Who’s the Real Challenger? The Paradoxes of Digital Consumer Banking in the U.S.
Mention the term “challenger bank” and bankers might free-associate labels such as “fintechs,” “disruptors,” or “non-banks.” Those terms would certainly be apt for a small group of tech-driven market entrants, most focused on providing mobile-savvy transaction accounts for consumers who may have an anti-bank mindset.
However, if you stand back and look at the market data (as we did for our recently released report, Digital Consumer Banks in the U.S.: Your Money or Your Wallet), some of the most fearsome online competitors for U.S. consumers’ deposits have very familiar names (or parent names): Marcus (Goldman Sachs), Discover Bank, American Express Bank, USAA Bank, Charles Schwab Bank, Capital One 360. A new crop of digital banking divisions with unique brand identities and products is also coming to market: Finn (JPMorgan Chase), Greenhouse (Wells Fargo), Citizens Access (Citizens Bank), and more. In total, these well-connected digital divisions are already providing co-opetition for their branch-centric retail banking divisions.
Already a Complex Competitive Market
It’s far too simplistic to adopt an “us” (bank) vs. “them” (challenger/fintech) view of the marketplace. In our analysis, we identify five different digital bank competitor segments: Full Service Online Banks, Lenders Gathering Premium Deposits Online, Brokerage and Insurance-Owned Online Banks, Online Divisions of Diversified Banks, and Fintechs and Bank Partners. Each segment competes with a different value proposition of products, rates and brands. Collectively they have captured an estimated $1 trillion+ in total deposits (year end 2018). While industry data reporting is imprecise in terms of the digital-only segment size, it is clear that the smallest deposit-gathering segment is — you guessed it — the fintech/challengers.
Four “P”s and a Big “C”
Why haven’t the fintech challengers had greater success in terms of deposit gathering? Let’s use the familiar “Four Ps of marketing” as an illustration. Product: The fintechs positioned themselves as providing customer-friendly mobile user experience (UX) for their transaction accounts, yet few have attempted to implement an extended product array to counter banks. Banks, on the other hand, were early online deployers of deposit and loan products, and they are quickly playing catch-up in terms of overall user experience and design. Place: Mobile is the great leveler of the playing field, as place becomes “anyplace.” Surcharge-free ATMs, person-to-person (P2P) payment services, and remote deposit capture further level the field for all digital competitors. Promotion: The challengers often lead with their non-bank identities, but once again the familiar banking competitors have quickly followed with unique digital identities. Some can play both the digital brand and legacy brands to advantage when they need a contemporary positioning (as Marcus does) or credibility (as does Goldman Sachs). Price:Here is where fintechs have generally missed the opportunity. Many banks have discovered the surprising stability of premium-priced online savings and CD accounts and their ability to rake in balances, a task that is hard to do when you are only offering mobile transaction accounts targeted to young consumers.
Then there is the surprising effect of the “C,” namely compliance and regulation. In the simplest terms, banks have built compliance into their products, procedures, and systems, and challengers often have not. It was a bit of a revelation to us in compiling our report, to find that despite the many challenger bank announcements, just a handful have actually sought and received a charter, or for that matter even launched using a partner bank’s charter. It is also notable that in spite of their user interface innovations on the front end, most challengers connect to a rented back end of a partner bank or banking core system provider. Compliance may be a burden on one hand, but it presents a surprisingly tall competitive barrier on the other. It’s difficult being a bank, a lesson the challengers continually face in the U.S. and abroad (see this article https://www.finextra.com/newsarticle/33677/n26-is-the-latest-fintech-unicorn-to-face-regulatory-scrutiny).
Challengers vs. Challenges
In spite of their surprising leadership position, banks with digital-only products or divisions today should not rest. Consumers constantly experience new digital interfaces and experiences across the broad landscape of online and mobile commerce. These influence the expectations they bring to their digital banking relationships. Banks without a well-conceived digital banking strategy have a lot to worry about, as more consumers find their way to deposit products fitting their needs through the convenience of their mobile device.
How does a fintech/challenger bank become a successful long-term competitor in consumer banking? Can the fintech/challengers monetize their transaction-oriented customer bases in some new way? Or is the default business model one of developing unique intellectual property for eventual sale to a legacy bank? A clear example or path forward is not yet apparent in the U.S. For now the challengers remain challengers, while at the same time their mobile UX and branding innovations provide valuable case examples for established banks to follow in their own digital divisions. In the meantime, digital-only banks or bank divisions will continue to build their deposit relationships and balances. After all, they have figured out how to live with the “C” problem.
by Ken Paterson