Community Banks and Credit Unions who thought that deposit outflows would decrease by the death of crypto are getting a rude surprise from an unexpected competitor - Fintech investing apps
Throughout the crypto mania of 2021/22 many Community Bankers were watching with dismay at the increasing volume of deposits leaving their banks for crypto exchanges like Coinbase.
For anyone who thought they could relax now the crypto market self-destructed they are going to get a very rude awakening.
Investment platforms are bundling investing and high yield on deposits to capture mass affluent consumers. The fight for deposits and digital engagement is going to accelerate as the battle evolves to be a head on war into savings accounts and deposit APY for mass affluent consumers.
The “crypto-years” saw billions of dollars flow out of community banks and credit unions and into crypto exchanges, fintechs and investment platforms. Community Bankers were alarmed. Consumers wanted access to products, features and functionality not offered by them and by competitors with better tech and more money and playing at a national level. These companies were offering a vast range of cryptocurrencies, yields advertised as high as 20-25% oh and debit cards.
How could community FI’s compete with this? By offering Bitcoin? Probably not.
In April 2022 Fiserv released an article and research, ostensibly in support of their launch with NYDIG and gave numbers behind the phenomenon.
“Fiserv recently conducted a review of ACH debits for 188 community institutions. The analysis shows more than $15 million flowing out of those financial institutions and into more than half a dozen popular crypto wallets in just 60 days.”
But beyond the headline this article gave a glimpse into the real problem - investment apps bundling banking and digital wealth management.
“Fintechs also account for a large percentage of the outflows, outpacing more established businesses. More than twice as much money flowed to Robinhood through ACH than to Amazon and Walmart combined during the same period.
With only an estimated 15% of US consumers investing in crypto it was only ever a niche market despite the headlines and volume and intensity of media coverage. Consumers were still confused by this new phenomenon, opening an account at a crypto exchange was full of friction and the products complex with little relation to what they knew and expected from banks. It was a war for deposits that was happening far away in a foreign island that few at home really understood.
What no one anticipated was the sudden increase in interest rates, something that we had not seen for a decade. Consumers understand interest rates, it’s a core and established bank product. This has opened an entirely new front in the battle for consumers and their deposits and its pitting investment firms against Community FI’s like never before. This is home ground for community bankers - the war has come to them.
Banks were always a little in awe of the awesome new products and services that Fintech’s could deliver, the digital user experience beat any bank on the market and the velocity of product development and the scale of marketing investment was a world away from community FI’s.
But Interest APY is just about headline numbers not features and functionality. It’s “show me the money”.
The entry into core banking services started with debit cards, benign enough, but has now suddenly exploded into a full out war for deposits.
Fidelity and Schwab have been offering compelling banking services for over a decade, focussed more on the affluent and high net worth segments. Robinhood and Wealthfront are taking it to the mass affluent.
Having raised over $6bn and with over 22m users at the high point of Covid and almost $100bn in AUM Robinhood should be scaring any traditional banker into many a sleepless night.
If and when they launch a credit card and lending the transformation into a full service mass market banking brand will be complete. Sofi has already made this transition although likely a slightly different demographic.
How can Community FI’s respond? The complaint has always been that Community Bankers don't have the same skills and access to product that Fintech's do. The vast majority of Community FI's don't control the UI of their online banking, that is outsourced to their core provider e.g. Jack Henry Banno, Q2, Alkami or a 3rd party developer that sits on the core e.g. Mahalo, Lumin, Bankjoy etc. So the ability to differentiate on digital features has been limited.
This changing, the online banking providers are investing heavily in digital experience and integrating with new solutions that can allow them to differentiate. Adding compelling Robinhood style investing services to an existing community bank is not the gigantic leap you might imagine. Unifimoney enables Community Banks and Credit Unions to embed Robinhood style investment services into their existing online banking.
Interest rates are also not dependent on cutting edge digital experiences - and are in the control of Community FI’s. There are multiple ways that they can offer higher rates depending on their structure, size and risk model.
Community Banks and Credit Unions can compete very effectively against Robinhood, Sofi, Fidelity and others - they have the tool kit already in their hands.
The real challenge is that to use these tools effectively so requires a velocity of change that few in Community Banking are prepared for or have experienced.
Those that do will reap the rewards, the remainder can only watch the acceleration of deposit outflows and the erosion of customer and member engagement as they consolidate their money life with brands that give them more.
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