Consumers may still see a bank or credit union as their primary financial home. However, they are increasingly willing to rely on nonbank providers for financial services and to move at least some of their business to a digital bank, according to research by Marqeta.
Americans, especially, are open to using financial services from other types of companies, such as a tech firm, retailer or social media platform. They have warmed to the idea fast too, with 56% of U.S. consumers saying they would be willing to do so, a 10% lift from 2022, the research found.
This trend is also evident in the United Kingdom and Australia but is more pronounced in the United States.
Consumers are unlikely to abandon traditional providers, says Rachel Huber, market intelligence lead for Marqeta. But, she says, the days of getting everything from one financial provider are likely over.
“Consumers are just interested in getting whatever service they need and they’re more willing to shop around to see what works for them,” she says.
The Advantage of Digital Alternatives: ‘The Clever Stuff’
Marqeta’s massive annual survey, conducted with the research firm Propeller during the first quarter of 2023, compiles responses from 4,000 people ages 18 to 65 (including 2,000 from the U.S. and another 1,000 each from the U.K. and Australia).
Overall, across the three countries, nearly half of consumers surveyed, or 47%, say they would be open to using nontraditional providers, a figure that jumps to 60% for those between the ages of 26 and 34.
A More Receptive Demographic:
The percentage of 26- to 34-year-olds who say that they would be open to using nontraditional banking providers:60%
In addition, 43% of the respondents say they deposit their wages in a traditional bank but conduct the rest of their financial business through other providers, often to access “the clever stuff,” as Marqeta puts it. These features include automated savings and overdraft protection, among other things.
Though more banks and credit unions have started offering such services, fintechs did so first and in a splashy way. Huber says legacy systems often impede traditional providers from adapting as quickly as they would like.
Data Privacy Gives Some Pause, But ‘Market Is Changing Overnight’
Despite the growing embrace of nonbanks, consumers still have reservations, the survey shows. Trust is a factor for 46% of those who have not considered alternative providers, while 36% don’t see their value. About a quarter, or 24%, have concerns about how their data will be used. Another 29% were simply not aware of the services.
“To me, those are really easily addressable,” Huber says, noting the reservations are no different from what you might find with any new technology. The hurdles usually fall with time, as well as increased marketing and proof of the new tech’s value.
For a majority of younger consumers, the hurdles have already fallen. “The market is changing overnight,” Huber says.
Younger people are relatively eager adopters of services like early access to their paychecks and programs that round up card purchases to the nearest dollar and deposit the difference in a savings account.
All About the Clever Stuff:
Alternative providers like fintechs and digital banks appeal to younger consumers in part because of attractive features like early wage access, automated savings programs and overdraft protection.
A quarter of those surveyed have tapped into early direct-deposit services, which allow users to draw from their paychecks up to two days early. Another 37% are interested in the service.
Automated savings — services that move money into savings on a regular basis — were used by 31% of those surveyed, with 43% expressing an interest in it.
Other sought-after digital services include overdraft protection, which is used by 32% of those surveyed. More than a third, or 36%, are interested.
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Key for Traditional Banks: Focus on Youth
The risk to established banking companies is that younger consumers choose to grow their relationships with the providers that are helping them with innovative products in their teens and 20s, Huber says.
“When you take a step back, what they’re really asking for is financial guidance to help them build wealth and help them do it in a safe way,” Huber says. “And I think that’s where a lot of these embedded finance and digital players have really filled that gap.”
Traditional providers are making progress in meeting customer expectations, Huber says. Just under half of those surveyed (45%) agreed that banks seem helpful and concerned about their customers’ needs. Only 17% of respondents disagreed.
“For traditional financial institutions, this offers an opportunity to connect with current and prospective account holders by offering additional tools and services that help them build wealth and meet their financial needs,” Huber says, citing, as an example, partnerships with fintechs that lead to account features tailored for children and young adults.
“There has also been more awareness and products around building consumers’ credit histories, as well, so they can have easier access to products such as revolving credit cards, auto loans or mortgages,” she says. “Whatever the product may be, the key is meeting the rising standard that consumers are setting.”
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Financial Squeeze Hitting Younger People Harder
More than half of the survey respondents, or 54%, have experienced rent increases over the last year. However, people are not rushing out to buy homes, as has happened in the past at times of rising rents. According to the survey, 51% are putting off a home purchase specifically due to higher interest rates and the general state of the economy.
The economic environment has been taking an uneven toll. Overall, 16% of survey respondents said they have been affected by layoffs. But there are regional and generational differences, with the impact of layoffs falling most heavily on younger people in the U.S.
Among all the respondents ages 26- to 34-years-old, 23% felt an impact from layoffs, compared with 5% of those ages 51 to 65. For the U.S. alone, the comparable figures were 29% and 8%, respectively.
At the same time, Americans generally appear less anxious than their counterparts. Less than half the survey’s U.S. respondents, or 42%, said they worry about the economy and that it is affecting their daily lifestyle or spending, compared with 55% in the U.K. and 55% in Australia.
The survey was conducted before the failure of three large regional banks, Silicon Valley, Signature and First Republic. Huber was unsure how those developments might have affected people’s responses. However, even before the headlines about the bank failures, more than half the respondents, or 57%, agreed that recent economic news had prompted changes to their household budgets.