By Eric Taylor, director of UX research and strategy at Varo Bank
Shortly before the Covid-19 pandemic hit, I had a fascinating conversation with a challenger bank customer — let’s call her Jennifer. Jennifer is a nurse practitioner, in her early thirties, and lives in Atlanta. Towards the end of the interview, when I asked her to give me three words that came to mind when she thought of her former brick-and-mortar bank, she hesitated for a moment and then said:
I won’t name the bank, but let’s just say that it’s a large national bank, which every American would recognize. When I dug a bit deeper and asked her about why she felt “professional thieves” was an appropriate descriptor, she explained that when she’d been in nursing school, money had been tight and she’d been dinged with numerous overdraft and minimum balance fees. Then, in her final year of studies, her financial situation got even tougher, and she was forced to max out her credit cards. She’d only recently been able to rebuild her credit into prime territory. She was now with Varo (my employer), a pure digital bank, which she felt gave her the same level as security as her old brick-and-mortar.
As a UX researcher in the fintech space, I have the opportunity to talk to people all across America about their financial lives. Jennifer’s conflicted relationship with traditional banking is a familiar story to those of us in the Fintech space. On one hand, the familiar, old school banking relationship feels secure and safe, and on the other, it feels like you’re being taken advantage of (to put it politely). Unsurprisingly, research has shown that most people who switch over to digital banks do so because of excessive fees and because they feel undervalued as customers.
It’s not your imagination. Bank fees are increasing.
Jennifer’s perception that bank fees have become exorbitant is grounded in reality. Following the 2008 crisis, banks were faced with a low interest rate environment and diminished income from securitization, trading, and real estate investments due to the economic downturn. In the ensuing years, big banks filled much of their revenue shortfall by raising fees—a lot. These service fees have increased both absolutely and as a percentage of noninterest income since the 2008 recession. This is part of a larger trend. According to a recent Cleveland Fed study, service charges increased from 14% of noninterest income in 2001 to over 25% in 2018.
Fast forward to 2019, when US banks raked in roughly $11 billion from overdraft fees.
Let’s not mince words. Fundamentally, these fees are about monetizing two things:
1) Customers’ mistakes (when customers don’t realize they’re overdrafting, or dipping below minimum balance threshold)
2) Customers’ desperation (80% of overdraft-related fees are borne by only 9% of accounts — the most needy folks, who on average carry a balance of $350)
On a functional level these service fees are analogous to payday loans, in that they act as a stopgap when customers have lumpy cashflow. However, in most cases, the implied interest rates and fees associated with overdraft loans are actually higher than the interest charged by payday lenders for small loans.
Also, it should be underscored that lower income folks and people of color are the hardest hit by banking fees. African American people pay, on average, $190 more in costs and fees for maintaining checking account than do whites. Latinx pay an average of $262 more in fees when banking. It’s no wonder that recent studies show that financial services remains the least trusted sector in the American economy.
Big banks can’t evolve, because they’re handcuffed by their business model
I recently read an interview with Jamie Dimon, the CEO of one of America’s biggest banks, in which he declared that the COVID-19 crisis was a “call to action for business and government to think, act and invest for the common good”. He also had some inspiring words to say about leveraging “this moment to think creatively about how we can mobilize to address so many issues that inhibit the creation of an inclusive economy and fray our social fabric.” These are admirable sentiments, but also quite problematic, since, as mentioned above, in 2018, 25% of big banks’ income came from regressive “service” fees (which include overdraft fees and minimum balance fees) that impact lower income and people of color disproportionately.
So Dimon is in a dilemma. On one hand, he wants to “think creatively” about how to make our economy more fair and inclusive, but on the other, his bank’s shareholders would be apoplectic if he suddenly renounced 25% of J.P. Morgan Chase’s income for… ethical reasons. Conclusion: despite all the high-flown rhetoric, eliminating or significantly reducing fees does not appear to be viable options for incumbent banks.
When the US economy opens up again, and starts to rebuild after the COVID-19 pandemic, traditional banks will be facing steep losses from bad loans, sketchy investments, and decreased deal flow. Income will be reduced across most of their business lines (maybe this is why Warren Buffet recently sold major holdings in Goldman Sachs, Wells Fargo and JP Morgan Chase). The economic situation will be dire, and consumers will be hurting. Big banks know this, and are setting aside reserves to cover a tsunami of defaults. In extremis, some small and mid-sized banks will fail, while others, especially the larger, more well-connected ones, will receive taxpayer-funded bailouts. Based on recent history, and their single-minded focus on shareholder returns, it’s highly likely that these same institutions will once again seek to offset income shortfalls by raising fees. After all, extracting fees from their customers is a critical part of their business model. It’s in their DNA.
This is already happening as we speak, with banks raking in near record fees, often from consumers that have been hardest hit by the Covid-19 epidemic.
Americans will become less tolerant of fees as crisis deepens
Clearly such scandalous behavior will not win the hearts and minds of American consumers. We’re facing the most challenging economic environment since the Great Depression. Though we’re in the early days of this crisis, Americans are already saving more, and becoming more frugal and price sensitive. This trend towards frugality will intensify over time. On a societal level, as in the last recession, we’ll probably see a lot of anti-big bank sentiment (think Occupy Wall Street, but broader-based). Both these factors will cause consumers to become far less tolerant of incumbent banks’ gratuitous and unfair fees. Traditional banking relationships will hit the skids… and Americans will optimize their finances.
But unlike the previous crisis, when alternatives were limited, there are now a surfeit of options in the US financial services space. Consumers will do their due diligence, and leave brick-and-mortar banks in droves. They’ll go to new digital players, many of which charge no, or minimal fees, thanks to their leaner, streamlined cost structures. Disruption can be messy, but this transition to purely digital financial platforms will be relatively seamless, given that the vast majority of people are mobile-first anyway, and have adapted fluidly to life without bank branches during the current COVID-19 crisis.
Furthermore, retention numbers should be solid—our surveys clearly show that challenger bank customers feel much better about their respective banks with regards to fairness and transparency than peers who bank with incumbents.This isn’t surprising, given that many of these fintechs have adopted a more empathetic, equitable approach towards their customers, and prioritize inclusion, while larger banks are burdened with a lingering legacy of exclusion (e.g., redlining) and other appalling behavior (e.g., Wells Fargo’s unauthorized account openings, etc.).
Banking traditionalists might bridle at this scenario— “Good story, but digital banks’ market share is minimal, and they don’t have the robust product suite that we can offer. And our relationships are sticky like glue!”
This is probably the same thing that large incumbent brokerage firms said when eTrade came on the scene in the 80’s, when, if you were lucky, you paid about $45 per trade. In the ensuing years, the entire industry was transformed as digital players devoured market share. Now people pay $0 per trade. The more strategically-minded traditional brokerage firms painfully adapted to the new paradigm and lowered fees. Those that didn’t lower fees went the way of the dodo bird and Google Glass. This time around, the shift towards pure digital solutions will occur much more rapidly.
A paradigm shift towards a customer-centric, tech-forward approach to banking
All of this bodes well for nimble and mission-driven challenger banks, which are far more attuned and responsive to customers’ needs than incumbent banks. But more importantly, the embattled American consumer will get a better deal that they’re currently getting. They’ve worked hard for their money, and don’t deserve to be treated like ATM machines by their banks.
Over the last few years, fintechs and challenger banks have earned the trust of millions of Americans from all sorts of backgrounds, folks like Jennifer . Going forward, these numbers will only grow, as people continue to look for more ethical digital alternatives that treat them with respect, and give them the fair deal they deserve.
New digital first bank – Monument – announces its key technology providers
- Monument selects Mambu, Salesforce, Amazon Web Services, Persistent Systems and Accenture as key providers for its technology build
- Monument is the first challenger bank in the UK to service the unmet demands of more than 3.5 million mass affluent clients: professionals, property investors and entrepreneurs
- It is building a modern, unique, lego-like technology platform which takes best of breed SaaS providers and integrates them in a cloud based microservices architecture
- This will deliver an exceptional client experience and enable Monument to innovate and to introduce new components on a frequent basis
- Monument today announces that Mambu will be the central core banking engine in the platform alongside Salesforce for CRM, and AWS for cloud services
- Monument has also engaged Persistent Systems and Accenture Interactive to support the platform build
Following receipt of its banking licence with restriction on 6 October 2020, Monument has now signed agreements with a number of key technology providers to enable the build of its bespoke technology platform.
Monument wants to deliver exceptional client experiences by using technology solutions that are modern, flexible, easy to integrate and ultimately, if necessary, able to be replaced should the need arise. The design of its lego-like technology platform is Monument’s solution to the huge challenges faced by the legacy systems of established banks. Having assessed the market over many months, Monument concluded that no appropriate single solution existed in the market for the products and services that Monument will launch in 2021.
In addition, Monument only wishes to develop its own technology where it can deliver significant competitive advantage, for example in the mobile and web services to be used by clients. Much of the technology platform is therefore based on best of breed solutions from modern, cloud-based providers.
Mambu has developed the leading cloud banking engine which is an excellent fit for the platform that Monument is building. Similarly, Salesforce provides an industry leading CRM (customer relationship management) solution which can easily be integrated with Mambu and other solutions. AWS, as a leading provider of cloud-based infrastructure, provides a range of components to ensure the platform is reliable, scalable, secure and flexible.
To support Monument in building and integrating a platform with more than 18 different components/providers, Monument has chosen to work with Persistent Systems, a leading global solutions provider specializing in digital with extensive experience in software as a service (SaaS) solutions. To support Monument in rapidly building its mobile app and web-based channels, Monument has chosen to work with Accenture Interactive, which has significant expertise in building innovative digital experiences in both the financial and non-financial sectors.
Steve Britain, Monument’s Chief Operating Officer said:
“We have been working closely with our chosen providers for some months now, to lay the foundations for the build of our platform. We are delighted at how much we have already achieved, particularly as much of the work has been done by a highly distributed team because of COVID-19. We are now focused on completing the work to build a unique configuration of best in class software components that will make us highly flexible for the future and deliver market leading client service.”
More announcements will be made shortly as other key components of the architecture are confirmed.
Sudip Dasgupta, Monument’s Chief Technology Officer added:
“It was essential to me that we selected the strongest providers available. Those that offer us modern technology solutions with the best degree of integration that we need, together with flexibility for the future and proven operational reliability. In Mambu, Salesforce and AWS we have certainly achieved that objective and we are excited about our future engagement with them. Equally, as we rapidly build our platform for launching with clients in early 2021, we wanted support from providers who have been on this journey before and in Persistent and Accenture Interactive, I am delighted to say we have found that.”
Monument will be the only bank to offer its clients an entirely digital journey for buy-to-let and property investment lending of up to £2million. It will offer market leading, top quartile savings rates and its model is designed to reward loyalty. So, if a saver deposits money for a subsequent fixed term, they will get a better rate than a new customer. And a borrower who renews their loan will also be offered a favourable rate.
UKRSIBBANK, part of BNP Paribas Group, announces a strategic partnership with financial wellbeing startup Dreams, to enhance the digital user experience of its 2 million customers in Ukraine
- The technology powering popular consumer app, Dreams – which has helped 460,000 users save over 440M EUR – will be made available to UKRSIBBANK’s users in Ukraine.
- Through the integration of the Dreams platform within UKRSIBBANK’s own digital tools, customers of the bank can set and achieve money-saving goals, track and improve their financial lives.
Dreams (https://www.getdreams.com/en/b2b/), the Stockholm-born fintech empowering millennials to save and feel better about their money, today announces a strategic partnership with Ukrainian commercial bank UKRSIBBANK, a subsidiary of French international bank BNP Paribas Group.
This partnership follows the announcement earlier this year of Dreams’ first enterprise partnership with banking software provider Silverlake Symmetri, and the recent unveiling of a new department in Stockholm dedicated to the development of Dreams’ B2B partnerships. The announcement marks an expansion of the company’s business model as it consolidates its B2B offering and evolves its services as a provider of white label solutions for financial institutions.
Through the integration within UKRSIBBANK’s own digital tools of the Dreams Platform – which is rooted in scientific principles – customers can set and achieve money-saving goals through clever, automated saving features, in addition to nudges and saving hacks.
The Dreams Platform will be included as part of UKRSIBBANK’s digital banking offering for its 2 million+ customers, and is set to grant millions of potential consumers across Ukraine access to products which will help keep their finances on track and improve their financial lives.
The rise in digital self-help tools has long been anticipated by Dreams and forward-thinking financial institutions. The current global economic uncertainty brought about by the COVID-19 pandemic has also placed significant strains on people’s finances, and the demand for better personal finance tools has only accelerated. The partnership with Dreams is welcomed by UKRSIBBANK which is currently striving to equip its customers with the best possible banking solutions whilst helping them achieve a more sustainable lifestyle.
Dreams is firmly established as an authority in its industry, having launched its consumer-facing app in its native Sweden in 2016 and Norway in 2018 – where it has already achieved a 16% market share of all 20-39 year olds.
Henrik Rosvall, CEO and founder of Dreams, comments: “It’s a true honour to be partnering with UKRSIBBANK and BNP Paribas Group, and we’re incredibly excited to be introducing the Dreams solution to UKRSIBBANK’s customers and the wider Ukrainian market.
“Dreams and UKRSIBBANK can now lead the charge, with BNP Paribas Group’s corporate strategy having shifted in recent years to focus on guiding customers towards responsible consumption and sustainable personal finance management. I’m confident that our mission of helping millennials save more and feel better about their money makes us the ideal partners.
“Our financial wellbeing platform – which is built upon behavioural science and personal finance management principles – will provide the perfect tool for UKRSIBBANK to help its customers make better financial choices and become more sustainable in the way they handle their finances. This partnership will also help UKRSIBBANK safeguard the loyalty of its customers and futureproof its digital banking offering against a growing number of challenger banks and fintechs.”
Konstantin Lezhnin, Head of Retail at UKRSIBBANK BNP Paribas Group, comments: “I believe that banks have a role to improve their customers’ lives. Planning and saving for important life events improves our quality of life by reducing stress levels, and we wish to make our customers feel more confident and in-control of their lives.
“UKRSIBBANK has always applied innovative ways to assist our customers in financial planning, so we are very happy to now be working with Dreams, the best European player in behavioural savings. They have an extremely solid track record in Sweden and Norway based on scientific research, so we are confident that this partnership will work positively for our customers in Ukraine. This also demonstrates our strategy to cooperate with startups and innovative companies that seek ways to expand their operations.”
Three times as many SMEs are satisfied than dissatisfied with COVID-19 support from their bank or building society
- More SMEs are satisfied (38%) than dissatisfied (13%) with their COVID-19 banking support
- Decline in SMEs using personal current accounts for business banking as more seek access to the Government-backed lending scheme
- Fewer SMEs believe nearby branches are important when choosing a bank or building society
- 15% of SMEs use mobile or online banking more often than before the COVID-19 pandemic
- When SMEs do look to switch, low or no charges for business banking remains the most important factor (47%) in selecting a new account
Three times as many SMEs have been satisfied than dissatisfied with the COVID-19 support available from their bank or building society, according to YouGov research commissioned by the Current Account Switch Service.
Overall, four in ten SMEs (38%) were satisfied with the support they received from their business current account provider since the pandemic began. This contrasts with one in ten SMEs (13%) who were dissatisfied. In general, more than half of SMEs (55%) are satisfied with their current business bank account, compared to 8% who are dissatisfied. However, inertia remains a problem as half of SMEs (50%) said they would not look to switch business accounts even if they were dissatisfied with their current bank or building society.
When SMEs do look to switch, low or no charges for business banking remains the most important factor (47%) in selecting a new account. Advanced digital features (35%), good interest rates (34%), and a personal connection through a relationship manager (33%) also mattered.
The SME banking research was conducted both in February and in September 2020. It also reveals that since the start of the pandemic, the proportion of SMEs using business current accounts has increased from 69% in February to 74% in September as firms are required to have a business account to receive access to the Government-backed lending schemes.
However, one in five SMEs (20%) still use a personal current account for their business banking needs, despite the risk that tax liabilities get confused, and calculations are made incorrectly. These businesses are also missing out on a range of business-only banking benefits such as integrated accounting software or invoicing tools offered by different providers.
In addition, the research shows the importance of branches to SMEs has declined over the seven months. When asked in February, more than a fifth of SMEs (22%) said the availability of nearby bank branches was important when selecting their bank or building society, compared to 17% in September. However, the Post Office could be fulfilling the role of branches in some areas.
The declining importance of nearby branches was most noticeable in the North East region where 35% of SMEs believed branches were important in February, falling to 18% in September. The importance of nearby branches also varies between industries. One in ten IT companies (11%) said nearby branches were an important factor compared to nearly three in ten (29%) leisure and hospitality businesses.
While branches are less important, digital banking use has increased for some SMEs. Several firms have started to use online banking for the first time as 15% of SMEs say they use mobile or online banking more often than before the social distancing measures were introduced.
Maha El Dimachki, Chief Payments Officer of Pay.UK, owner and operator of the Current Account Switch Service, said: “Across the country, banks and building societies have been working hard in difficult circumstances to meet customer needs. Thanks to that work, small and medium-sized enterprises are more likely to say they are satisfied than dissatisfied with the support they received from their business account provider since the pandemic started. But lockdown has changed small business behaviour dramatically, in a way that points to significant changes to their banking needs both now and in future.
“It’s encouraging to see many small businesses are generally satisfied with their business bank accounts. However, even when businesses are unhappy with their bank, some don’t consider switching as an option, despite the many benefits available. We’ll continue to raise awareness of the benefits of switching among small businesses to help them get the most from their bank account.”
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