For decades the checking account was the pin in the center of the map of every consumer banking relationship. It defined “primary financial institution.” It was the account that most consumers lived out of, paying bills from it and getting paid into it. Even as “checking” involved fewer checks, these accounts still connoted “centrality” and “primacy” for institutions. They served as the starting point for hoped-for cross-selling.
But experts says that Americans’ relationship with this longstanding account category may be evolving, and, along with it, the concept of being a consumer’s primary financial institution. This is coming at a point where financial institutions face a changing deposit growth and acquisition market, now that the “safety-first” phase that followed the financial crisis has passed.
The implication is that checking accounts must evolve into something new — something substantive, beyond a new name. And not just to please younger generations either. Research shows that even older Americans would move their business to newer providers of checking alternatives.
Check Out Time at the ‘Payment Motel’?
Perhaps one of the bluntest assessments of the traditional checking account comes from Cornerstone Advisors. Ron Shevlin, Director of Research at Cornerstone, wrote in a report that checking accounts have become nothing more than ” paycheck motels” — a “lower-quality kind of place” where people temporarily park their money before it moves on to a bigger and better place. Money can move so quickly now, he says, that checking has become essentially a “pass-through account.”
“Banks and credit unions are feeling the impact of deposit displacement — the diversion of funds from traditional checking accounts to alternative accounts,” says Shevlin. “They are putting their money into health savings accounts, P2P payments tools like Venmo and Square Cash, savings tools like Acorns and Stash, and robo-advisor tools like Betterment.”
Byron Marshall, Director of Research at BAI, says the growth rate for checking deposits has fallen from somewhere around 3.25% annually down to about 1.00%. Marshall says multiple factors played a role, including:
- the end of “free checking” at most institutions
- efforts to cull low-quality checking relationships, like dormant second accounts
- stagnant population growth over almost a decade
- less moving of households, which used to drive formation of new accounts
- mobile banking and remote capture, which together, have lessened the need for new accounts for those households that do move.
The bottom line? Over the last five years, checking deposit growth has been declining, and according to Shevlin, growing deposits will become even more difficult than it was in the past.
Lower Engagement, Less Success With Cross-Selling
Banking providers offering classic checking accounts aren’t necessarily enjoying the traditional benefits associated with the much-coveted “PFI status.”
“The proliferation of new digital services make the customer’s engagement with the checking account less important,” writes Hank Israel, Director at Novantas, in a report. “Primary checking used to matter more when branch interactions were the center of the sales experience.” Back when consumers depended on branches and ATMs for cash deposits and withdrawals, checking accounts were the natural foundation to build wider and deeper relationships on. As many Americans rely less on cash, the foundation supports less and less.
Israel argues that primacy should be built more along behavioral lines than on specific account types, and those behaviors will vary by demographic and lifestage factors. Personality type also plays a role today, says Israel. About a third of consumers are by nature consolidators, liking to keep all their affairs in one institution; another third are deal-chasers, who spread their finances all over seeking the optimum or opportunistic; and finally, the final third are a blend, deciding where to keep each financial relationship based on their concerns at that time.
A bank or credit union’s best shot at cross-selling lies with consolidators, according to Israel, because they will grant the institution the “first at-bat.” But with the range of choice available to today’s consumer, even that advantage may not mean as much as it did once. Israel believes technology “has reduced the opportunity cost of maintaining multiple financial relationships,” enabling more a la carte choices for some.
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There’s a Bank in There, Somewhere
These shifts come at a time when “platformication” makes a traditional financial institution’s role seem even less central and more commodity-like.
“Younger consumers are becoming a lot more ‘bank agnostic’ and platform dependent.”
— Byron Marshall, BAI
“Younger consumers are becoming a lot more ‘bank agnostic’ and platform dependent,” says BAI’s Marshall. This could be an unintentional consequence of banking-fintech partnerships, where a marriage between disruptor+provider can create an exciting collection of features… but one where the traditional institution lies buried deep beneath.
Marshall points to Stash as an example. Young consumers with a Stash account will say they do their “banking” with Stash, not the underlying providers of the actual transaction account plugged into the Stash platform.
Shevlin warns that his research exploring consumers’ interest in a hypothetical Amazon bank account should trouble banks and credit unions. The 2018 study found that if Amazon offered a checking account as part of a broad package of services, two out of five adults in their prime banking years would sign up.
However, the competitive threat Amazon represents could be overblown. Shevlin’s research found that if a bank offered a similarly broad package of services, one in five of the same respondents would go for it, with as many as 40% possibly switching from their present provider.
Shevlin says this suggests that what consumers would like is bundled, package relationships. However, he’s not talking about the kinds of package accounts that proliferated for years — free travelers checks, accidental death travel insurance, free notary service. He thinks banks and credit unions need to completely rethink package accounts.
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Time to Remold Tired Checking Accounts
Considering the financial landscape, Shevlin says even disruptors talk more about complete change than they have actually effected in practice. A day or two before being interviewed, Shevlin listened to a webinar featuring three challenger financial brands. He found it interesting that as much as these brands hope to change financial services, in their terminology they were quite traditional, constantly referring to “checking accounts.”
Retail banking providers of all shades and flavors — from traditional institutions to disruptive fintech startups — need to break free from the confines of classic checking.
“Institutions have to find new ways to increase their value proposition,” Shevlin warns. “Utilities selling commodities can’t cross-sell and up-sell.”
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5 Ideas You Can Create New Account Packages
Shevlin, Marshall, and Israel suggested several ways about how to think differently about packages, or bundled services.
1. Put services together that address the challenges of modern life. A transaction account is a small, enabling part of what would make life easier for modern consumers. Shevlin suggests that identity protection built into a package account would be of interest — many think ID theft is a “when,” not an “if.”
Financial health assistance features built into an overall relationship would also be of interest — people don’t need new kinds of savings accounts, but they need help saving money, he points out, and they can also use help analyzing their expenditures. Artificial intelligence can make such a bundle of features possible.
Essentially, it comes down to thinking like a platform, instead of like a bank or credit union.
“Monetize digital financial tools, instead of just giving people a temporary place to put their money,” says Shevlin.
In the same vein, Marshall reminds planners that Gen Z values being able to do things in one place, as in platforms.
Novantas’ Israel suggests that consumers might come to consider your institution as primary if they received higher limits on mobile deposits, granted in recognition of their status as “family.”
2. Think about what will make your institution different. Israel suggests that institutions consider how their offerings can be considered “craft brew.” They need to stand out to command primacy and the traditional pricing advantages enjoyed by primary financial institutions. (Typically, Novantas research shows primary customers are willing to pay loan rates 20% higher and receive deposit rates 20% lower.)
3. Pay closer attention to product names. Every person who has ever had a learner’s permit should understand this one. BAI’s Marshall notes that many institutions provide “student accounts” to young people. This implies that as soon as you graduate, you don’t want that account anymore. Even in a college community where graduates will be returning home, with today’s technology there is no reason a young consumer would need to close that relationship.
With Gen Z on the cusp of possibly doing more business with banks and credit unions, this is a priority. “Call it ‘Entry Level’ or something like that,” says Marshall, “so they don’t graduate out of your institution and into someplace else.”
4. Design packages for the ways people live today. As an example, Shevlin points to the gig economy. More consumers today have erratic income and other fluctuating financial patterns. Yet most banking products look like everyone still works in the “traditional” economy. What features in an account would appeal to gig workers? asks Shevlin. And what other niches can the institution identify and craft services around?
5. Work towards long-term relationships, not just the initial sale. Israel suggests that institutions work harder at maintaining communication with consumers long after the onboarding process. Too often, he says, institutions fail to build out an account. Improved product design may help here, but the institution must work at keeping the channels open. And today’s technology provides more ways to stay in touch than ever, through social media, in-app, texting, and more.
That said, recognize that not everyone may need —or even want — a “face.” As much as Umpqua’s “Go-To Banking” effort, which gives all customers a personal banker they can “go-to,” has appeal, there’s a feeling among these experts that it can be overkill. Israel points out that plenty of banking consumers don’t particularly want to talk to humans and that most consumers don’t have that many issues with their financial institution over the course of a year.