Non-Banks Jumping Into Banking Roles

If you’re old enough, you probably remember walking into a bank branch to do all of your banking. Some of you might even still do that. You may even have had a specific person you met with that knew you and your financial situation.

But soon, the traditional model of banking might be gone. Those towers you see in downtown urban areas, showcasing major financial institutions, as well as your local neighborhood branch, may begin to change (and become less common). This is all due to FinTech.

What exactly is FinTech?

Financial Technology, or FinTech for short, is the use of both innovative thinking and technology to create and deliver financial solutions to consumers. The model competes directly with the traditional model of banking, offering leaner, faster, safer, and more customizable options for banking.

FinTech provides more value, more convenience, and more control into the hands of you as the consumer. By avoiding overhead costs like physical staff and brick and mortar locations, FinTech solutions can provide lower-cost (and better) financial solutions to you quicker.

In addition, FinTech companies don’t necessarily need to have the local or community presence that a bank would. Bank of America is a great example. They’re headquartered in Charlotte, NC. They have a huge community presence (and there’s even a football stadium named after them).

While great for press, this costs a ton of money and overhead. As you can see, traditional banks just can’t keep up in the long-run.

FinTech is still relatively new and in many cases, doesn’t have the credibility or security embedded to make consumers completely shift away from traditional banks. But once FinTech figures out how to play alongside traditional banks, it can threaten the very fabric of the industry.

Why FinTech is threatening the traditional banking model

So why and how is this even happening? Isn’t banking a tightly-regulated space?

The short answer is yes. Many people blame regulatory changes for this shift. One example is the Payment Service Directives, which give “non-banks” the ability to enter into the payments market.

We want things when we want them

There’s also an increase in us as consumers wanting everything quick and customized to us.

Think about it – would you rather have a checking account that has features based on everyone or one that has features based on you, your spending habits, and your credit history? The former is a traditional bank. The latter is something a FinTech company can look into and solve now.

Technology is more forward-thinking

But at the end of the day, more and more technology is popping up. We’re using our phones more. We’re using voice searches. Frankly, we’re becoming tech-dependent and kind of lazy.

So FinTech companies are going with the tide and catering to where consumers are at. They’re being innovative and forward-thinking, where traditional banks haven’t been.

Brand loyalty is a thing of the past

In addition, we no longer care about brand loyalty or companies with long-established histories. We want companies that serve our needs in the best way, with the best service and the best technology.

The data proves it

The data shows that this is the trend. For instance, Juniper Research did a study that showed global digital payments volume was almost $3.9 trillion in 2017. That’s a 14 percent increase over 2016.

In addition, global consulting firm CapGemini predicted a 10.9 percent yearly increase in global digital payments through the year 2020.

Traditional banks just haven’t kept up.

The Financial Brand mentions a variety of studies that support this. Here are some of the highlights from their research:

• A survey by Citizens Bank showed CFOs from 300 companies want to see a 15 percent increase in receivables paid electronically
• Aite Group found 44 percent of small business still make their payments by check, but are more and more interested in electronic payments
• More than half of surveyed small businesses use electronic payments, but only for about 20 percent of their payments or less
• 36 percent of surveyed businesses said they’d be interested in electronic payments if their traditional bank offered it

And According to the BBC, over in the UK nearly 3,000 physical bank branches shut their doors for good over a three year period (2015 to 208).

Research performed by HubSpot also shows that during that same time (2013 to 2018), venture capital investment in FinTech increased nearly 330 percent (to almost $37 billion) across the world.

What are the different types of “non-banks” responsible?

First, let’s break down the different types of digital banks (or “non-banks”) that are part of the disruptive FinTech industry. In this article, I’m using non-banks as a broader term for simplicity, but it’s actually a subset type of digital bank:

New banks

“New banks” have full banking licenses and are competing directly with the big banks. They offer most, if not all, the same products and services as traditional banks.

Ally Bank as just one example, offers competitive online savings accounts, checking and Money Market accounts, as well as high-yield CDs, no-penalty CDs, and raise your rate CDs.

Ally also offers investing services so that you can help with stocks, ETFs, Mutual Funds, Bonds with minimum investments and fees, as well as loan services – including auto loans and home loans.

Neo banks

“Neo banks” don’t have a banking license and they partner with different financial institutions in order to offer services that a bank traditionally would.

In most cases, you’ll need a traditional bank to sign up (so you can fund the account), but they often give you way better deals and technology options than traditional banks.

Chime®, for example, has a super easy-to-use mobile app and banking is free.* Once you sign up with Chime, you get the following: a spending account that works like a checking account, a savings account, as well as a Chime Visa® Debit Card. 

With Chime, there are no monthly fees for anything including minimum balances, overdraft, foreign transaction, or withdrawing cash.² And you’ll get real-time alerts for all of your transactions which these days, is reassuring.

* Chime is a financial technology company, not a bank. Banking services and debit card provided by The Bankcorp Bank, N.A. or Stride Bank, N.A.; Members FDIC.
² There’s no fee for the Chime Savings Account. Cash withdrawal and Third-party fees may apply to Chime Checking Accounts. You must have a Chime Checking Account to open a Chime Savings Account.

Beta banks 

A “beta bank” is actually a subsidiary (or sometimes, a joint venture) of existing traditional banks. The purpose of a beta bank is to offer financial services using the parent company’s banking license.

Usually, big banks open these to enter new physical or demographic markets, and they typically have a limited feature-set.

Non-banks

“Non-banks” have absolutely no connection to a banking license whatsoever. Instead, they provide financial solutions in other ways, getting appropriate licenses to do so.

This gives companies like Wealthfront the ability to do their own thing and not deal with big banks. Wealthfront manages your first $10,000 for free with no fees whatsoever though you’ll need $500 to open an account. Wealthfront provides free financial planning with seasoned professional financial advisors, plus access to Path, Wealthfront’s automated financial advice engine.

However, you still retain full control (if you want it). You can edit existing Wealthfront portfolios by deleting or adding an ETF, build your own portfolio with expertly vetted ETFs, or just let Wealthfront do it all for you.

Where and why is this happening?

Where is this happening?

We’ve already seen the likes of Ally Bank become a prominent contender in the banking space. Then we saw companies Chime take over and give us new options for checking accounts.

Now, we’re seeing all of these high-APY cash accounts become available.

Most recently, Empower jumped on the bandwagon, offering its Empower Cash™ and Savings Planner™ to its customers. 

And it’s going to continue to happen.

Square, the company you know as being able to accept payments for small businesses, just recently filed again with the FDIC to get a specific license that gives it the ability to accept government-issued deposits.

And mobile-only startup Varo Money just got preliminary approval for a national bank charter from the Office of the Comptroller of the Currency. This is the first step to full approval and FDIC approval, but they made history already.

So why is this happening?

The answer is simple – profits. Think about it for a minute. These FinTech companies, particularly non-banks, aren’t under the scrutiny of traditional banks just yet. 

They have millions of customers with upwards of billions of dollars invested and/or managed in some way, in addition to the gobs of data they already have access to. Once they get official banking licenses, they will be lightyears ahead of traditional banks.

But it’s an uphill battle they’re willing to fight. Meanwhile, traditional banks are shaking in their boots.

Are traditional banks ready for this disruption?

Nope.

According to PwC, just 17 percent of executive leaders from over 500 worldwide banks felt “very prepared” for a customer-centered banking experience. 

What makes this study even more frightening is that nearly 90 percent of the respondents understood that online capabilities and innovation were critical. And get this – just 11 percent of them felt adequately prepared.

Where traditional banks are still trying to be everything to everyone, non-banks have established themselves in the market by targeting a subset of the industry. They’ve built their businesses on technology and customer service, whereas old banks are still trying to catch up with the times.

In that same PwC study, 55 percent of the executives that responded felt that non-banks posted a threat to traditional banks.

Do people still want bank branches?

Older generations – maybe. Younger generations – probably not.

There was a study done by Mintel in partnership with Kantar that showed the following data on whether consumers believe banking in person at a branch is unnecessary (graphic provided by The Financial Brand):

As you can see, the study revealed that Baby Boomers and World Word II vets strongly or somewhat disagreed with the statement (at 45 and 51 percent, respectively).

On the other hand, iGeneration (aka Gen Z) and Millennials strongly or somewhat agreed with the statement (at 42 and 48 percent, respectively).

This is pretty shocking if you ask me. I can tell you personally (and I’m a Millennial), I would avoid a face-to-face interaction at the bank if at all possible, in any situation. It’s not because I don’t like talking to people, but it’s because I have to get in my car, drive, wait in line, fill out a paper slip, and process a transaction manually.

The whole model is outdated.

So while I think there’s a space for physical branches, I can’t see them looking the same or being constructed as frequently in the future.

Are traditional banks even relevant anymore?

The fact is, traditional banks are quickly becoming less relevant. In 2016, EY did a study called the Global Consumer Banking Relevance Study (you can find the full PDF here). The study found all kinds of interesting facts about banking relevance and consumer habits.

One of the most interesting factoids was that 40 percent of the respondents expressed an increased excitement about what alternative companies may offer them and, simultaneously, decreased dependence on their current bank.

In addition, the study showed a lagging trust level for traditional banks when pitted up against neobanks and nonbanks (graphic courtesy of The Financial Brand):

So when we think about whether traditional banks are still relevant, the answer is yes, but it may not be for long (at least not in the same way they are today).

Should you switch to a “non-bank”?

My advice is to weigh all of your options considerably. You don’t want to start shifting all of your assets all over the place, nor do you want to have multiple accounts with a bunch of different banks (non-, neo-, or not).

That being said, all signs point to a future dominated by FinTech companies. So if you wait, you can weigh the options and choose the best new competitor. That also gives you time to see what your current bank can come up with.

But if you’re ready to make the decision now, here are a few characteristics to have that will make a non-bank right for you:

• Tech-savvy. Non-banks are completely focused on technology. If you’re not glued to your phone and don’t appreciate technology, a non-bank probably isn’t right for you.
• Okay with “beta”. Many of the technologies being tested are in “beta” – meaning that they’re still being tested. This means that not everything will be perfect out of the gates.
• Fine with limited options. A non-bank won’t have as many banking solutions as you might need (such as physical checks or a connected credit card). If you’re fine with a no-frills experience, a non-bank might be right.
• No physical branches. A non-bank will never have a physical branch, for many of the reasons I mentioned above. If you see no need to ever walk into a branch to do your banking, go for it.

What are the best “non-bank” options right now?

It depends on what you’re looking for, but our favorites are as follows (keep in mind, most non-banks will focus on savings accounts today):

Wealthfront Cash Account

Currently, the Wealthfront Cash Account offers an impressive 4.55% APY. It also has no fees, unlimited transfers, and FDIC insurance covering up to $5 million.

Wealthfront doesn’t just handle your banking and savings needs, though. One of the big perks of this bank is its investing tools, which let you build a diversified portfolio with little to no work whatsoever. You can even choose from a variety of socially responsible funds and tech-focused ETFs.

Check out our full review here.

Empower Cash 

Just recently announced, Empower’s Cash account gives you 1.80% APY with unlimited transactions, FDIC insurance up to $1.5 million, no fees, and no minimum balance.

Betterment Cash Reserve

Betterment invests their Cash Reserve accounts in 80% Treasuries and 20% bonds, giving you up to a 2.25% APY annually.

It has tax advantages, and while not the highest APY, is convenient if you already have an account with Betterment.

Cash Reserve is only available to clients of Betterment LLC, which is not a bank, and cash transfers to program banks are conducted through the clients’ brokerage accounts at Betterment Securities.

Summary: where does banking go from here?

Banking laws are going to keep evolving. In addition, we as consumers will grow to trust digital banking more and offer less loyalty to the brick and mortar banks we grew up with. Because of this, the FinTech space will become increasingly more complex and filled with competition. 

In the near future, we’ll continue to see more challenger non-banks enter the traditional banking space. We’ll also see traditional banks scramble to shift their approach to be more tech and customer-centric.

In the end, the companies that offer the best products, use the leanest and quickest technology, offer the highest level of security, and provide best in class customer service will win out. The question is, which side are you on now?

Read more:

• Banking Tips: Best High Yield Savings Accounts Compared
• How To Choose An Online Bank: 7 Features To Look For

(Personal Capital is now Empower)
Empower Personal Wealth, LLC (“EPW”) compensates Webpals Systems S. C LTD for new leads. Webpals Systems S. C LTD is not an investment client of Personal Capital Advisors Corporation or Empower Advisory Group, LLC.