5 Key Digital Banking Trends in 4Q21

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.

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.

5 Key Digital Banking Trends in 3Q21

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:

  1. 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.
    • New product launches during the quarter included Acorns Early Smart Deposit; the Albert Cash checking account; a checking account and mobile app from Atmos Financial; the Douugh Wealth robo-advisor; as well as an instant payments feature from gohenry.
    • Digital banks who raised funding in 3Q21 included Revolut and Varo (raised $510 million, valuing the company at $2.5 billion).
  2. 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.
  3. 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.
  4. 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.
  5. 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).

Six keys to building a digital bank that delivers

In our recent blog post, we described digital banking strategies that are emerging from traditional and nontraditional industry players. Whether starting from bricks and mortar or monoline, here are six best practices to consider:

Clearly define success

Your institution’s drive to digital banking is indelibly shaped by your current channel infrastructure, ROE/ROA goals, product portfolios and customer bases. So, recognize that digital banking objectives are not all the same:

  • Regional banks are most likely to create digital banking platforms to expand banking operations into new geographic markets faster and cheaper than branch acquisition or build will allow.
  • Monolines, like credit card, financing or segment lenders, are most focused on reducing cost of funding and increasing diversification.
  • The top three are all about defense through offense, and leveraging investment capacity to maintain share and improve profitability.
  • Many are motivated by the chase for younger demographics.

And of course, some banks conclude that evolution is a better strategy than revolution, and focus on enhancing digital banking capabilities rather than launching standalone or sidecar digital banking units.

Get internal support for the development of a digital banking unit.

Change within many organizations – but especially banks, which tend to be conservative – often faces internal resistance from legacy structures, systems, policies as well as organizational inertia. For a digital banking unit to be successful, these internal barriers need to be identified and overcome. Key to overcoming this resistance include:

  • Getting senior management buy-in and active support
  • Ensuring that all relevant bank departments are included in the unit’s design, launch and ongoing rollout
  • Implementing an internal marketing program to gain widespread understanding and acceptance of the new unit

Develop a digital banking unit road map.

Most digital banking units start with a high-yield savings account. Then there is usually a lull before a new product (such as a checking account or a lending product) is added. This delay is due to a number of factors:

  • Banks often create these units with a narrow focus on growing deposits. CIT launched an online bank in October 2011, and its product portfolio consisted of savings accounts and CDs until November 2019, when its launched eChecking (a digital checking account). In the same month, CIT described its digital bank as a “nationwide digital deposit franchise” in an Investor Update.
  • Banks want to analyze how units are performing (in terms of customer acquisition, customer attrition, deposit growth, etc.), what marketing approaches and offers are most effective, and what roadblocks have been encountered.
  • Banks tend to focus investment and energy on the initial launch and not enough on the post-launch period.

This delay in launching additional products can be addressed by creating a rollout plan that also covers the post-implementation period. The plan should include comprehensive feedback mechanisms for providing actionable intelligence to all relevant departments, which in turn improves turnaround times for technology fixes, new product introductions, offer development, and follow-up marketing campaigns.

One bank that has shown the way in rolling out new digital banking products is Citi. In launching a digital-first approach outside of its light branch footprint, one of the bank’s primary objectives was to cross-sell banking products to its huge credit card customer base. In 2019, it launched Citi Accelerate Savings, two lending products (Flex Loan and Flex Pay), and Citi Elevate Checking (a digital high-yield checking account).

Create and launch an integrated marketing plan.

While the technological, operational and product-related issues around the development of a digital banking unit are hugely important, the bank’s marketing department should also be involved in the initial design and development of the unit. Marketing needs to develop a marketing plan that covers:

  • Branding: determining how closely the unit should be associated with the parent bank, and developing a brand and branding guidelines.
  • Targeting: identifying and profiling target segments, and creating a plan to reach them.
  • Media: determining the optimal allocation of investment in traditional and nontraditional marketing channels to reach and engage with targeted consumers.
  • Messaging: developing messaging that both highlights your digital bank channel’s key selling points, and tackles perceived concerns, such as security and privacy. This messaging should be consistently expressed through various media channels.
  • Offers: testing and refining a range of offers (acquisition, cross-sell, referral, etc.) for different segments.

Once this plan has been developed, the bank then has to devote equal energy on the development and implementation of specific marketing initiatives, which should include testing various program components to get feedback on what is working – or not – with a focus on speed and flexibility.

Integrate your digital and human channels.

Even as many consumers move to digital channels for their everyday banking (and even for more complex financial transitions), these consumers continue to prefer a channel mix that includes digital and human components. This is a key advantage that traditional bricks-and-mortar banks will continue to have over digital-only banks, so they will want to leverage digital-human channel integration.

  • PNC is following a digital-first approach outside of its footprint, supported by a very thin branch presence (“solution centers”) in selected markets. In a December 2019 interview at the Goldman Sachs U.S. Financial Services Conference, PNC’s CEO Bill Demchak claimed the bank has been “really surprised to the upside on how important those solution centers are…. We’ve accelerated the solution center build, and we’ll do more than we originally assumed.”
  • Santander Bank’s planned digital bank is expected to operate initially within its footprint, so it will need to coordinate efforts with the bank’s branch channel (and avoid cannibalizing existing clients). In a November 2019 American Banker article, the bank said that the account-opening process will be entirely digital, but clients will be able to access accounts through the branch if they choose.

Build a compelling customer experience.

Even for the most tech-savvy consumers, conducting their banking operations primarily through digital channels is a relatively new phenomenon. While consumers are attracted to the speed, ease and convenience of performing banking tasks online, they remain reluctant to fully commit to the digital channels for all their financial activities (e.g., acquiring new products and services, discussing sensitive financial matters). Banks can in part address this concern by providing the option to engage with the bank through a physical channel. Banks can also build consumer trust and engagement by providing a digital experience that incorporates user experience (UX) design, personal financial management (PFM) tools and content, as well as access to customer support via social media, phone and/or live chat. In a recent ABA Banking Journal article, John Rosenfield, president of Citizens Access, claimed that “designing an excellent customer experience was the highest priority” in creating a digital bank.