The question “will technology disrupt retail banking?” is a common talking point among the banking industry right now. The current rate of investment is on pace to exceed $1 billion this year, double the total from 2018 and more than 6 times the total from 2017. Dealing with finances is a common stressor in our society, but will technology disrupt your retail banking? Read the article below for more information.
Disruption is a word Silicon Valley loves to throw around when it comes to life-changing innovation. Disrupting the banking industry is somewhat of a holy grail and investment to that end is now picking up steam, with over $750 million invested year to date in challenger banks in the US according to CB Insights. The current rate of investment is on pace to exceed $1 billion this year, double the total from 2018 and more than 6 times the total from 2017. Not counted in this data are foreign challenger banks like N26 and Revolut making their way into the US and other consumer finance companies launching checking and savings accounts, from lending company SoFi to stock trading app RobinHood and roboadvisor Wealthfront.
So how are all these companies changing the way their customers manage their money? Not drastically, at least not yet. Challenger banks have so far focused on lower fees, earlier access to direct deposits, higher interest rates, and better service. Improvements? Sure. Disruption? Hardly.
Challenger banks claim that their streamlined operations and lack of brick and mortar locations enable them to eliminate maintenance fees, but some incumbents like USAA have already matched them with no checking account minimums or fees. Similarly, while overdraft fees are a huge problem, to the tune of $33 billion a year, there is a difference between eliminating fees for overdrafts and eliminating overdraft protection. Chime, for example, eliminates overdraft protection, meaning they will reject transactions that would take an account negative in the first place – something all banks already offer by law. Varo Money does actually offer no fees on overdrafts as long as the overdraft is less than $50, but is subject to certain other conditions including that you employ direct deposit of at least $1000 a month in your account.
Early access to direct deposits sounds appealing, but the actual benefit compared to direct deposit at any other bank is less obvious when looking at the fine print. As for higher interest rates, digital banks have been offering meaningfully higher ates since at least 2001, and while they’ve proven to successfully attract customers and deposits, the rate at which customers are leaving the big incumbent banks have not been significant enough to cause those banks to increase rates to compete. Chase still offers a measly 0.01% on savings accounts, and is by no means struggling for deposits.
New competitors also claim a better user experience, with slick mobile apps and better customer support. Immediate notifications for new transactions and a better interface are nice to have, but likely not enough to get mainstream consumers to switch banks when 2% higher interest rates didn’t already do the trick. Moreover, the incumbent banks have invested significantly in improving their own mobile apps, and will continue to catch up here. Chase’s mobile app is much improved, and Wells Fargo recently launched Control Tower, a feature to help you manage subscriptions, likely inspired by success of apps like Trim and Truebill.
Will these upstart companies acquire customers? Certainly, they already have in surprising numbers. But displacing, or even competing with, top tier banks will take a whole new approach to the way consumers manage their money. According to Lindsay Davis, Senior Intelligence Analyst at CB Insights, “Challenger banks have proven they can acquire customers. Key to keeping customers engaged is predicting what new services to launch ahead of their needs.” Indeed most consumer fintech companies are planning new features in pursuit of more or less the same goal – to be the main hub for your finances – but are approaching this goal in different ways. We are still in the early innings of how this will play out.
What would real disruption in banking look like? Sorry Chase, but it likely has nothing to do with emojis (RIP Finn). Real disruption means going above and beyond current product offerings to help customers reach their financial goals – whether paying off debt, buying a home, or saving for retirement. Here are a few ways that could materialize:
A holistic view of your finances
The bank that allows you to view, and manage, your entire financial picture in one place will have a huge advantage. This means your checking and savings accounts, credit cards, student loans, mortgages, car loans or leases, retirement accounts, brokerage accounts, and even your insurance accounts and upcoming bills like rent and wireless. In addition to a better user experience for the customer, it also means more data for the bank to help them compete effectively for some of these other products. To do this effectively may require an intervention from regulators in the US to spur open banking. According to Davis, “unlike Europe where banks are required to open up access to customer data via regulations like Open Banking and PSD2, the US regulators have been slower to force banks to open up to startups despite the demand from consumers for access to their data. Downstream, consumers are ultimately hurt because of the quality and accuracy of the data fintech startups can access.”
Ideally this means the user can manage his or her entire finances, including executing transfers, payments, and trades, without ever leaving this financial hub.
Timely, Actionable, and Unbiased Recommendations
Should you use that tax refund to pay down your student loans, or fund a new brokerage account? Should you open a traditional or Roth IRA? What credit card is best given your spending habits? Maybe you’ve realized some capital gains this year and should be paying estimated taxes to the IRS each quarter? Most people don’t know the answer to these questions, and in some cases don’t even know these questions should be asked. With the advances in artificial intelligence, personal finance apps are starting to make significant strides on offering automated financial advice and this will only improve going forward.
A truly seamless experience would ensure these timely suggestions are accompanied by a simple button to act on that advice. Imagine a notice from your bank letting you know how much you can save by refinancing your mortgage, and a push button approval to go ahead and do it all for you in the background.
The key to doing this successfully and earning customers’ trust is to not only push a bank’s own products. The trust a bank could gain from offering unbiased advice (even if that means recommending a competitor’s product), and the ensuing data collected from the user, may very well end up being more valuable than consistently cross-selling the bank’s other inferior products. Doing so will help the bank determine where its products fall short and innovate or improve accordingly, while failure to do so may prevent the bank from ever being that trusted financial hub in the first place.
The simple act of dealing with finances is enough to stress many people out. And yet, so much of it is simple enough to be automated. Automated savings apps and features are now quite common, and similar technologies could be used to do many of the tasks that people should already be doing but too often do not. Setting aside money to pay each of your upcoming bills would help customers avoid the need to do math every time they check their balance. Also, with existing technology today, it would be straightforward to help customers improve credit by automatically making extra payments to their credit cards, as well as optimizing the order in which they pay down debt to minimize interest payments.
For Wealthfront, this is what they call “Self-Driving Money.” The company, which started as a robo-advisor but has since launched other banking products, envisions an experience where a customer automatically deposits their paycheck into an account, and Wealthfront takes care of the rest. According to Kate Wauck, VP of Communications, they’re not too far off from this future today.
Mobile banking apps are getting better. Fees are getting more transparent (though still a ways to go for some). We have fintechs to thank for forcing the incumbents hands here, and it will likely be fintechs leading the next wave of innovation as well. In order to truly offer a differentiated product though and threaten market share from the big banks, challenger banks will need to compete on more than just price. The successful bank of the future will use actionable advice and automation to improve the financial lives of their customers – all without the stress of having to manage it themselves. That’s when Chase, Wells Fargo, Bank of America, and Citi will really start to sweat.