Meet Alvin, a Silicon Valley executive in his late-30s. Alvin has accounts with three banks, an online brokerage account and has borrowed from no less than nine lenders in the past five years.
In today’s world, why wouldn’t he? Quick and easy enrollment processes, fee-free offers, mobile apps to keep on top of things and competitive shopping information make finding and maintaining several open accounts with multiple financial institutions free and easy for Alvin.
Financially literate, technologically savvy and affluent, Alvin is a member of the overbanked.
The overbanked are consumers who hold open deposit accounts with three or more financial institutions. According to Dennis Chira, an Oliver Wyman survey in January 2016 showed the overbanked account for ~10 percent of the banking population, have an annual household income of ~$170,000 and hold household assets of ~$900,000.
Alvin, and the millions of overbanked like him, consumes financial services in a wholly new way. Fueled by technological advances that allow for unprecedented access and choice, the overbanked mix-n-match offerings from various providers to create a customized, bespoke portfolio of financial services. For checking, the overbanked consumer typically holds a primary account with a larger institution that offers convenience and scale.
When it comes to savings, there are multiple accounts — a basic savings held alongside the checking to serve as a holding tank prior to transfers, and usually two or three high-yield online accounts with money shifting between institutions to capture the highest available interest rates. And there is usually an investment account with an online brokerage like Charles Schwab, and perhaps one with an innovative fintech startup like SigFig or Acorns.
This may not sound extreme in an app-driven world characterized by daily interactions with a multitude of service providers. However, the overbanked consumer’s eager willingness to leverage multiple service providers to customize their financial picture will challenge the as of yet largely undisrupted domain of traditional banks.
Favorable conditions for growth
While the overbanked may be viewed as an interesting footnote in the current environment, this will change. The expansion of more online banks like Ally, GS Bank and Simple, and the expected rise in U.S. interest rates, will both play a role in increasing the ranks of the overbanked and raise its profile as an important customer segment.
Banking is an incredibly complex business where long-standing players have a tremendous advantage in both structure and human capital.
Online banks will be an accelerant. When interest rates rise, these challengers will aggressively court the overbanked with more attractive rates, better incentives and seamless experiences — all in an environment where consumers are increasingly open to online and mobile banking.
New players are eyeing the market, from the likes of Goldman Sachs, which joined the ranks of online banks with GS Bank, to lending platforms like Earnest that have expressed desires to be a consumer bank, to traditional banks that are considering online-only arms to gather deposits in areas where they don’t operate branches.
Online banks and upstart lenders have understandable reasons to be deposit-hungry, based on the relative value of these funds to their institutions. Today’s online banks have positioned themselves to deploy deposits into high-margin and highly profitable offerings like credit cards, auto loans or mortgages.
Additionally, these entities tend not to be as “blue chip” as traditional banks, and lower credit ratings translate to higher overall costs of borrowing if funds are sourced from capital markets. Both of these factors can easily result in a higher value placed on customer deposits, as well as a willingness to offer highly competitive interest rates that might be scoffed at by a traditional, branch-laden bank. These economic incentives, pent-up consumer appetites for better rates and the increasing openness to banking with multiple institutions will propel online banks further into the mainstream.
Another condition supporting the rise of the overbanked: transferring money has never been cheaper, easier or faster. Bank-to-bank transfers via an Automated Clearing House (ACH) take two business days and cost nothing. New transfer services like Venmo and Square Cash let users link bank accounts and transfer money in one business day, using only their emails or phone numbers.
Setting up an account from a new bank to receive a transfer typically takes only one’s username and password from that bank, and is instantly verified. Banks like Tangerine, formerly ING Direct and today one of Canada’s largest online banks, are taking this further with new banking relationships that begin with just a scanned check from a traditional bank.
The overbanked will find the gymnastics they may have been willing to undertake in managing their finances are simply no longer necessary.
Technology has empowered the overbanked in dramatic ways. The availability of information, fueled by social media and comparison-shopping websites like Bankrate.com and NerdWallet, has transformed a previously labor-intensive shopping effort in an opaque world. Additionally, aggregators like Mint, with more than 10 million users, have stepped up to help the overbanked manage the bespoke, mix-n-match model of financial services by collecting myriad data from bank accounts, credit card companies and retirement accounts to give them a dashboard view of their financial life.
More service providers will emerge with innovative approaches aimed at greasing the wheels of what has previously been complex and cumbersome. The overbanked will find the gymnastics they may have been willing to undertake in managing their finances are simply no longer necessary.
Arresting the decoupling of financial services
While it has been tempting for pundits and investors like Marc Andreessen to predict the demise of traditional banking, this doesn’t appear likely in the near term. Banking is an incredibly complex business where long-standing players have a tremendous advantage in both structure and human capital.
With that said, segments of the population like the overbanked, blending consumer expectations fueled by technological advancement and a very real potential impact to bank profits, represent the next frontier of where these banks will need to focus.
The overbanked consumer will test the banking industry’s ability and willingness to adapt to a customer-centric future. The overbanked expects from their banks more than a small shift in focus toward technology and personalization. In addition to better mobile banking apps, these consumers also demand compelling incentives in exchange for their business. They expect their bank to find ways to add value to their lives, to anticipate their evolving financial services needs and to make relevant suggestions in much the same way Amazon and Netflix have done with retail goods and movies, respectively.
Until traditional banks can move from a culture of incremental improvement based on the competitive landscape and available technology to a model that places the customer and their needs at the center of a culture of innovation, the unraveling of relationship banking will continue, and likely accelerate.
Buzzwords, I know — but we cannot lose sight of how in the past 20 years, the traditional bank has found itself slowly losing exclusivity over their customers’ financial lives. In exactly that same period, Amazon.com has found a way to optimize the whole customer relationship, expertly and skillfully seducing its customers into buying from its website everything from eggs to electronics to designer shoes.
A next-generation approach
Soon consumers will have compelling economic reasons to care about where they keep their deposits. Banks that win in this competitive environment are the ones that can develop an intimate understanding of their customers’ expectations, and have the capabilities to meet those needs in a more personalized manner.
This is not just about pleasing customers. More importantly, it is about the ability to make economically efficient decisions about which products to offer, at what price, through which channels and to which customer.
In much the same way that Amazon and Netflix have done, banks will have to make investments to better understand emerging customer segments like the overbanked, and work to find ways to capture relevant components of the relationship on economically attractive terms.