A new threat to financial institutions exists: deposit-taking Financial Technology (FinTech) companies.
Over the last decade, a number of direct-to-consumer FinTech companies have entered the market with attempts to deliver a more powerful financial experience to consumers. Examples of these companies include robo-advisors (Betterment, Wealthfront), personal financial management tools (Simple Bank, YNAB, Qapital), borrowing companies (SoFI, Lending Club) and many others. At first, these companies were focused on helping consumers improve a specific aspect of their financial life. Replacing the consumer’s primary banking relationship was either not the focus, or just not possible at the time (mainly for regulatory and scalability reasons).
However, because of API-enabled core banking systems and less focus from regulatory agencies on this segment (relative to financial institutions), FinTech companies are able to offer government insured deposit accounts alongside their core product offering. This has enabled these companies to be more of a direct threat than ever before to banks and credit unions.
For the past 10-20 years, banking has been a very transactional experience with focus on experiences such as depositing checks, making transfers and in general, replicating the branch experience through mobile and online channels.
Today, the transactional components of banking are necessary, but also have become commoditized. Instead, consumers are looking for that next financial partner who focuses less on delivering the most functionality, and more on impacting their financial life. For example, which financial partner can help the consumer save more, spend smarter and solve financial problems before they occur? We describe this as a shift from “transactional banking” to “emotional banking”.
Over the past 5-10 years, the financial services industry has witnessed thousands of new FinTech companies take advantage of this shift in banking. These new companies focus on the gaps existing financial institutions offer and deliver an emotional set of financial features to consumers. Now, with the ability to take government-insured deposits, banks and credit unions should be aware of this new form of competition.
Acorns focuses on helping the everyday consumer invest money. For example, if the consumer spends $3.87 at Starbucks, Acorns would round this charge up to $4.00 and invest the difference ($0.13) in the stock market. This money movement is out-of-wallet (i.e. the consumer is not manually facilitating the money movement) and out-of-sight (i.e. the consumer isn’t notified every time this happens).
However, Acorns now offers Acorns Spend - a fully FDIC-insured checking account. Consumers now have the option of opening up an account, with a fully functional debit card, all through Acorns. While this account certainly does not have the breadth of functionality a typical financial institution offers (stop payments, cashiers checks, remote deposit capture, etc.), early data suggests consumers will interact with Acorns far more than their primary financial institution. This implies consumers value a more impactful banking experience over the more traditional “feature-based” banking experience.
In addition to Acorns, there are a number of other “robo-advisors”, such as Betterment or Wealthfront, that may look to add checking accounts to their functionality base in the future.
Another example of a deposit-taking FinTech company is Qapital.
Qapital prides itself on its robust out-of-wallet and out-of sight savings tools. For example, consumers can set up a “Round Up” rule where everyday transactions are rounded up. Or, consumers can set up a “Set and Forget” rule. For example, every Sunday a certain amount of money will automatically be transferred to a “Rainy Day” fund. Other savings options include: “Spend Less” rule (spend less than $20 a week at Starbucks, save the difference for a car), and their “Guilty Pleasure Rule” (save for a trip whenever you order takeout).
Like Acorns, Qapital offers an interest-bearing, government-insured checking account. Consumers who have built loyalty to the Qapital platform can extend their relationship to include a checking account.
Alone, applications such as Acorns and Qapital can be powerful. They empower consumers to save money without thinking or acting. Coupled with a government-insured checking account, these FinTech companies are direct competition to financial institutions. Financial institutions should continue to offer a robust and complete set of functionality, but should place far more emphasis on delivering a more powerful and emotional set of financial services to their end-users.