The Neobank Threat: How Worried Should Banks Be?

Two stories in the press caught my attention this week:

  • American Banker reported that "Chime, a mobile-only neobank for millennials, said that it has opened 750,000 accounts to date and is signing up users at a brisk pace this month."
  • Tearsheet reported that "SoFi is rolling out checking accounts without a banking license, demonstrating the new reality that a company doesn’t have to be a bank in order to bank customers."

Tearsheet quoted a SoFi executive who said:

"We want to be the personal finance operating system of the future for our members, where everything you do works better because we’re creating a better experience."

What Do Consumers Think?

How worried should existing banks and credit unions be of this neobank threat? Cornerstone conducted consumer research that might help address that question.

First, let me just say that, when asked "If you were looking for a new checking account, which three features or factors would be most important to your decision?," ZERO PERCENT of consumers said "A bank that provides me with a personal finance operating system."

OK, that wasn't fair, because we didn't provide that as a potential answer. And I stand by that decision.

More instructive, however, are the results to two other questions. In the first, we asked "Which of the following financial institutions (or type of institution) do you have your primary checking account with?" Just 1% of Millennials have their primary account with a digital bank (i.e., like Chime and SoFi).


The Hard Math

Let's do some math here (no, don't leave, I'll do the math for you).

The United States Census Bureau estimated the number of millennials in in the US, in 2015, at 83.1 million. If 1% of them have their primary account with a digital bank (or neobank), that works out to 831,000 Millennials.

So if Chime has already opened 750,000 accounts with Millennials, they have a 90% share of the digital bank market!

One of three things is going on here:

  1. Older consumers (i.e., not just Millennials) have opened accounts with Chime;
  2. Millennials have opened additional--i.e., not primary--accounts with Chime;
  3. Chime is miscounting or misrepresenting the number of accounts opened.

Let's give Chime the benefit of the doubt, and take #3 off the table. I only bring it up because of another neobank who was found to have misrepresented their number of accounts a few years ago. Counting up the number of accounts you should be simple, but maybe it isn't.

Option #1 is a possibility. Believe it or not, among Gen Xers and Baby Boomers (who have a smartphone and a checking account), 1% say they have their primary checking account with a digital bank--the same percentage as Millennials do.

If Option #2 is, in any way, prevalent, I can't imagine those accounts will see much activity. It would have been more interesting if Chime had also reported average account balances and payment activity for the accounts opened.

Looking Ahead, Will Neobanks Be a Threat?

We asked consumers "If you were looking for a new checking account, of the following FIs (or type of institution), select up to three that you would be most likely to choose from."

Young Millennial (1988-1996) Old Millennial (1980-1987) Gen X
Boomer (1945-1963)
Bank of America 43% 49% 32% 21%
Wells Fargo 35% 30% 26% 18%
A credit union 29% 31% 36% 45%
Capital One 26% 28% 29% 23%
JP Morgan Chase 23% 28% 23% 22%
Citibank 21% 28% 20% 17%
A community bank 16% 15% 26% 28%
A large regional bank 14% 13% 18% 20%
US Bank 13% 14% 11% 8%
USAA 12% 12% 11% 12%
Digital bank 7% 6% 9% 7%
Source: Cornerstone Advisors survey of 2,015 US consumers, Q3 2017

The good news for neobanks is that, compared to the percentage of consumers who are currently neobank customers, a considerably larger percentage will consider digital banks if they were in the market for a checking account. The surprising news is that Millennials are no more likely than Gen Xers and Boomers to consider a digital bank--and that's bad for the neobanks because Millennials are most likely to be looking for a checking account.

I draw a couple of conclusions from this:

  1. Interest in digital-only banks isn't about age--it's about confidence. Why are as many Boomers, and a larger percentage of Gen Xers, willing to consider a digital bank if they were in the market for a checking account? It isn't simply because they're comfortable with the technology. It's because they're comfortable with--and confident in--their ability to manage their financial lives without the safety net of a branch.
  2. Interest in the megabanks isn't about branches--it's about technology. There are people who will look at the chart above and conclude "Aha! See? Consumers do want branches!" Wrong. Millennials flock to megabanks because--and this will hard for for fintech floozies to take--they have the digital technology. If Tearsheet and the rest of the industry really wants to know what the "new reality" is, it's this: Megabanks have digital technology that works. And just because something comes from a fintech startup, that doesn't mean it works, or is better than what's already out there.

Ron Shevlin
Director of Research
Cornerstone Advisors