How Consolidation is Disrupting Traditional Banking

Dante Steinmetz
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During the summer of 2021, I interviewed five banking visionaries - Ayal Levin, Aaron D. Sims, Dilip Ramachandran, Adam Moelis, and Alibek Junisbayev - in an attempt to better understand the banking industry and how data aggregation is changing it. In those conversations, one overarching theme emerged; with the innovation of open banking, there will be mass consolidation in the industry.

Before the Covid-19 pandemic, traditional banks and Credit Unions with brick-and-mortar locations were a great option for consumers. A bank that offered all the lending and account management services in your community was all you needed. This paired with the perceived stability, trust, and branding these established players have creates a certain hook that makes it difficult for a member to leave. While switching banks may have a low monetary cost, the time-cost and perceived stress of switching is a significant deterrent to the average member. For these reasons and more we can expect a slow demise to brick and mortar banks, but one that was certainly accelerated by the unprecedented effects of a global pandemic.

“Today’s average consumer wants customized support and needs to be empowered with embedded financial literacy, something not taught in schools anymore.” -Aaron Sims

Mobile banking apps are growing in popularity, but they still have a ways to go before truly becoming catch-all solutions that rival traditional bank services. There are two different ways banks are entering the mobile banking space. The first way is through partnership. Banks like E&Y have partnered with neo-banks (banks that are digital-only), providing them with the chartered services they need for an improved digital experience. Other financial institutions, for example, Canvas Credit Union, are forming strategic partnerships with numerous Fintechs that have created unique features to drive engagement. With an influx of neo-banks in the market and the decreased importance of geography in users’ banking decisions, digital differentiation is a must for financial institutions.

“Younger generations are shifting to online-only banking.” -Dilip Ramachandran

Brick-and-mortar services are still popular with older generations, but they are becoming increasingly less important in most people's decisions on choosing a bank. In the midst of the 2020 pandemic, over 75% of the U.S population opened and used their primary bank’s mobile app. Younger generations lead that trend, with over 80% of millennials and 90% of Gen Z using mobile apps as their primary banking method. The goal of mobile banking apps is to enable people to complete all the traditional financial needs from their mobile devices. And we are now seeing even the most established banks - i.e. Bank of America - developing mobile apps that offer a plethora of services. On a macroscale expecting 10,000 banks to service over 300 million Americans is unsustainable. Mobile banking removes the geographical dependency while also removing change costs - this makes unique features a key differentiator.

“Banks will offer services that cater to each customer segment with features that meet their needs.” -Alibek Junisbayev

There are currently hundreds of mobile banking apps, each with feature bundles catering to either the general public or niche segments. In order to be a primary bank, they need to create a full-service digital banking experience via acquisition/strategic partnerships or product development. An over-saturated market makes offering engaging features the only way for banks to differentiate themselves in the increasingly all-digital banking space. Fintechs who offer unique features are forced into choosing to either become a neo-bank or partner with an existing bank to supplement their services. Neo-banks may offer better features in some aspects, say a better checking account, but most neo-banks are not big enough to provide a full range of product services that the legacy players offer. While a banking app for every profession may make sense logically the banking market does not currently differentiate by every discipline and neither will larger banks. The legacy players and traditional banks are adding fintechs services to their apps to compete with neo banks’ engaging and sexy features. Being able to offer table stake features, in addition to unique ones, is critical for any bank to become a user’s primary bank as consolidation continues.

“A differentiating feature is helpful in the short term but long-term one feature will not be enough to keep a mobile app alive.” -Ayal Levin

Offering enough features to become a primary bank is a daunting task in the new mobile banking space and consolidation of banks and fintechs will occur to create the banks of the future. Regardless of a bank’s size, a common trend in banking is resolving the growing financial literacy problem in the United States of America. The consensus among those I interviewed is that financial health or literacy will rise as more features dedicated to financial health or literacy become table stakes in digital banking. Consolidation will revolve around the different financial features and unique features fintechs offer to add to the banking application’s core functionality.

“Even if the other accounts have better features, nobody wants to keep their money in a bunch of different places.” -Adam Moelis

As neo-banks gain market share and start being in direct competition to Credit Unions and legacy players who currently have the brick and mortar locations, there will become clear winners and losers of the space with one winning bank taking the majority of the target customer segments. For the members, consolidation of the industry will give them a more personalized banking experience which will improve their overall financial health. Consolidation in the banking industry will also give members the seamless experience they desire.

At FinGoal our mission is to be the most trusted enabler of hyper-personalized financial services in the ecosystem outlined above. We see our role in this consolidation trend to provide analytics and infrastructure to trusted financial brands so they provide solutions that take into consideration the individual end-users on a more human level; what they value and what is motivating them right now. Not only do we agree with the visionary experts I interviewed, our goal is to enable financial institutions and Fintechs to create the most personalized banking experience possible.