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Americans Don't Want A 'Digital' Bank

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OBSERVATIONS FROM THE FINTECH SNARK TANK

As legend (and Simple's website) has it, back in 2009, Simple’s future founder Josh Reich emailed his friend and future co-founder Shamir Karkal after a frustrating banking experience and asked: Why is banking so complicated? What if banks didn’t charge so many ridiculous fees? What if your bank taught you to feel confident with money?

And thus Simple was born. According to its website:

We created an FDIC-insured checking account built to help you save money, and to support smart spending with built-in budgeting tools. The accounts are free and our customer service is kind, helpful and human (in other words, talking to us won’t inspire you to start a bank of your own out of frustration)."

Sounds great, right? But 10 years after the launch of neobanks in the US, just 3% of Millennials have their primary checking account at a digital bank like Simple, Chime, or Moven according to a new study from Cornerstone Advisors. And not surprisingly, that percentage drops to 1.5% of Gen Xers, and 0.8% of Baby Boomers.

All told (including accounts that aren't "primary"), consumers have opened just 7 million deposit accounts at digital banks.

Cornerstone Advisors

In contrast, more than four in 10 Millennials have their primary checking accounts at just three banks--Bank of America, JPMorgan Chase, and Wells Fargo. You know, the "complicated" banks that charge "so many ridiculous" fees.

And a third of Gen Xers and Baby Boomers still keep their primary checking account at those three megabanks.

It's Not About Bank Branches

If you're thinking this proves that there's still life in branch-based banking, stop right there.

A colleague of mine tells the story of his adult (30-ish) daughter who he describes as "so left-wing, Bernie Sanders wasn't liberal enough for her." He says:

"If there's anyone who you would think would be banking with a credit union, it's her. But she doesn't--she banks with Chase. When I asked her why she said 'Best mobile tools, Dad.'"

Yes, young consumers say that location of bank branches is important to their choice of banks. But few consider the quality of the in-branch experience to be a factor in deciding who they do business with.

Cornerstone Advisors

So Why Do Consumers Open Digital Bank Accounts?

The great "disruption" of banks promised (or hyped) by the neobanks has certainly not come to fruition. But that doesn't mean there isn't a role for these digital banks in consumers' financial lives. It's just that that role isn't the primary checking account.

Consumers are opening accounts at digital banks for three predominant reasons (which vary by generation):

Cornerstone Advisors

  • Young Millennials are looking to get better financial management tools than they get with their primary bank.
  • Older Millennials are nearly equally split between those looking for better financial management tools, better debit card rewards, and better interest rates.
  • Gen Xers and Baby Boomers are looking for better interest rates than they get from their primary bank.

The prompts to the survey question should have included  "I wanted to do business with a bank with no branches." But I think it's safe to assume that if survey respondents wanted a digital bank for that reason, they would have selected "other reasons," which was the least selected response among the options.

Consumers Don't Want a Digital Bank--But Digital Transformation is Critical

Here are the conclusions I draw from all this:

1) Americans don't want a "digital" bank. Channels (or customer access points) have nothing to do with consumers' decisions to do business with a so-called digital bank. They're looking for better tools, rates, and/or rewards. As a result, they "accessorize" their primary checking account with ancillary, or secondary, accounts from providers who can give them those things. Those providers just happen to be called digital banks.

2) Branches are a security blanket for consumers. The debate over the potential vitality of the branch network is nonsense. Even though many Millennials still cite branch location as an important factor in making their selection of their primary checking account, they do so because too many banks' digital delivery capabilities aren't good enough.

Commerce Bank (now TD Bank) founder Vernon Hill once said, when asked back at the turn of the century why his bank wasn't making big investments in online banking, "Nobody wants a relationship with a machine."

Nobody wants a relationship with a brick either, Vernon.

What consumers want is convenience. Bank branches were created to make it more convenient for consumers--so they didn't have to drive far to go to their bank. That "convenience" has been replaced by technology. Or at least, it should be.

3) All banks need to become digital banks. Consumers might not want a "digital" bank (i.e., "digital-only" bank), but banks need to become digital banks. I'm talking about front- and back-office processes, not channel delivery. "Digital transformation" is a hot topic among bankers today. It should be. But it's not a project (and certainly not a strategy)--it's simply a point in the evolution of the industry.

 

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