Growing Impact of Payment Disruptors Threatens Financial Institutions

Big tech and mega retailers are impacting the banking industry in a big way – and they're hitting hard on payments. Meaningful innovation is necessary for traditional financial institutions to remain relevant.

Americans are in the market for new banking relationships and they’re finding the latest offerings where they shop for everything else: mega retailers and big tech.

In the past year, there have been numerous long-term changes in banking – from digital adoption to contactless payment methods. Yet the biggest shake-up might be the types of companies entering banking. From Google to Walgreens, Apple to Walmart, tech and retail corporations are entering banking in large numbers – and with big plans to change how Americans consume and spend.

While each company has a slightly different model, they are all seeking to own the payments relationship – the most frequent point of interaction a consumer has with their financial institution.

Banking as an industry has been slower to innovate than many others, and as a result, others are seeing an opportunity to step in and create transformation – specifically in payments. For retailers, an entrance into payments provides the obvious benefit of increased access to and interactions with the very individuals who are already customers.

By increasing the touchpoints of these relationships, they build on customer loyalty and increase top-of-mind status.

For tech companies that already own so many of the daily engagements and have access to a plethora of consumer data, adding payments to the mix provides them with an opportunity to continue to increase interactions, reliance and data sharing – giving them more information and control over every decision an individual makes.

Financial Institutions Beware:

The ramifications of tech companies and retailers entering payments is vast: technology standards are quickly evolving, the market for financial tools is widening and consumer loyalty has an entirely new look.

Impact of Higher UX Standards

Tech giants have perfected user experiences over the years and know what consumers are seeking from online and app-based engagements. They are able to take this knowledge and expertise and translate it into banking – making the same seamless experiences we all have when using online search and shopping available in payments as well.

Apple, with its Apple Card, is a prime example of a tech company taking a traditional financial experience – opening a new account – and transforming it into a user-friendly digital experience. Instead of a cumbersome in-person paper application process, the Apple Card is a start-to-finish, digital account opening process that takes just minutes from the when the application is started to the digital card being available.

As a result of these digital experiences being introduced by tech companies, consumers are no longer willing to patiently stand by the traditional banking processes.

Payment Options Abound

The U.S. financial industry has long offered many options to cardholders. With over 10,000 banks and credit unions at one point, there was no shortage of institutions to choose from. The difference between now and then, is that challenger banks, retailers and tech companies are now among the mix – offering different features and perks than traditional issuers.

Adding to the abundance is the easy access and digital availability these new options offer. A majority of financial institutions have relied on in-person account opening, but these new options are not only available online, but are often promoted through digital methods (online advertising, payment wallets, emails, etc.) and are more accessible through digital channels (websites and apps).

The ease in accessing these other accounts makes them alluring options – especially during times when people are engaging more online and less in person.

Consumer Loyalty in Question

Consumer loyalty is threatened by the financial offerings being teased in-store and on their devices 24 hours a day. With 21% of consumers always shopping for a new banking relationship, tech companies and retailers realize the opportunity to enter payments and are quickly entrenching themselves in the finance industry.

In addition to the willingness of a consumer to switch banking relationships, the allure of a new account is often too strong to resist. These industry disruptors are often quick to offer perks – in addition to features – that traditional institutions do not. From free DoorDash and Netflix subscriptions, to higher interest rates and bonus offers – many new checking accounts are coming with benefits that are especially enticing to the Millennial and Gen Z consumer.

88% of Millennials and Gen Z access their bank accounts using mobile devices, with Baby Boomers and Gen X not far behind them in adopting mobile access, according to Cornerstone Advisors. In the past three years, digital banks have tripled their share of new accounts, megabanks have increased new applications from 36% to 51%, and community institutions have seen their new account openings cut in half.

The Future of Payments

The stark reality that loyalty and cardholder relationships are being threatened is something that traditional financial institutions of all sizes must face if they want to remain relevant and competitive in days to come. While megabanks are not yet seeing the impact of new entrants in the market, they – along with community issuers – must remain vigilant in digital adoption to maintain cardholder relationships.

More and more consumers are looking to access and control their finances when and where it suits them best. Opening a new account at 7 a.m. on a Saturday during soccer practice? Setting up alerts and travel plans at 11 p.m. on a Tuesday as their flight lands in Paris? Checking a balance and creating an ATM withdrawal request from the grocery store line? Yes, yes, and yes.

All of these features are among those that today’s consumer wants to access and easily execute without standing in line or waiting on hold.

Today’s banks and credit unions need to remain agile and respond quickly as consumer needs and expectations evolve, adopting a spirit of innovation that allows for quick onboarding of digital technologies, features and consumer offerings.

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