It’s a New World: Why Consumers Have Embraced Nontraditional Banking
The rise of nontraditional banking was one of the significant business stories of the past few decades and its amplified acceleration due to the COVID-19 pandemic has been the banking industry’s top story of 2020.
The shift from traditional institutions to fintech and “challenger” banks can be alarming. Any plan for post-pandemic success means you’ll need to effectively counter (or co-opt) that momentum, but first you’ll need to understand why consumers are looking for alternative financial services providers.
Physical Money Meant Physical Banks
Conventional banks and credit unions are rooted in the idea of money as a physical artifact: coins, bills, checks and the like. Money traditionally existed in the form of objects that required secure physical storage and a place where they could be exchanged. The bank, and its branches, met those requirements.
Those needs have broken down gradually over the past few decades. Credit and debit cards, and now tap-to-pay apps, made carrying cash optional. Payment apps have eroded the use of checks and money orders between friends and family, and banking apps now allow for remote check deposits. Even for those who still lean heavily on cash and checks, ATMs can dispense one and accept the other without needing a dedicated building of their own.
In many ways, it’s analogous to the way the music industry has evolved. Music once took the physical form of vinyl records, cassette tapes and CDs, sold in retail stores. Now it’s purchased digitally or more often simply streamed, and aside from boutique retailers, the physical record store has mostly disappeared from the landscape. Similarly, in a time when consumers live their lives online and digitally, the logic of branch-centric banking is increasingly tenuous.
Alternatives to Banks: Why Consumers Are Venturing Toward Fintech
Money’s switch from pieces of paper to electronic equivalents may be at the root of the threat to traditional banking, but there are many other reasons consumers have embraced alternatives to banks and credit unions. A few of the most important include:
Lingering mistrust of banks
The financial crisis of 2008-2009 was a watershed moment for the industry, and not in a good way. Banks were blamed for precipitating the crisis, and then — through bailouts — evading the consequences of their actions. Consumer trust never fully recovered from that.
With interest rates hovering near zero for years, banks have been reliant on noninterest income — much of it in the form of fees — to maintain profits. Offering low or no fees on core offerings is one way many “challenger banks” (Chime, for example) have successfully differentiated themselves.
Banks and credit unions are full-spectrum financial services providers, offering a broad range of services. James Robert Lay, a longtime industry consultant and the author of the Amazon best-seller Banking on Digital Growth, argues that fintech insurgents “have been slowly chipping away at financial brand market share through highly focused, ‘best of breed’ digital experiences” rather than attempting to be all things to everyone.
He points to examples like Chime’s simple product and simple messaging (“Banking that has your back”), Unifymoney’s laser focus on high-earning millennials, and Aspiration’s emphasis on sustainability and ethical issues.
Fintech companies are also nimble enough, and data-driven enough, to target specific groups or demographics who fall through the cracks at conventional institutions. They can (and do!) broaden their horizons afterward, but by then they’ve firmly established a core competency or a core clientele.
More appealing user experience
Banking apps are functional within their limits, but that’s faint praise. Fintech apps, in comparison, are…apps. They’re simple and intuitive, like the ones everyone’s accustomed to, from Netflix to Spotify to Instagram. It’s like going from an ’80s car with a push-button radio and a cassette deck to a Tesla with its touch screen.
Simpler user journeys
Whatever a user wants to do at any given moment is usually simpler and easier and requires fewer taps (or clicks) in a fintech app. This means they’re much less likely to abandon a process and look for alternative solutions and they’ll never be told to go to a branch to complete that same process.
Advanced personalization and recommendations
The best fintech apps make heavy use of data and analytics to make timely, personalized recommendations to users. Bank apps struggle to do this: not because they don’t collect enough data (usually they do), but because the data is often siloed and not available for real-time analysis.
Fintech operations are often able to offer lower rates for borrowing and higher rates for savings or investing, because their overhead is lower than that of conventional financial institutions. It’s easy to undercut the competition when your physical footprint consists of a few hundred square feet of leased office space but your competitors maintain dozens (or hundreds) of physical branches.
The COVID crisis added physical distancing and risk avoidance to the mix, making fintech apps an even more appealing alternative to conventional banking. It also exaggerated the impact of many of these other points: users who lost income during the crisis would be especially sensitive to the impact of overdraft and late payment fees, for example.
The net effect has been a surge in the use of digital banking services. As Lay puts it, “Banking is undergoing the biggest transformation ever, but it has been like a frog boiling in water. It happened slowly until it happened quickly.”
Competing With Nontraditional Banking Alternatives
Conventional institutions, especially credit unions and smaller regional or local banks, aren’t competing on a level playing field. Fintech companies have low operating costs, are flush with venture capital and often face a lower level of regulatory oversight than full-spectrum banks. The megabanks, for their part, have the resources to compete simply through loss-leader promotions and determined spending on their digital offerings.
Smaller institutions don’t have pockets that deep, so the blunt-force approach isn’t an option. Success for them will boil down to canny analysis and strategic spending on the things that matter. The deck isn’t entirely stacked against smaller banks, though. Despite the advantages fintech operations enjoy, Deloitte’s 2020 Digital Banking Maturity report found that over 80% of the industry’s “digital champions” were, in fact, among the established players rather than upstarts.
So how can you become one of those champions? For many institutions, the road map might look like this:
Scrutinize your weaknesses
Where do your products and services fall short of your users’ needs? You can get some guidance by looking at the fintech competitors’ offerings, which are calculated to draw consumers away from banks and credit unions. An even better option is simply asking your own users what their pain points are, or reaching out to members and customers you’ve lost and offering an incentive to explain why they left.
You definitely need outside opinions to do this properly. Insiders are too close to the decision-making process and are affected by the consensus views within your walls (“groupthink” is pejorative, but not inaccurate).
Rationalize your physical presence
This is tough, in an industry that traditionally equates success with a strong physical footprint, but it’s necessary. Many branches still generate enough business to pay for themselves handsomely, and some are justified because they serve otherwise-underserved communities where capable phones, generous data plans or internet service can’t be assumed. As for the rest, it’s time to ask whether they’re an asset or a liability.
Many consumers still like the idea of physical locations, but those don’t necessarily need to be traditional, full-service branches. Even Starbucks, for all its success, has gone through this process. At the end of the day, coffee is still physical and money (very often) is not: if Starbucks can do this, you can too.
Become digitally competitive
This is crucial: the upsurge in digital engagement will be a lasting change, and if your existing digital platform can’t compete with fintech brands for completeness and ease of use, then you can’t compete. Period. Upgrading to a modern digital platform will give you the data-management and analytics tools you need to meet the challenger banks head on.
With a modern, full-feature app of your own, you’ll be able to go toe-to-toe with fintech companies on personalization, timely suggestions, push notifications, financial coaching and all of the other trappings of alternative banking. It’s also how you’ll tackle all of those limitations and pain points you identified in your current operations.
Align yourself with consumers’ thirst for “authentic,” “local” and “ethical”
Humans are innately contradictory creatures. While consumers are flocking to large, faceless tech-driven providers, there’s a countervailing desire for authenticity and sustainability, often expressed as support for merchants and service providers who are local and rooted in ethical business practices. This creates an opportunity for you to differentiate yourself from the facelessness of both Big Tech and Big Banking.
Painting yourself as the home team, especially if you can legitimately point to specific ethical or environmental practices, is a solid strategy. Another option — if you haven’t put those practices in place yet — is to promote businesses, organizations and individuals who are making a difference in the community and happen to be among your clients.
Banks and credit unions are full-service destinations by nature, but don’t try to promote every service to every potential end user. Proverbially, if you specialize in everything you don’t specialize in anything. To compete with niche-focused fintech competitors, you’ll need to identify (or create) market niches where you can excel.
Lay’s advice? “Take a first-principles approach to growth as you look to optimize [your] positioning and products for niche market segments. Consider this prime time to examine the purpose of your financial brand: Are you still being driven by a mission and vision from the days of old? Or can you define a new purpose, focused on creating value for a new niche market segment?” If you can’t define the value you’re creating, you’ll need to go back to the drawing board.
Look for partnership opportunities
There’s much to be said for having a “wingman” when you’re facing a tough task. In banking terms, that can mean seeking out complementary businesses and forming mutually beneficial partnerships. Fintech operations do this: for example, BankMobile struck a deal to provide “white label” banking services to T-Mobile’s cellular customers.
A national cellular carrier might be out of your league, but there should be plenty of local and regional players in your market who’d be open to a working relationship. You might place loan officers at auto dealerships or realtors’ offices, for example, or partner with a local business-incubator agency to provide mentoring and small-business lending to entrepreneurs.
If you already have ATMs in your local grocery chain, explore the idea of adding a small cubicle and a service rep. That makes a “mini-branch” that might allow you to close or repurpose a full-size branch, generating substantial savings.
Bring the empathy and empowerment
One of the things you’re fighting is that, paradoxically, rootless and faceless fintech companies feel like they know consumers better than you do. Why? Because money management is a source of stress, confusion and vulnerability for consumers. By making it easy and convenient, fintech competitors give their users a sense of empowerment and empathy (“they just ‘get’ me…”).
This is a game that credit unions and regional banks can also play, and well. “Human-centered growth will be key,” Lay says. “Put people at the center of all of your thinking and all of your doing. At the end of the day, people want to feel healthy, wealthy and happy. Money is the thread that connects all three dots.
“I see a tremendous opportunity to look beyond offering just a financial product,” he continues, “[toward] financial coaching to empower people to reframe their financial mindsets and habits, to truly help them create the future they want instead of just getting deeper and deeper into debt.” That’s a critical point for some, given that increased debt is often the dark side of switching to a fintech company.
New Focus, New Tools, New Opportunities
A few tweaks to your marketing plans aren’t going to be enough to make your way in the “next normal.” The banking industry as a whole is undergoing a generational change, and what’s required is nothing less than a full rethinking of your business model. That’s the bad news. The good news is that it brings plenty of opportunities for institutions that successfully navigate the changes. Any bank or credit union that can successfully leverage its existing history and footprint against the fintech brands and its new digital platform against peer-group competitors will be in a strong position to earn clients from both.
The key is to remember that your shiny new digital tools, while crucial to your survival and success, aren’t an end in themselves. All the data-management and analytics software in the world won’t help you if they’re misdirected. They’re simply a means to the desired end, which is empowering your users — through coaching, timely suggestions and other means — to improve their money-management habits and meet their own goals.
“There is a tremendous opportunity to use data in conjunction with human experience, to provide guidance like never before,” Lay says. How? “By putting the transformation of people over the commoditized transaction of dollars and cents.” It’s counterintuitive and perhaps paradoxical, but the best route to reaching your institution’s goals may lie in assigning them a secondary position, behind your clients’ goals.
Harvard Business Review: The Social and Political Costs of the Financial Crisis, 10 Years Later
Federal Reserve Bank of Cleveland: Trends in the Noninterest Income of Banks
Chime: Banking That Has Your Back
Digital Growth Institute: Wise Investments Just Take the Right Motivation (With Ben Soppitt)
Aspiration: Leave Your Bank, Change the World
McKinsey & Company: How US Customers’ Attitudes to Fintech are Shifting During the Pandemic
Pace University, Elisabeth Haub School of Law: Shadowing Lenders and Consumers: The Rise, Regulation and Risks of Non-Banks; Shelby D. Green; September 2018
Deloitte: Digital Banking Maturity 2020
Accenture: 2020 Accenture Global Banking Consumer Study
IBM Research Insights: Meet the 2020 Consumers Driving Change
University of Pennsylvania Wharton School of Business: Why Fintech is Disrupting Traditional Banking
The Decline of Big-Bank Lending to Small Business: Dynamic Impacts on Local Credit and Labor Markets; Brian S. Chen, et al.; September 2017
Harvard Business School: The Dark Side of Fintech Borrowing
McKinsey & Company: Reshaping Retail Banking for the Next Normal