In the Battle for Direct-Deposit Relationships, New Technology Is a Game Changer

The inconvenience of switching used to be an effective defense against losing direct deposits and the status of ‘preferred financial institution’ that often came with it. But fintechs now make it so simple for consumers to change where they deposit their paycheck that it only takes about 90 seconds to make a switch. And some fintech competitors, like Square's Cash App, are coming after direct deposits hard. Retention is a lot harder than it used to be.

Direct-deposit relationships are not as sticky as they used to be, with technology making it easier for people to switch the account where they send their paycheck.

Companies like Pinwheel and ClickSwitch are turning what used to be a cumbersome process into one so simple it can be done in 90 seconds with a few mouse clicks.

This has become a useful tool for neobanks and fintechs trying to woo customers away from traditional banks and credit unions. And it is forcing all financial institutions to get more active about playing defense in trying to retain direct deposits.

“We think of the direct-deposit relationship as so important because having that generally means that you have the primary account relationship,” says Jamie Warder, head of digital at the $190 billion-asset KeyBank in Cleveland, Ohio. “And having that primary relationship means that you get the first crack when that customer is looking for additional financial products and services.”

KeyBank is counting on a satisfying customer experience to minimize defections to aggressive digital competitors. “We spend an enormous amount of time, energy and focus on creating products and experiences that make our clients not want to leave,” Warder says.

But the bank is also being proactive about pursuing more direct-deposit relationships. It works with ClickSwitch so that new customers can set up direct deposit quickly and easily.

No Longer a ‘Clunky, High Friction Experience’

Banks and credit unions haven’t had to work very hard at keeping direct-deposit relationships in years past. Steps like filling out HR paperwork made changes inconvenient for consumers.

But employers and employees no longer have to deal with such friction.

One of the fintechs facilitating this new deposit dynamic is Pinwheel. The company was founded in 2018 and has raised $77 million in funding so far, including a Series B round of $50 million in January, per Crunchbase.

“We’re directly connected to payroll systems and make it easy for employees to switch completely or partially from one deposit [destination] to another.”
— Kurt Lin, Pinwheel

Pinwheel, which calls itself a “payroll connectivity platform,” has relationships with nearly 2 million employers as well as major payroll networks like ADP and Justworks. Its technology allows employees to switch a direct-deposit relationship with just a few mouse clicks.

“Traditionally, it has been exceptionally hard for employees to switch direct deposits. It might involve submitting paperwork to HR, and it was a super clunky and high-friction experience,” says Kurt Lin, Pinwheel’s co-founder and chief executive officer. “We’re directly connected to payroll systems and make it easy for employees to switch completely or partially from one deposit [destination] to another.”

Pinwheel has data on about 85 percent of the workers in the country, according to Lin.

New Threats to Retaining Direct Deposits

Pinwheel also offers its clients — which include fintechs such as Acorns, Varo and Square’s Cash App — data that provides insight into payroll flows. One of its pitches to potential clients is that they can use such real-time income and employment data not only to reduce risk, but to become the primary financial institution for users.

What’s more, Pinwheel enables clients to market to the employees of the millions of companies it has relationships with.

Though all of Pinwheel’s publicly listed customers are fintechs or neobanks, it does work with some traditional banks as well, according to Lin, who says he is unable to share any names.

He says the companies that work with Pinwheel usually increase their direct-deposit inflow by about 20% on average. He cites Square’s Cash App as a particular success story, claiming that its direct deposits shot up more than average even though it isn’t a traditional bank.

Friction Is No Longer a Buttress:

People can switch their direct deposit from one financial institution to another in less than 90 seconds, thanks to technology from companies like Pinwheel.

Block, the tech company that owns Square, offers banking products and services like payments, cards, and savings accounts to consumers. Its intent is to displace the traditional financial institutions its customers might be using.

“Over time, we want to work towards being ‘primary’ because everything that you need in your financial life you can find within Cash App Card,” Block’s co-founder and chairman, Jack Dorsey, told analysts on the company’s third-quarter earnings call. “So that’s the goal, that’s what we’re focused on, and I think we have the best strategy to get there.”

Charlie Kelly, a partner at the tech vendor management firm Remedy Consulting, lists direct deposit as the top indictor of whether accountholders think of a financial institution as their primary one. Others include debit card activity, bill payments and use of multiple channels and multiple products.

“If you own one of these secondary relationships, but not the primary, then your chances of being the place the customer shops first drop significantly,” Kelly writes in a blog post.

Dig Deeper:

KeyBank’s Strategy: Satisfy Customers, Pursue Switchers

KeyBank focuses on retaining direct-deposit relationships in all that it does, Warder says.

The bank provides financial advice and tools to help people manage their finances better. It works to design products that are appealing. It also aims to deliver “great customer service” consistently through in-person and digital channels. “We are hoping that these combinations of things make them say, ‘We want to stay here,’” Warder says.

KeyBank is also investing in digital innovation. An example of that is its work with ClickSwitch, a fintech acquired by Q2 in 2021.

ClickSwitch facilitates digital switching of direct deposits in just 90 seconds. The platform also makes it easy for consumers to move digital memberships, subscriptions, and vendors to a new card.

On the Intention of Retention:

KeyBank says its formula for retaining primary relationships is providing great service, investing in digital innovation, and offering financial wellness tools.

Warder says a common impetus for a consumer to change their primary banking relationship is a big life change, such as getting married or divorced, starting a new job or moving to a new area.

So KeyBank uses its new tech partnerships in tandem with traditional bank marketing tactics — for example, sending a list of “new movers,” consumers who recently purchased a home, offers that have strong potential to convert into new customers.

The strategy appears to be working: KeyBank says it onboards around 12,000 new direct-deposit relationships per month.

Banks can’t rely “simply on customer inertia” or customer inconvenience to keep the direct-deposit relationship, Warder says.

Consumers are “deposit splitting” more often these days — sending direct deposits to two banks, or a bank and a fintech, he says. “It’s going to be more competitive than ever before to win and keep these primary relationships.”

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