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Digital banking supremacy hinges on user experience, not just high rates


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Digital banking supremacy hinges on user experience, not just high rates

Digital banks have attracted customer interest and worried commercial banks by offering deposit rates in excess of 2%, well above the industry norm. But many companies are increasingly focused on personalized customer experience on a digital banking platform — not high rates alone.

For traditional brick-and-mortar U.S. banks reliant on long-term relationships, the evolution of digital startups could increase the pressure to build cutting-edge digital platforms.

From Chime to Aspiration to Varo Money, financial technology companies have piled into the banking landscape in recent years. The trend continued in the fourth quarter as Robinhood Markets Inc. and Brex Inc. each launched cash-management accounts that paid above-market rates.

Varo Money knows its above-market introductory rates are not a differentiating factor, CEO and co-founder Colin Walsh said in an interview. He said the fintech, which is seeking a bank charter and currently offers services via a partnership with The Bancorp Inc., is looking to attract young customers it can retain for the long term. As of Dec. 1, the company offered a 1.92% rate on savings accounts that can be increased to 2.80% if the customer makes five debit card purchases per month and direct deposits at least $1,000 per month. The higher rate is limited to the client's first $50,000 of savings.

Another fintech is hoping high deposit rates can translate into long-term loyalty. San Francisco-based startup Beam launched on Sept. 24 and offers a base rate of 1.5%. The company markets rates as high as 7% if customers use "billies," credits earned by logging into the platform or inviting friends. The boost lasts for a single day, but depositors can also increase their permanent rate to 2% or 2.5% if their email invites translate to active users. The company places the deposits at banks through cash sweep programs, which distribute deposits into a high-paying account at any number of participating banks.

"We're democratizing brokered deposits and catering to the average Joe who doesn't have $100,000 to invest in a [certificate of deposit]," Beam CEO Aaron Du said in an interview.

At the same time, Du and other executives behind high-paying digital platforms say they are offering a lot more than a higher rate. They are providing bank accounts that offer more convenience, charge low or no fees, and provide a superior user experience.

"If you look 10 years out, you'll see banks like ourselves operating on modern technology and focused on building full relationships with our customers that service them end-to-end," Varo CEO Walsh said. "My objective is to change the whole landscape."

Arguably the biggest name in tech also jumped into banking in November when Google announced plans to offer checking accounts. It is unclear whether the accounts will feature high rates, as few details have been released.

But a couple of consultants said the tech giant is likely seeking to win over customers with a high-touch user experience that reduces payment friction. That has been the goal of other top tech companies reaching into finance, such as Apple Inc.'s credit card, Facebook Inc.'s payments and Uber Technologies Inc.'s credit and debit cards.

"They're basically facilitators of seamless commerce," said Todd Baker, managing principal for Broadmoor Consulting, an adviser to financial services and fintech companies. "So what Google or Facebook or anyone else is trying is to make it easier and less clunky to pay and transfer money within their ecosystem."

Not moving the competitive needle

The nation's largest banks appear to agree that consumer experience is more important than a high rate. JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. all kept their deposit rates near zero but have reported significant market share, performance that executives attributed to a broad suite of services and a superior digital experience bolstered by billions of dollars in annual spend.

Some companies that paid up for online deposits — such as Ally Financial Inc. and Goldman Sachs Group Inc. with its Marcus product — have reported even stronger deposit growth than the largest banks. But executives at those companies have similarly acknowledged the importance of seamless customer experience. Ally executives said on an Oct. 16 earnings call that deposit growth was strong in the third quarter even as the company became less competitive on rate. They cited an "increasing desire for convenient, seamless products and exceptional customer service."

Goldman Sachs CFO Stephen Scherr also downplayed rates at a Nov. 5 investor conference, depicting the company's retail game plan as the development of a broad financial services platform.

"I think what we've established is really an early beachhead at the achievement of an ultimate goal of creating a broader consumer platform overall," Scherr said.

There are signs the deposit pricing pressure has started to wane. In the third quarter, the aggregate cost of interest-bearing transaction accounts declined by 4 basis points, the first linked-quarter decline in four years. While 2% handles on savings accounts have attracted plenty of headlines, they were not quite a game-changer for the industry, said Eric Byunn, co-founder of Centana Growth Partners, an investment fund focused on financial services.

"There have always been a set of folks playing the aggressive rate game," Byunn said in an interview. "The fact that we've added a handful of companies that in terms of market share are just de minimis — I don't think it's made a substantial difference."

While the tech threat on deposit pricing might be fading, the race to develop the best-in-class platform for financial services is on. Several players appear to be in a full sprint. JPMorgan executives have said the bank spends $11.5 billion on technology each year, evenly split between "run the bank and change the bank." Axos Financial Inc. has been developing its "universal digital bank" model for years and plans to launch several new products over the next year. Keefe Bruyette & Woods analysts said in a Nov. 1 note that they were "particularly impressed" by Axos' retail strategy.

Seamless financial platforms do more than win and retain customers — they provide opportunities for banks to cross-sell products and deepen client relationships, Baker said.

"In today's digital environment, consumers are willing to give up financial incentives for speed, efficiency and seamless integration," said Jim Marous, publisher of the Digital Banking Report, a fintech-focused publication. "What rate would be enough to compete against personalization? Banks can't offer it."