Banks Lost $3 Trillion to Fintechs in the Last Five Years. Blame the Primacy Myth
By Steve Cocheo, Senior Executive Editor at The Financial Brand
Simple Subscribe
Subscribe Now!
Executive Summary
- In the last five years banks and credit unions have watched over $3 trillion in deposits leave for fintechs offering savings and investment services, according to research by Cornerstone Advisors.
- To slow or reverse that trend, traditional banks and credit unions need to shake off stale product design and conventional ideas about primacy.
- One solution that could especially appeal to “Zillennials” — a checking account directly linked to the ability to make investments seamlessly.
For years, Ron Shevlin has been calling consumer checking accounts “payment motels” — short-term places for retail customers to park their funds before moving money to other destinations. But even that dismissive label doesn’t quite do justice to the deposit trends that the analyst’s recent research has uncovered.
He argues over $3 trillion has been checked out of the payment motels, apparently permanently.
In the last five years, $2.15 trillion has flowed from megabanks, regional banks and community financial institutions into fintech investment accounts like Acorns and Robinhood. Furthermore, over the same period these institutions have lost $1.05 trillion to fintech savings accounts.
Shevlin, managing director and chief research officer at Cornerstone Advisors, based these numbers, shown in more detail in the two tables below, on projections made from a survey of more than 2,700 American adults with a smartphone and at least one checking account. (The full Cornerstone study, “Stemming the Deposit Outflow: The $2 Trillion Investing Opportunity for Banks and Credit Union,” can be found here.)
It’s not just a matter of consumers chasing return, because traditional players have raised their rates when necessary, according to Shevlin.
Want more insights like these? Check out Pinwheel’s content hub: Primacy in the Digital Age
Deposit outflow to fintech investment accounts by type of financial institution and generation ($ in billions)
Source: Cornerstone AdvisorsThe classic idea of primacy is evolving, and how it is evolving defies past definitions.
“The data paints a less-direct relationship between direct deposit and primary account status,” Shevlin says in a separate report, “Billions Lost: The Cost of Bankers’ Myths About Americans’ Finances.”
Deposit outflow to fintech savings accounts by type of financial institution and generation ($ in billions)
Source: Cornerstone AdvisorsHow so? First, many people maintain multiple checking account relationships, more so among Millennials and Gen Z. Shevlin also found that over half of the respondents in the latter study didn’t correlate an institution being their primary provider with it receiving their direct deposit.
In fact, the report found that many people — one in four — with multiple checking accounts actually have their direct deposit sent to an account that they don’t consider to be their primary. And that share is even higher with Gen Z — a third of them do that.
Finally — and this really tears at the classical idea of primacy and direct deposit — having the direct deposit relationship doesn’t actually pay off that much. The research found that only a slightly larger percentage of customers who have direct deposits made to an institution also obtain such services as credit cards, auto loans, personal loans, and mortgages from their “primary” provider.
“I believe that the primacy construct in consumers’ minds today is at the product or service level,” rather than at the institutional level, says Shevlin. “They have a primary checking account. They have a primary payment tool. They have a primary investment account. In fact, I think the idea of who’s your primary financial institution is a dated concept.”
Shevlin says it has become so easy to move funds around the financial services universe that consolidating all of one’s accounts in one institution “makes no sense in today’s world.”
That’s not to say that primacy at the product or service level isn’t important.
“It puts you not necessarily at the top, but in the running for a broader relationship,” Shevlin says. “But it doesn’t guarantee anything.”
But if the checking account remains an important hook, how do you hold the relationships and the money? And how do you win back some of what has already leaked out?
Shevlin has some thoughts on that too. But first it’s important to understand that younger generations — Millennials, Gen Z and the blend of the two that Shevlin sometimes likes to analyze as “Zillennials” — don’t invest like most of the Baby Boomers and Gen Xers who are making product and strategic decisions in many banks and credit unions.
Read more: Credit Unions May Have Problems Brewing Among Millennials and Generation Z
It’s Not Your Grandpa’s Investment World, and, Increasingly, Not Yours Either
Among younger generations, much more of the flow from traditional institutions has been from deposit accounts to investment accounts.
“On average,” Cornerstone’s report says, “Gen Zers and Millennials move deposits to investment accounts about three to four times a month. Gen Xers average nearly two moves a month, and Boomers average nearly one a month.”
The report also notes that a growing portion of Zillennials “are investing, opening investment accounts with fintechs and crypto exchanges, and opening and using banking products from these providers.”
Spend some time on Acorns and Robinhood, and you’ll see things connected to what Cornerstone is talking about. Acorns, for example, has been acquiring products that fill out its lineup of services that support consumers at every family life stage. It’s no longer just an app for young people dipping their toe into investments.
Robinhood has also been expanding, and is planning to launch Robinhood Banking, a platform offering elements of a private banking experience, “providing access to traditional checking and savings accounts with luxury benefits,” according to a company announcement. The lineup will include not only estate planning and tax advice, but perks like access to the F1 Monaco Grand Prix and private jet travel.
And then there’s cryptocurrency.
“Crypto is a growing asset class for younger consumers,” according to the “Stemming” report. “A quarter of Gen Z investors and a third of Millennial investors have crypto in their investment portfolio.” More specifically, Zillennials average a quarter of their investment assets in cryptocurrencies, and for one out of five Zillennials, more than half of their portfolio is in crypto. The study also found that many of those Zillennials who aren’t currently in crypto told the firm that they plan to move money into crypto in 2025.
What’s driving this interest? “It’s a desire for return as well as to get rich quick, ride the wave, ride the boom,” Shevlin says. “I would also guess that if you’re 23 years old, it’s cool to be in crypto.”
Regarding crypto, Shevlin says banks and credit unions that want to hang onto relationships may have to choose to offer crypto in some way — or watch some younger customers walk.
“There is consumer demand for investing in crypto,” says Shevlin. “So, it becomes a question: Do you want to meet the demand of your customers? You have the choice to not offer it, but there’s a cost. They are going to go do it somewhere else.”
Shevlin says a few years ago bank boards he spoke with considered crypto but ultimately shied away. It was seen as a rogue offering.
Today, he says, “there’s a growing belief that with the right regulatory oversight and constraints, it’s more acceptable to offer.”
Read more:
A Potential Strategic Shift: Adopt an ‘Investment Checking’ Approach
An important evolution of the “payment motel” is that while the money used to move out as payments, now the money is leaving the bank to go to different accounts that the consumer also owns, Shevlin says. It turns the bank checking accounts into a hub, of sorts, but still not one where the money stays very long — maybe more of a “payment bus stop.”
Can banks and credit unions pull back funds that have checked out? Perhaps not everything, Shevlin says, but by re-thinking what a checking account is, they could regain some of what’s left and change the state of things to come.
Cornerstone’s research indicates that many Americans want more out of checking, especially younger people. The firm presented survey respondents with a number of options.
One such option would integrate checking with investment services. This was of interest to many Zillennials. More than half — 53% of Gen Zers and 51% of Millennials — thought such an arrangement would be a better value than the checking account that they currently consider to be their primary.
“On one hand, this should be interpreted as a serious threat to community-based financial institutions, because they have a precipitously low share of primary account status among Zillennials,” the Stemming report says. “On the other hand, it represents an opportunity to offer these products to young consumers to lure them away from megabanks and fintechs they do business with today.”
Older bankers may recognize a parallel here. In the late 1970s, then-independent Merrill Lynch launched the Cash Management Account, which linked a checking account provided by Bank One (long since part of JPMorgan Chase) with investment services and with a Visa card. In subsequent years it was much imitated by both other brokerage firms and some banks. Back in the day, it was an upscale product.
Financial services have come a long way since then, in terms of boundaries, technological capabilities, and product design, Shevlin notes. The original Merrill CMA — meant as a banking bridge with brokerage — was clunky compared to what can be done today.
Adopting some variation of checking plus brokerage with today’s rules and tools could establish traditional banking players with the generations that increasingly will make up their core prospects — and be inheriting from older generations. It could bring them in with a product that combines the appeal of both a primary checking and a primary investment account.
