of them.
All but how they bank.
For most consumers, keeping their banking and money
management activities separate from other connected economy activities is their
preference. They want a more robust banking and financial services ecosystem,
but one that is under their control, where their details are private, secure
and shared with their permission, and not commingled with other activities.
We see the TCH RTP® network piloting Request for Payment to
help banks bring bill pay back into the bank and the mobile banking experience.
The opportunity for consumers to pay a bill and have it posted in real time –
24/7/365 – is potentially a game-changer for consumers, provided that bill pay
details are enriched inside of the app. On that front, innovators are working
with the banks to provide more transaction clarity and digital receipts, which
will help.
The ability for Zelle to clear and settle P2P real-time over
RTP rails can make bank P2P more competitive as network availability matures.
That lack of ubiquity and certainty on the part of the sender and receiver
deters bank P2P adoption at scale.
At the same time, card networks are innovating installment
credit with existing credit lines for their issuers, at the same time that
banks and credit unions are investing in building BNPL options. Big banks are
piloting programs to make credit more inclusive by using non-traditional data
sources to underwrite consumer credit risk.
It’s progress, but reactive – a response to the FinTechs
that are getting traction.
Banks have the trust of the consumer and the building blocks
to serve as a key player at the center of the consumer’s financial services
ecosystem – with the potential to reimagine what that means for themselves and
the consumers and businesses they serve.
Their biggest threat the single-feature mobile app that one
day becomes a more robust mobile banking option. It’s taking too long to
recognize that consumers won’t keep waiting around for them to play catch-up.
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