You hear it all the time when it comes to the battle with the mega banks – convenience through mobile banking and robust user experiences are what’s driving more and more customers to remain with large banks. But what we don’t hear much about is “deposit displacement”, or the diversion of funds from traditional retail banking accounts to non-traditional entities.
Money In, Money Out.
Enter the “paycheck motel” as Ron Shevlin likes to say. Of course, checking accounts remain important to financial institutions, but for too many, they are creating a drag on earnings. While checking accounts have served well as a household financial hub, they are increasingly transforming into temporary holding accounts where people simply hold their money before diverting it into the plethora of non-traditional, alternative “places.” Here are just a few examples of these non-traditional places:
- Health savings account. Deposits in HSAs grew from $14 billion in 2012 to roughly $45 billion at the end of 2018. Where did that money come from? It was siphoned away from consumers’ primary checking accounts and into HSA accounts that are probably not held at the same banks as the primary checking accounts. This diversion typically occurs during payroll processing, which means these funds never even see people’s checking accounts.
- Person-to-person (P2P) payments. With the advent of apps like Venmo and Square Cash, consumers made more than $60 billion in transactions through person-to-person payment platforms in 2018. Currently, Venmo has a whopping $2.2 billion of funds sitting in users’ accounts and not in their bank accounts.
- Retailer mobile apps. Even simple daily transactions like a cup of coffee in the morning are now contributing to deposit displacement. Starbucks’s recent SEC filings revealed that the merchant currently has $1.6 billion in deposits on customers’ loyalty cards.
- Robo-advisor tools and Savings tools. Consulting firm A.T. Kearney estimated that assets held in robo-advisor tools will reach $2.2 trillion by 2020. Many of these apps automatically transfer a portion of funds from users’ bank accounts into an alternative account meant for investing and paying off expenses, such as student loans or rainy day funds.
Money is Moving, Not Customers
Large financial institutions have undoubtedly made banking more convenient but this is not the only contributing factor to low customer attrition. Checking accounts are simply playing a smaller role in the flow of consumers’ money as their attention is preoccupied with these non-traditional accounts. As a result, consumers are less likely to take the initiative to shop around for a new financial institution to open an account with.
Attracting New Customers
Deposit displacement will only continue to occur as the mobile and digital economy continues to evolve. So how can community banks and credit unions keep themselves relevant and take down the paycheck motel sign?
It’s simple, to attract new customers, financial institutions need to boost the value of their checking accounts. They can accomplish this by bundling services with checking accounts that consumers already want and pay for, such as roadside assistance, phone protection, and ID theft protection, just to name a few. According to research from Cornerstone Advisors, there is strong consumer demand for a wide range of value-added services that can be bundled with checking accounts. Among just millennials, around 45% would be interested in obtaining more than 11 popular value-added services from a financial institution, including those named above.
To help you get a full picture of exactly what services consumers want and are willing to pay for, Cornerstone Advisors has compiled their extensive research on the subject into the Accessorizing the Checking Account whitepaper which you can download below.