The transition to digital banking is in full swing. Financial technology companies and neobanks, also known as non-traditional digital banks, have accelerated this move. Some fintechs are positioned to help community financial institutions (CFIs); others are trying to replace them. Here’s what that means for CFIs who want to make the transition to digital and become “hybrid institutions.”
Consumer loan and account ownership has moved away from community financial institutions.
According to a recent estimate by TransUnion in their Industry Insights Report, fintech lenders originate 38% of all unsecured personal loans.i The businesses we refer to as “marketplace” lenders have put themselves solidly into the business that CFIs rely on for much of their revenue. Most of these alternative lenders don’t compete for deposits, but clearly the jump isn’t a hard one to make. Sofi recently earned their bank charter and will now aggressively pursue deposit dollars.
On the upside for CFIs, 65% of consumers have a primary account with a traditional bank, according to recent research by Galileo.ii This means their expectations are being set by those institutions, for good or for ill.
35% of consumers use a digital-only, prepaid, or stand-alone digital account and fully 77% of consumers have additional accounts for things like online shopping, bill pay, and peer-to-peer payments.iii
That’s compelling evidence showing that even if consumers still have one foot firmly planted in the world of conventional banks and credit unions, they’re exploring other options and willing to hold deposits in those other accounts. And when you consider consumer switching behavior, the opportunity for CFIs widens from a crack to a massive window.
Who is switching and where are they going?
The COVID-19 pandemic put a lot of pressure on CFIs and pushed many consumers to reconsider their primary financial institution. Features such as easy digital account access became a top priority, and not every institution was ready with a viable response.
According to recent data from Rivel, consumers sentiment toward switching institutions has jumped since the pandemic.
31% of consumers are unhappy with their current primary banking relationship and 15% say they intend to switch accounts in the next six months. Those numbers are much higher than pre-pandemic levels.
The majority of consumers (62%) indicated that they are somewhat or highly likely to switch to a digital-only bank. And younger consumers are the most likely to prefer a digital-only banking provider.
Reasons consumers choose to go digital:
Fits the way they do other things
Reasons consumers stick with a traditional institution:
Reassured by ability to visit local branch
Problems harder to solve online/mobile
The convenience of a digital-only bank is a massive draw. And the loyalty that some institutions are relying on to keep their account holders close is not enough to make them ignore the convenience of your competitors.
How are community banks and credit unions affected by these changes?
When consumers do business with marketplace lenders, neobanks, and megabanks, there are five main effects on CFIs:
Loss of fees from lending and accounts
Loss of interest income
Loss of interchange
Loss of cross-selling loans or accounts
Loss of stable primary relationship deposits
What CFIs need is a way to compete on a digital, national scale and retain the relationship with the consumer.
At Kasasa, we’ve spent 20 years helping institutions like yours secure market share. The word “secure” is crucial, because if community financial institutions fail to take decisive action to build stronger relationships with new and old account holders, the competition will steal them from you. Once upon a time you could assume that if a consumer had an active checking account with you, the relationship was secure. That is no longer true.
Consumers use lots of financial tools to move and store money on a daily basis. They’re not loyal to any single brand, unless that brand gives them a reason to be loyal.
The requirement to have a digital presence became an absolute necessity during the COVID-19 pandemic. That turned nearly every CFI into a hybrid institution almost overnight. But we’re moving into the next phase where consumers are savvy to the convenience of banking online and will be looking around to see who has the best offering of products.
For institutions who are unwilling or unable to adapt, this trend will be a blow to the heart. And Kasasa is not going to let that happen without a fight. We’re currently positioned to help all community financial institutions to transition to the post-hybrid banking age and to continue securing relationships with consumers. We will rebuff the neobanks, megabanks, and predatory fintechs. We’re inviting every single community financial institution to join us. Together we’ll go far.
i Data on aggregate levels of unsecured personal loan originations are from TransUnion’s Industry Insights Report (2019:Q1).
ii Consumer Banking and Money Survey. Galileo Financial Technologies, LLC 2021.