Banking industry trends are driving digital innovation. Digital banking is no longer an innovation that helps a few firms stand out; rather, the ability to access and manage one’s accounts from both a website and mobile app is an expected feature of owning deposit accounts proven essential to support customers during the COVID-19 pandemic. The internet is also a main method for consumers to research banking options, where low-fee and high-interest options stand out to customers seeking transparency and value from financial institutions. Mobile-first challenger banks embody this movement, betting that strong app design and low-fee experiences will build a large customer base. These challengers and many incumbents recognize that robust online banking platforms are now table stakes, so they focus on mobile platforms and personalization through AI to differentiate their offerings.

Digital banking innovations increase competition within the industry

Banks of all sizes face more competition than ever as traditional firms, startups and big tech firms use digital channels to reach a wider range of customers. Both national and regional banks reduce their total branch count while expanding into new markets, relying on brand recognition and strong digital platforms to acquire new customers. These large banks are popular largely because branch-based banking remains important, even for digital-savvy users.

The dominance of these large banks points to a dual strategy that combines branch-based support with a first-class digital offering. At the same time, many consumers hold accounts at multiple institutions, likely combining a branch-based checking account with a high-yield online savings account.

Corporate Insight’s digital experience surveys allow us to stay abreast of consumer sentiments as the digital landscape evolves. In the 2018 iteration, 94% of respondents said they owned at least one account at a traditional bank with branches. The dominance of these large banks points to a dual strategy that combines branch-based support with a first-class digital offering. At the same time, many consumers hold accounts at multiple institutions, likely combining a branch-based checking account with a high-yield online savings account; 67% of Millennials have accounts at more than one bank, and more than half hold accounts at online-only banks.

Most Millennials bank with some of the largest banks in the U.S.

Which of the following do you consider your primary bank?

Meanwhile, app-based startups are launching mobile-first platforms that undercut traditional options with few fees and high interest rates. Unlike longstanding online banks with their own charters, these mobile-first challengers go to market quickly, often by partnering with existing banks and conferring benefits to both sides. The partner bank gains deposits at a national scale without opening new branches, while the fintech can build a fresh mobile app that includes all the staples of deposit banking—direct deposit, debit cards, FDIC protection, mobile deposit and even the ability to send checks—without running afoul of regulators. Options like Chime, Current and MoneyLion rely on these relationships to support innovative offerings.

Chime tested early disbursement of federal stimulus to 1,000 users following the passage of the CARES act, using its innovative offering to better support its users during the COVID-19 pandemic and accompanying recession.

With lower operating costs, mobile banks offer significant value with few fees, stellar interest rates or even earlier access to paychecks via direct deposits. With better access to regular income, users are less likely to miss important payments and incur fees; Chime and Varo Money users who meet certain criteria receive additional flexibility with the option to borrow from future direct deposits without fees. Chime The strategy of undercutting incumbents proved successful in Europe, where challengers experienced rapid growth. Now, several of these fintechs have launched U.S. banking options, hoping the same strategies will make waves on new shores. Each brings a unique approach. Founded in Germany, N26 built a platform solution that combines a checking account with various partner services—like international P2P transfers through TransferWise—into one digital offering. Revolut focuses on making cross-border banking seamless by supporting a range of currencies, so customers can transfer funds and transact when necessary. Meanwhile, UK-based Monzo’s beta offering started from scratch, aiming to bring the same user-inspired approach that resonated with its initial offering.

When satisfaction no longer drives brand loyalty, reliable or innovative banking products must stand on their own merits.

The expanding digital banking market provides prospective customers with both a wide range of products to choose from and the ability to compare products online. Our survey shows that many customers—especially Millennials—are likely to change banks despite high satisfaction with their primary bank, even among those likely to recommend their banks to peers. When satisfaction no longer drives brand loyalty, reliable or innovative banking products must stand on their own merits.

Millennials are still likely to switch banks, even when satisfied and willing to promote their existing banks to peers

What is the likelihood that you would move your primary bank account to another institution, on a scale of 0–10?

In a 2018 Overdraft Fee report, we assessed fees through a hypothetical scenario and found that in the last five years, overdraft fees from traditional brick-and-mortar banks reached their highest since 2009 while interest rates stagnated or dropped. Meanwhile, direct banks and mobile app-based startups leveraged the lower operating costs of digital platforms to offer high-yield deposit account alternatives with minimal fees. App-based challengers Varo and Chime actually compete with traditional banks by offering overdraft coverage, while Discover eliminated most fees on its checking, savings, money market and CD accounts. In this hyper-competitive digital banking environment, traditional banks recently started removing fees or introducing low-fee account options in order to compete with challengers. Several firms—such as Ally and Citizens Bank—also focused marketing campaigns and cross-selling strategies around product transparency. Banks can keep building trust with customers by continuing to minimize fees and promoting clear, comprehensive product information on their public sites.

Ally Marketing Campaign Infographic

COVID-19 proves the need for robust digital banking

As the novel coronavirus outbreak spreads, banks have modified their branch and call center practices for the safety of their customers and employees alike, relying instead on their digital capabilities to make up for the reduced access to these customer service channels. Banks quickly increased email communications and site messaging as the crisis unfolded, reassuring their customers and encouraging use of digital self-servicing solutions. While every firm in the Bank Monitor coverage group delivered such content by mid-March, a concurrent JD Power survey revealed only one third of respondents reported hearing from their bank about COVID-19 response measures; meanwhile, 13% of respondents heard from their bank but found the information unhelpful. Aside from encouraging digital banking usage, many banks noted longer than normal wait times for phone-based customer service while at the same time unhelpfully directing customers in need of assistance to the same inundated call centers for support. As the situation evolves, firms across the coverage group are expanding their outreach to be more specific and helpful by noting branch closures and other service modifications, listing specific relief measures like fee waivers and penalty-free CD withdrawals, building digital forms for requesting such relief and announcing multi-million-dollar pledges to emergency relief.

Ally COVID-19 Email Outreach

User preference for mobile banking drives innovation on that platform

Banks trying to differentiate their digital capabilities must increasingly focus on mobile banking as comprehensive online banking platforms become standard fare from banks and credit unions. It is no surprise that most clients interact with their banks via digital platforms, which offer superior convenience for users. According to our survey, 45% of respondents primarily access their account via mobile apps, compared to 34% using personal computers. Furthermore, users are leveraging digital platforms more frequently than other channels. Among respondents, 88% accessed their primary bank’s app at least once a week, with 25% logging in every day. The trend is especially prevalent among Millennials; 54% primarily use mobile apps for digital access, and 93% use their primary bank’s mobile app once a week. As these users continue to mature and Gen Z consumers come of age, the relative importance of robust mobile banking apps will only increase.

Mobile apps are the preferred channel for digital banking, especially among Millennials

Much of the current innovation in the digital banking space has shifted from online platforms to mobile devices. Financial services app development is not as simple as porting mobile banking sites to a native app; marketers and developers must consider the specific needs of users who demand both feature availability and intuitive design. Users expect to see all core online features adapted to mobile apps’ reduced screen size and unique navigational infrastructure. Apps must also offer simpler, more user-friendly journeys for common online banking features such as funds transfers and card controls. Our Mobile Banking Audit found that firms tend to focus on money movement capabilities in their mobile apps but do not give the same attention to account servicing and management features, even when they offer these services via their online banking sites. In contrast, leaders in the mobile space—such as Bank of America and Chase—provide a comprehensive suite of information and tools without compromising usability.

Chase iOS App

Proactive personalization is the next frontier for digital banking

As artificial intelligence becomes progressively more sophisticated, the digital banking industry is undergoing a renaissance in personalization features, customer segmentation and targeted cross-promotion. Financial institutions cannot simply focus on their financial products’ terms, fees and features to spur acquisition; they must be able to target the customers most likely to convert or benefit from a product. Industry developments in AI and machine learning now provide insights not previously available via established marketing analysis models, and these insights allow banks to promote microtargeted products to customers with the goal of increasing conversion rates and customer satisfaction.

With so many digital banking features becoming table stakes, firms must incentivize adoption with features that are not simply unique but tailored to customers’ behavior.

Another value-add is real-time information on users’ earning and spending behaviors, identifying trends to help users achieve their financial goals. Predictive analysis of user data allows Bank of America’s Erica chatbot to alert customers if their spending habits for the month might exceed their account balance, remind customers of recurring payments and help users track month-to-month FICO Score changes. Wells Fargo’s predictive banking insights include flagging higher-than-normal monthly payments, suggesting users transfer money to savings when their checking account balance is higher than expected and prompting customers to establish a travel plan for their account when they purchase a plane ticket.

Bank of America iOS App Erica Insights

Mobile check deposit and P2P transfers are now table stakes, so firms must incentivize adoption with features that are not simply unique but also tailored to individual customers’ behaviors. In a market with nearly ubiquitous use of digital banking apps, the most important resource for firms to harness will be user data, and firms are already leveraging this data to make their digital banking platforms a powerful resource for customers. More news on key trends and industry movements is available in Bank Monitor’s biweekly update reports.

Bank Monitor Update Report Industry News Piece

Real-time money movement is more than a preference

Consumers have come to expect transaction resolution in real time, no matter the delivery method. Amazon can deliver their orders in two days or less, and P2P networks like Venmo and Zelle allow them to instantly send money to their peers; therefore, consumers are likely to find three-day settlement times for ACH transfers between their accounts unacceptable—especially when they also incur a fee. To stay competitive, banks will need to continuously improve their money movement offerings, providing the same convenience and speed of the technology companies settings standards for online platforms. Networks in development, like RTP from The Clearing House and the Federal Reserve’s FedNow, will allow banks to implement such features, though some have a head start; Chase was the first of 18 banks in the Bank Monitor coverage group to implement real-time ACH transfers. These solutions, however, may not be enough to compete with blockchain-based options like RippleNet that aspire to make instant, cross-border payments available to all.

New Chase Real-Time Delivery Option Coverage in a Bank Monitor Update