Owing to the capabilities of smartphones and the fact that fewer people derive value from a bank branch, some of the best ideas in consumer banking have no physical footprint. To find them, you have to inside the AppStore or Google Play.
New app accounts arrive at the moment when many of our communities are losing their bank branches. The convergence of change in how people interact with products means that our notion of how we bank is evolving dramatically.
I will review four of my favorite digital app-based bank accounts at the end of this entry, but first, I thought I would cover some of the context behind the changing face of retail banking.
It starts with the demand for branches. Banks provide branches because customers want them. Except they don’t seem to want them as much anymore.
I recently spoke with a C-Suite executive of a mid-sized bank. He said the decisions are hard, “but many branches are no longer justified, as the foot traffic is so minimal. We don’t get many people coming in anymore.”
The typical suburban bank branch costs about $650,000 to build and almost as much to operate every year. Unfortunately for banks, they increasingly find it harder to justify the expense. Opportunities to sell profitable products – such as a new mortgage or a credit card - no longer take place inside a branch. People go online to comparison shop. With deposit-taking ATMs and mobile deposit of checks, a person can even manage day-to-day tasks without going inside a bank branch office.
Not surprisingly, traditional banks continue to announce new bank branch closures. In the last week alone, national banks have revealed plans to close 61 branches. US Bank said it would close 19 all by itself, and Wells Fargo listed fourteen locations that it intends to shut down.
Rural America is experiencing most of the decline, and in fact, some banks are opening branches in urban areas while simultaneously closing others in small towns. Not much can be done about it, as regulators leave the decision up to the banks.
Oddly enough, a few types of locations will see increases in branch volumes. Notable examples include branches located in retirement communities and inside storefront space in strip malls. In both cases, banks would most likely rent space. Depending on the generosity of commercial landlords, they might even be able to forego the costs of up fitting their space.
New branches will be smaller, too. According to the American Bankers Association, the average size of a new branch office will be 800 square feet smaller than ones currently in operation.
Mobile platforms may be the answer. Innovative companies are launching new app-based bank accounts that can deliver services at a little cost. Consumers who take advantage of these opportunities will benefit because app-based banks can pass on their savings to customers. The accounts rarely charge fees. Offering access to fee-free ATM networks has become an industry standard. Some have eschewed overdraft fees.
App-based banking is the natural heir to online banking, which came of age about ten years ago when USAA, Capital One, and ING first came to market with online bank accounts. Their users raved about the ease of use and the benefits of low-cost banking.
Historically, those online accounted offered the best interest rates on savings accounts. I recently blogged about some of the best deals out there. With the rare exception, all of the highest-yielding accounts had to be utilized through an online channel.
With Change Comes Skepticism
Many people continue to look at these accounts with suspicion. I support all efforts to cast a diligent eye on any financial product that serves consumers. It is worth asking if we are talking about “old wine in a new skin.”
The Federal Reserve has chimed in with its concerns about fintech, but for the most part, their attention has focused on non-bank lenders. I can see their point, as consumers will generally pay more to borrow from a Kabbage or an OnDeck Capital compared to a traditional bank. The consumer derives less value than they would with a loan from a standard bank. That is the critical difference. Online accounts still come with FDIC insurance, but they charge fewer fees and paying higher rates of interest on account balances.
Maybe the proof lies in the responses that emanate from some of the big banks, where reports say that the banks worry that the new entrants pose a threat to their business. Ernst and Young noted that Fintechs provide “simpler, more convenient, more transparent” services. In some cases, banks have responded by making new investments.
Small community banks, who generally lack the resources to devote lots of money to invest in tech, face a different prospect. They have to double down on the traditional approach to delivering services. That could explain part of why the customers that small banks do retain tend to be older. An older customer base does confer advantages, as most people build assets as they age. That goes back to an earlier observation – that retirement homes are among the few places where new branches are being built – but it also underscores the bet that some banks have to make. Rather than investing in the mobile platforms that millennials prefer, some financial institutions are betting that they can do better by focusing on the narrow subset of people who don’t like change. That’s a tough bargain.
A caveat to that rule is that most of the financial institutions that serve as back-end issuers for Fintechs are smaller. Nonetheless, those few instances should not be taken to obscure the real trend – which is that the vast majority of smaller community banks are not participating in fintech.
The conversation would probably be more natural if we were not conversing under the catch-all phrase of fintech. The products that deserve regulatory attention tend to cluster within two spaces: high-cost installment loans marketed to consumers and short-term lines of credit intended for small businesses. These firms offer fast money under disclosure regimes that obscure the actual cost of credit through the use of high origination fees. On the other hand, digital bank accounts still operate within all of the same regulatory requirements while offering better rates. The early history of fintech investment products is decidedly mixed – we have seen issues with trading practices at Robin Hood, but there’s plenty of evidence to suggest that a robo-advisor like Betterment can deliver the same returns as the traditional financial advisory services but without the corresponding management fees.
My list of my favorite online app-based bank accounts:
Simple: I have had a Simple account for almost five years. Simple was one of the first financial institutions to emphasize banking over a smartphone. Users can transfer money instantly from Safe-to-Spend to a “Goals” savings pocket, where balances of more than $2,000 can earn over 2 percent in interest. Simple recently pulled its online bill payment function, but you can still set up a pull payment via a bank-to-bank ACH transfer. Simple is one of the few products that let people use remote photo deposit for money orders.
Chime: Chime Bank has amassed more than one million accounts, so it must be doing something right. Chime is essentially a fee-free account. It falls behind some of the other options because it does not offer a high-yield savings account in conjunction with its traditional “spending” side. Chime does have an early direct deposit of pay function. I have never had a Chime account.
Varo Money: As with Chime, the Varo Money bank account has more than one million customers. Like Chime, it offers early direct deposit of pay. It’s also fee-free. However, Varo has high-yield savings as well as remote photo deposit of checks – but not for money orders. I have had a Varo account for over one year.
Empower: The Empower bank account is a recent arrival to app-banking. Empower differentiates itself for its cashback service. Users get one percent on the first $1,000 they spend over the VISA rails in any month. Empower’s savings account currently pays 1.9 percent interest. For accounts that have met specific requirements, Empower doubles the rate of interest and the cashback bonus. As with the others listed here, Empower strives to deliver a fee-free experience. While Empower does not yet have a remote photo deposit service, they may add it shortly. One other difference-maker – Empower will refund one out-of-network ATM visit per month. I have had an Empower account for about six months. It’s a great product.