Every year, the FDIC releases a survey of American banking habits, and they recently released their 2019 survey. There are definitely a number of positive trends for the fintech industry in this survey, most notably the overarching shift of personal financial behavior to mobile and digital banking methods. But the survey also raises questions about who consumer fintech innovations are actually serving, and the scope of the neobank market opportunity.
I. Shift to mobile and digital personal finance behavior
The great news for fintech companies and leaders in this survey is that consumer behavior is certainly shifting in the direction of mobile and digital banking, and there’s still plenty of room to grow. The % of consumers accessing their bank primarily through mobile banking increased ~4x in the last four years to 34% in 2019. That’s a rapid shift in behavior, but still leaves 2/3 of Americans remaining to shift to primarily using mobile banking despite near-universal cellphone usage in the United States.
II. Who do fintech innovations serve?
Many fintech companies market themselves as vehicles for financial inclusion. Often, this is with good reason; after all, it has traditionally been much easier to sign up for an online or app-based bank account than to sign up for an account with your local bank, though established banks have caught up dramatically from a technology perspective in recent years (more on that in a bit).
The FDIC survey reveals that the primary users of mobile banking have been higher-income, highly-educated, and urban consumers, while ~40% of rural populations still averaged 10x visits to bank branches last year. Additionally, 44% of households making $75k or more used P2P payment services last year, but this declines to 25% or less of households when looking at households making $50k or less.
One simple explanation for wealthier households making greater use of fintech innovations is that these households have more access to the digital tools like high-speed internet and expensive data plans that enable the products. However, I also see a partially missed opportunity from both a business and social perspective for fintech companies.
One can imagine a service such as Venmo or Square Cash for P2P payments, or Transferwise for remittances, being especially helpful to lower-income populations given that they might not be moving substantial sums of money. And companies such as Credit Karma and Possible Finance have found significant commercial success serving a subprime/mass-market consumer base. There’s no reason money movement and mobile banking services can’t make more of an effort to better serve lower-income populations.
III. What is the neobank opportunity?
The two facts that shocked me the most in this report were that 97%+ of consumers were very satisfied or somewhat satisfied with their primary bank account, and 90%+ of consumers felt their bank was very clear or somewhat clear about fees. The findings reminded me of the fundamental issue with healthcare reform; even though the system doesn’t work for society at large, a majority of people like their own doctor and insurance plan. Similarly, it is hard to argue that the financial services industry really works for all Americans right now, but a staggering % of consumers seem happy with their banking services.
This brings into question whether the new neobanks popping up left and right are primary or secondary accounts for their consumers, and how large the market opportunity is for them. As noted above, banks such as JPM and BAML have been quick to innovate in the technology space in recent years, and speaking from personal experience, my Chase app and service are actually very good now. If the vast majority of people are happy with their banks, and the vast majority of people still bank with “traditional” banks, where is the opportunity for neobanks?
I’ll dive into that more in future posts, but for now, this report on overdraft revenue from Oliver Wyman is a good place to start. It notes that “In 2019, consumer overdraft fees generated $17 billion of revenues for the industry and represented 66 percent of consumer deposit-related fees for the nation’s largest banks (those with more than $1 billion in assets). Among the top 25 regional banks, consumer overdraft-related fees accounted for an average of 9 percent of pre-tax net income.”
That, right there, is the crux of the opportunity for neobanks. People might be happy with their primary banks, but that doesn’t mean those banks are always serving them well. The challenge is - how do you serve all of your customers fairly as a bank while creating a profitable business model? I’ll dive into that more in future writing.