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 we enter 2022, it is worthwhile to look back on the key trends in the U.S. payments space during the past quarter, as many of these trends should continue this year.
Key credit card metrics continued to improve.
According to the FDIC, credit card outstandings rose 1.2% y/y (to $806 billion) in 3Q21, the first y/y growth rate since the first quarter of 2020.
The Federal Reserve Bank of New York reported that the credit card application rate rose throughout 2021, reaching 26.5% in October 2021 (a significant change when compared to the series low of 15.7% in October 2020)
Purchase volume rose at a 20%+ rate for most leading issuers in 3Q21
Charge-off rates remained at or near at historic lows.
Leading issuers launched new credit cards to fill gaps in their product portfolios and upgraded existing cards in key categories.
Wells Fargo launched a low-rate card called Reflect, featuring an 18-month 0% introductory rate that will rise to 21 months for cardholders who make payments on time.
U.S. Bank launched secured card versions of two existing unsecured credit cards; Altitude Go and Cash+.
Climate change-focused challenger bank Aspiration introduced the Aspiration Zero Card.
The Buy Now/Pay Later (BNPL) market continued to grow and evolve, with traditional payments players (e.g., Capital One, Mastercard) announcing plans to introduce BNPL options. Existing BNPL players reciprocated by launching card and pay-in-full options (e.g., Klarna announced plans to introduce a debit card and Affirm announced a pay-in-full option).
Gen Z and Millennials have emerged as key targets for both established and emerging payments firms.
American Express reported that spending by Gen Z and Millennials rose 38% between 2Q19 and 2Q21, while Baby Boomer spending declined over the same period. And perhaps more significantly, Gen Z and Millennials accounted for 75% of new Platinum cardmembers.
TransUnion reported Gen Z and Millennials accounted for 47% of total credit card originations in 2Q21, up from 39% in 2Q19.
However, it appears that traditional banks have not yet adapted their underwriting processes to capture this segment. A survey by Alliance Data found that 27% of Gen Zers claim to have been turned down when applying for their first credit card, a rate two times the level of any other generation.
The strong growth in digital payments (which accelerated during the pandemic) continued in 4Q21:
eMarketer predicts that U.S. e-commerce sales will pass $1 trillion in 2022.
Leading person-to-person payments provider Zelle processed $127 billion of payments in 3Q21, up 53% y/y.
We expect that most of these payments trends will continue in 2022 as consumer behaviors and preferences continue to be reshaped by the COVID-19 pandemic, and established and emerging payments providers adapt their solutions, offers and messaging to these market dynamics.
Numerous surveys continue to highlight financial literacy gaps among U.S. adults and children, illustrating the ongoing need for financial education programs (according to a Step survey, 97% of teens believe that financial literacy is important). Many financial firms and their partners have been at the forefront in developing and distributing innovative financial education programs. The following are noteworthy financial education trends in the 3rd quarter of 2021.
Build engagement with younger segments through financial education programs and content. Firms are looking at a wide range of channels to reach younger demographics:
HSBC created a new world in Minecraft – Fintropolis – designed to improve financial literacy.
Bank of America launched a 7-part series on YouTube that aims to share financial know-how with both parents and students.
Develop financial education partnerships with associations and advocacy groups.
OneMain Financial partnered with EverFi to launch the Money LaunchPad financial literacy program for students in grades 9 to 12.
BancorpSouth committed $1.5 million to Operation HOPE for financial literacy programs and announced six additional HOPE Inside locations.
Target specific consumer segments with financial education programs and thought leadership tailored to their unique needs, including:
LGBTQ: Capital One published an article, “The Debt Free Guys: Financial Obstacles Facing LGBTQ+ People”, and Ally published an article on “Financial Considerations for LGBTQ+ Couples.”
Couples: Ally Bank launched a marketing campaign targeting couples’ fears over the “Money Talk”, and Morgan Stanley listed “6 Money Questions to Ask Your Partner Before You Commit.”
Widows and Widowers: MassMutual published “A financial checklist for widows and widowers.”
Brand financial education programs to bring together various financial education initiatives as well as raise consumer awareness and engagement. Recent examples:
Regions introduced the Next Step podcast, the latest resources from the bank’s Next Step financial education program.
Capital One launched the Money & Life program, which builds on its former Money Coaching program.
Position financial education as part of broader ESG and CSR initiatives. Financial education efforts are now more prominently featured in financial firms’ annual ESG and corporate social responsibility (CSR) reports.