As the banking ecosystem moves to a digital-first profile, we have identified the following five trends that shaped digital banking during the most recent quarter. Furthermore, we expect that these trends will persist into 2022.
Not only has digital banking achieved critical mass, recent surveys have found that it has become an indispensable tool in people’s lives.
A Citizens Banking Experience Survey found that 90% of consumers and 86% of small businesses use digital banking channels. Moreover, 40% of consumers claim that digital banking capabilities are the most important factor when choosing a banking provider.
Recent years have seen digital challengers engaged in a land grab in a market characterized by very strong growth and relatively low barriers to entry. Several digital banks have attained significant scale while others have established a strong presence within a specific market niche. However, we are now seeing signs of a shakeout in the digital bank sector in 4Q21 with pullbacks, market departures and consolidation.
Monzo and N26 both announced during the quarter that they were quitting the U.S. market.
MoneyLion announced the acquisition of Even Financial for $440 million.
Google dropped plans to offer bank accounts to its users.
Traditional banks are addressing the threat from digital banks by continuing to grow their digital user base, adding new digital functionality, improving the digital user experience (UX) and acquiring/partnering with fintechs.
Bank of America continues to lead the way in digital banking engagement among the main U.S. banks. In October, it reported that 5 million clients were using Life Plan, its personalized digital financial planning experience.
U.S. Bank is also a leader in driving digital banking penetration among its customer base; digital customers represented 70% of its total active customers at the end of 3Q21.
According to an Atos survey, 66% of bank leaders named transforming the digital experience as a top priority.
Younger demographic segments represent the key battleground between traditional and digital banks.
Traditional banks tend to have higher levels of trust and loyalty among older segments, a fact that is increasingly recognized by the banks themselves; a Bank Director survey found that 95% of financial executives believe that they have the tools in place to effectively serve baby boomers. However, only 43% believe that this is case for Millennials.
According to a Plaid survey, younger segments have the highest fintech adoption, led by Millennials at 95%, followed by Gen X at 89%, and Gen Z at 87%. (Boomers’ fintech adoption rate was 79%.)
While traditional banks migrate to a digital-first approach, they believe that clients will continue to value the branch channel.
Many banks are announcing branch reductions as they reduce branch density. Our analysis of FDIC SDI data on domestic U.S. branches shows that there has been a decline of almost 10,000 branches over the past five years, with some evidence in recent quarters that the rate of bank closures has accelerated (a decline of at least 1% of total branches in three of the past four quarters). However, it is important to note more than 82,000 branches remain in operation.
According to a Capital One survey, 42% of consumers reported that they missed being able to visit their bank branch during the pandemic.
Branches are also crucial to establishing a foothold in new markets. Citizens’ CEO Bruce van Saun claimed at a December 2021 conference that the bank could not target the New York City metro market without the branches it is acquiring from HSBC. JPMorgan Chase has similarly used flagship branches to gain a foothold in expansion markets.
We expect that many of these trends will continue and even intensify in 2022 as both established and emerging players adapt their product offerings, channel strategies and customer experiences to changing customer behaviors and preferences as well as an increasingly dynamic competitive environment.
As consumers turn to digital banking channels for everyday banking – and for an increasing range of more complex banking interactions – the battle between digital challengers looking to enter and grab a share of the market and traditional banks seeking to optimize customer retention and engagement has intensified. With this in mind, the following are five key trends that emerged in the digital banking space during the 3rd quarter:
Existing digital challengers are expanding their product portfolios and raising funding for further growth.
Established digital banks are continuing to report strong customer growth. They are looking to enhance existing customer relationships by introducing new products.
Digital banks who raised funding in 3Q21 included Revolut and Varo (raised $510 million, valuing the company at $2.5 billion).
New digital challengers are emerging. With relatively low barriers to entry, new digital banks continue to emerge, with many targeting specific market niches, such as the recent launch of Nerve, a challenger bank for musicians.
Traditional banks are investing to build strong digital engagement. Banks have responded to the challenge posed by digital challengers by directing increased resources to develop features and tools that enhance the digital experience. To show progress on this, many banks are now publishing metrics not only on (digital/mobile) usage, but also on growing digital engagement:
Bank of America reported Zelle P2P payment users rose 24% y/y to 15.1 million in 3Q21 and Zelle payment volume jumped by 54% to $60 billion.
U.S. Bank reported that digital transactions accounted for 80% of total transactions in 3Q21, up from 67% in 3Q19.
Huntington Bank reported that digitally-assisted mortgage applications accounted for 96% of total mortgage applications in 3Q21, up from just 9% in 3Q20.
Traditional banks are developing their own digital banks. While many traditional banks are competing with digital challengers by enhancing their digital banking functionality, some are going further by
Launching standalone digital banks: Cambridge Bank launched Ivy Bank, a digital-only division.
Adding products to the digital bank’s offering: Citizens Access, Citizens’ national digital bank, is planning to introduce mortgage lending and student refinance by the end of 2021, as well as checking, home equity, credit card and wealth in 2022.
Traditional banks remain committed to the digital-human channel model. Many banks have realized that the broad transition to digital channels for everyday banking transactions means that they can continue to serve a market with a less dense branch presence, so are cutting branches in existing markets. However, their continued reliance on branches is seen is the fact that many are opening branches in de novo markets (JPMorgan Chase is halfway through a plan to open 400 new branches by the end of 2022). Banks are also redesigning branches in existing markets to reposition them to take on new roles (e.g., advisory centers, brand beacons, community hubs, locations to showcase new innovations).
Banking customers’ growing preference for digital (online and mobile) channels – as well as the huge number of digital challengers looking to gain a share of the market (read our December 2020 blog on segmentation among new entrants) – has led established retail banks to ramp up their investment in digital channels.
Growing digital banking users continues to be a prerequisite in establishing strong customer engagement. The onset of the COVID-19 pandemic in early 2020 was the catalyst for many reluctant consumers to use digital (online and mobile) banking channels for the first time. Many of these have continued to use digital channels even through branch banking has returned.
The top three retail banks – Chase, Bank of America and Wells Fargo – all report steady growth in active digital users. Bank of America claimed that 70% of its Consumer Banking households now use its digital channels.
Many U.S. banks also publish metrics illustrating that customers are using digital channels to carry out an range of banking activities, such as:
Conducting banking transactions:
The digital channel accounted for 68% of Region Bank’s total customer transactions
Interactions using Bank of America’s Erica virtual financial assistant rose 153% y/y to 94.2 million
18% of UMB Bank’s consumer deposits were made using its mobile app
Making person-to-person (P2P) transfers:
Regions reported a 75% y/y rise in Zelle transactions
Acquiring new products and services:
Truist reported that 44% of new checking accounts were opened digitally
The digital channel accounted for 65% of U.S. Bank’s total loan sales