This Month in Retail Banking: Fintech Shake-Up, Rates and Overdraft

It’s already December, but things aren’t slowing down yet. That is particularly the case with topics that we explore in this month’s issue.

We start off with some news that is hot off the press – two of the biggest European consumer fintechs are pulling out of the U.S. We look at why they are withdrawing and what it means for traditional U.S. banks and other fintechs that are making inroads.

We then move to the fast-changing views on rates. Not only are they likely to rise in 2022, but it now looks like the increases will take place faster and more frequently than what was on the table just a few months ago.

If you haven’t yet read our new overdraft research report, “Competition Drives Overdraft Disruption,” you can eyeball a snippet of it here. Please see the embedded link for the full report.

Speaking of research, we reveal additional insights from our research on business banking and our annual shopper survey.

We wish you a happy and healthy holiday season.

Agenda

A Shake-Up for Fintechs

While it was already clear that it is difficult for fintechs to get a U.S. charter, we now see that it is far tougher for them to gain a foothold among American consumers. And there are lessons to be learned for those that want to succeed.

In recent weeks, Monzo and N26 announced their withdrawal from the potentially-fruitful U.S. market. Meanwhile, competitor Chime was the most downloaded banking app in the first half of 2021, registering 6.4 million total installs, a good 3.7 million more than Current, the closest runner-up. In the same period, N26 recorded just 172,000 downloads while Monzo’s statistics didn’t even make any of the industry’s top lists.

Challenging as it may be, institutions continue to look to the competitive U.S. retail banking market to uncover opportunities for profit. For digital-only banks, conditions over the past couple of years made market share look ripe for the taking, with pandemic-enforced rules putting pressure on brick-and-mortar institutions.

The fate of N26 and Monco comes as no surprise when considering their strategies as compared with Chime. While N26 and Monzo looked to appeal to a mass market (N26 went as far as saying it would target anyone in the U.S. “who lives life on a mobile phone”), Chime has executed a strategy to appeal to low-and middle-income consumers by offering users the ability to get their direct-deposit paychecks early. In a country in which millions live paycheck to paycheck, this type of service will naturally sit well. The company also followed the same strategy with federal stimulus payments, delivering the funds to hard-hit consumers before other banks gave customers access to the money.

But headline-grabbing offers would mean little without Chime’s in-app user experience that offers market-leading automated savings tools and goal-setting functionality, daily notifications and transaction alerts, person-to-person transfers, pre-authorized withdrawals and ACH transfers – all smoothly integrated in an intuitive and dynamic interface. Chime clearly wants users to hang around once they’ve completed an engaging account opening and onboarding process.

Chime has succeeded by presenting a unique value proposition with a differentiated product offering that has been marketed intelligently. It’ll need to remain on the front foot, however. Many incumbent banks have revised overdraft fees and policies and are overhauling their apps. Revolut is hoping to gain its U.S. banking license in the first half of 2022. Incumbents aren’t standing still either: Truist’s digital team is expected next year to add strength to its solid foundations.

There are plenty of other new entrants in U.S. retail banking and we will likely see additional ones in 2022. The question: will we also see more casualties?

Rate Hikes on the Horizon

The Fed is becoming increasingly aggressive as the rate of inflation exceeds expectations, signaling an end to tapering in March instead of June and appearing to speed up the timing to raise the benchmark Fed Funds rate. The markets are pricing in even more aggressive assumptions, with an 80% likelihood of at least one increase by June and the possibility that rates increases will start as early as March or May. By the end of 2022, Fed Funds futures are now showing three Fed rate increases as the most likely outcome, with a chance for four or five. (See Figure 1.) This is a marked change from even two months ago, when markets were pricing in only a 10-20% chance of a Fed increase by June. 

Figure 1: Target Rate Probabilities for December 2022 Fed Meeting

Source: CME FedWatch Tool

A more aggressive Fed pace would significantly increase the likelihood of some price competition returning in 2022. Even with high levels of excess liquidity remaining at most banks, Curinos models show that three Fed increases are likely to result in some acquisition rates moving off floor levels. Banks with lower volumes of surge deposits – particularly those with lower concentrations of primary checking like direct banks – may need to increase rates to see a continued growth trajectory, particularly with inflation continuing. Even for banks that don’t need the growth, defensive pricing may be critical.

How will you retain core relationships in the face of increased competition?

The Overhaul of Overdraft

Barely a week goes by in which we don’t see an announcement from a bank, credit union or fintech about a new policy related to overdraft. There is certainly a re-awakening under way for a product that has both generated controversy and provided a valuable backstop for consumers for decades. Just this month, Capital One dropped all overdraft fees and Chase announced it will give customers extra time to correct overdraft balances.

To that end, Curinos recently conducted extensive research into overdraft practices and customer attitudes about the product. The following are some of our key findings and observations:

  • U.S. overdraft revenue fell approximately 57% from $40 billion in 2008 to $17 billion in 2019.
  • Frequent overdraft use fell by 40% to 4.9% between 2010 and 2020.
  • Traditional banks and fintechs that offer consumer-friendly overdraft and overdraft alternatives have experienced a 40% improvement in account acquisition since 2017 compared with a decline of almost 30% for non-innovators. (See Figure 2.)
  • A majority of overdraft comes from consumers who see benefit in the service, specifically as an emergency safety net to cover rent/mortgage, utility payments, groceries and medicine. And nearly two-thirds of consumers indicated that it was a conscious choice to trigger an overdraft payment.

Figure 2: Innovation and Account Acquisition

Source: Curinos Overdraft Report, Banks with OD innovation include: Bank of America, Capital One, Citibank, Huntington, M&T, U.S. Bank, Chime, Current, Varo, SoFi Money, Discover

These findings will be particularly critical for 2022 as short-term liquidity options like buy now, pay later continue to penetrate the market. Providers who aren’t aware of these trends and don’t act on them will be left behind.

We encourage you to review the entire report, which can be found here.

Businesses Seek “Superior Products and Services” Over Branches

Recent business banking research conducted by Curinos found that 39% of businesses identified “superior products and services” as an important attribute when they are choosing their primary institution. (See Figure 3.) Only 32% cited “convenient location(s)” as an important attribute, a significant decline since 2018 that is consistent with what we are seeing on the consumer side. Branch-centricity is declining, which means banks that want to win new customers must increasingly think about differentiated product, services or branding.

Being “easy to work with” is still the most important attribute, although businesses are defining that in different, more virtual ways during the COVID-19 pandemic.

Figure 3: Businesses now value superior products and services more than convenient locations

Source: Curinos Customer Knowledge | 2018/2021 U.S. Business Banking Research Q19

The Evolving Drivers of Convenience

Digital adoption and the shift toward digital acquisition has continued to evolve the retail banking industry. COVID-19 has acted as an accelerator of digital adoption, and the newest data from the Curinos Shopper Research illustrate the latest trends in this evolution.

Historically, branch-based factors drove about half of consumers’ view of convenience. In recent years, not surprisingly, online and mobile banking have surpassed the branch network in driving importance among consumers. (See Figure 4.) Interestingly, touchpoints with the institution continue to be important. The research shows that ATMs still matter to consumers and being “easy to reach by phone” has become more important over the last several years, particularly with Gen Z and Millennials who are less frequent branch users.

Looking ahead, it will be critical for banks to think about their convenience proposition differently, whether that means investing heavily in digital capabilities/remote support or reimagining the offerings delivered at the branch. Simply having a physical presence no longer cuts it.

Figure 4: Consumers’ definition of convenience continues to shift away from branch-centric factors

Source: Curinos Customer Knowledge | U.S. Shopper Survey all markets nationwide: 2014 (N=6,116), 2018 (N=8,582), 2019 (N=9,185), 2020 (N=10,038), 2021 (N=13,222) Q26. What would do the most to make a bank a convenient place for your checking account?
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