What's New With Banking (2021)
This is the first of the 2021 “What’s New With…” series. As I began my research for the series, a common theme emerged. The Pandemic has altered, perhaps permanently, many aspects of our financial lives. In terms of banking, the pandemic really accelerated three trends:
- Accelerated movement along the continuum from in-person banking to online banking to use of banks’ mobile apps;
- Proliferation and growth of digital-only banks (challenger banks) competing with brick and mortar banks;
- Proliferation and growth of “neo banks”-- financial apps that provide some type of financial service, but rely on chartered banks to complete any banking transaction.
Harder to find was much news on what have banks done to help customers facing financial hardship. Only Ally Bank (a challenger bank) got press for dropping overdraft fees during the pandemic and just announced the change would be permanent. (CNBC)
"Americans paid $12.4 billion in overdraft fees in 2020. (For reference, 2019 overdraft fees collected totaled $11.7 billion.) The latest FinHealth Spend Report shows that 80% of overdraft fees are paid by consumers with consistently low checking account balances. Of the consumers who paid overdraft fees in 2020, 95% were considered financially vulnerably and disproportionately Black and Latinx, thereby demonstrating how overdraft fees contribute to systemic inequity within the banking industry."
What are other banks doing? Bank of America, for instance, instead of charging overdraft $30/event charge a flat $4.95/month for overdraft protection, but make it free for students and “prime” customers. (Remember the quote above about inequity?) While Federal officials requested banks back off on overdraft fees during the pandemic, most didn’t unless a customer declared financial hardship. They are not likely to disappear either, as they are still a big source of revenue. (Charlotte Observer)
If you have an hour, the best way to come up to speed with what is going on in the banking sector is to take the NGPF On Demand PD entitled “Banking in the 21st Century.” In the mean time, here are some of the key points and highlights to be aware of.
Digital and Mobile Banking Uptake
Banking still serves the same purpose it has for 200 years. But the way customer needs are satisfied has changed. Having multiple (online) features allows customers to use the ones most important to them, customizing or personalizing the banking experience. (Forbes) Online and mobile banking were well on their way to becoming the “new normal” for banking, especially for younger generations of customers, but the pandemic seems to have pushed usage of these features up further, faster. For example, US Bank experienced such a shift. In fact, they are seeing numbers they didn’t expect to see for five years. And once a customer gets used to online banking, the jump to mobile banking, which is required for some transactions not available online like depositing checks, is not such a stretch.
“By February this year, nearly 80% of customer transactions at U.S. Bank were digital and nearly 60% of active customers did most of their banking that way.” (Star Tribune)
The national usage statistics are similar:
“Roughly three in four Americans (76%) have used their primary bank’s mobile app within the last year for everyday banking tasks like depositing checks or viewing statements and account balances, according to the Ipsos-Forbes Advisor U.S. Weekly Consumer Confidence Survey. Only 21% of survey respondents said they didn’t use their bank’s app.” (Forbes)
Many banks closed branches during the pandemic, and made in person banking by appointment only. Going forward, there will be fewer bank branches, and those that exist will likely be smaller and look quite different. In person banking will likely occur to have a conversations about financial planning or securing a loan, not to get cash or deposit a check, so bank counters and tellers may disappear and be replaced by desks.
We understand that younger generations are more comfortable with mobile banking and fintech apps than the older generations, but what was surprising is how the pandemic really spurred baby boomers (55-75 year-olds) down the digital path. Older customers may need a bit of coaching to get started and to learn to avoid scams, (Time.com) but it looks like they will continue to use these features. Given this increase in usage of bank websites and fintech apps, it is interesting to note the concerns, if any, people have about banking remotely. The data below was compiled by Deposit Accounts.
Challenger and Neo Banks
Scott Galloway, adjust professor at NYU, describes why banking is ripe for disruption in a No Mercy/No Malice article published this week. Here are a few reasons he mentions:
- Walk into most bank branches and you feel like it could still be the 1980s;
- 25% of the US population is unbanked* or under-banked, many due to lack of sufficient funds for minimums or high fees imposed;
- Inequity leaves room for alternative banks to step in and fill the void.
*According to the Federal Reserve Bank of New York, the unbanked percentage is 5%. The unbanked are the ones most in need of a bank. (The FRBNY article cited above examines the history and reasons for inadequate banking services.)
Both Challenger and Neo Banks cut costs tremendously by eliminating the need for a physical presence (branches). In turn, they can afford to offer any number of benefits to customers, tailored to who they are targeting. We just mentioned that Ally Bank (a challenger bank) is dropping overdraft fees. Since its inception, it has paid much higher interest on its savings accounts that the big traditional banks. Even at its low current rate of 0.5%, it is paying 50 times what Chase pays.
A Neo bank that has gotten lots of attention recently is the banking app Dave (Banking for Humans). It has been backed by Mark Cuban and is planning to go public using a SPAC. (CNBC) Here are a few of the features that make Dave attractive to its “members:”
“For a $1-per-month membership fee, users can access checking accounts with no fees and up to $100 in overdraft protection without fees or interest. Members who sign up for direct deposit also get automated budgeting and the ability to build up their credit scores through the reporting of rent and utility payments to credit bureaus.
Both Dave and rivals Chime and Varo give early access to paychecks, but the other two claim there are no minimums or hidden fees. Interested in saving the planet? Aspiration also gives you early access to your earnings, and plants a tree every time you swipe your card.
Walmart’s Green Dot is turning prepaid cards into checking accounts. It is not clear how big or profitable this will be for Walmart, or if it will be attractive to the lower income customers that are finding Dave, Chine and Varo attractive. Walmart will waive monthly fees for customers who can direct deposit $500 per month. If this turns the Greed Dot card into a true debit card, the customer can avoid the $3/load fee to top off the prepaid card. Customers will get $200 of overdraft protection, but at a cost of $15 per use. (Forbes) The $500 monthly direct deposit could be an issue for many currently using the prepaid debit cards, and while $15 isn't $35, it is still a huge implied interest rate on overdrafts.
The 21st century issue for banking of all flavors will be security. On one side, customers are justifiably wary that a bank or fintech app will suffer a security breach or be hacked. On the other hand, customers need to be educated on keeping their personal and financial information safe as they increase the number of online financial transactions of all types. We mentioned that baby boomers needed to be educated on safety, but we certainly need to stress safety to the young, first time users as well.
About the Author
Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.
To get access to NGPF answer keys, assessments, and teacher-only resources: create a FREE Teacher Account