What Do Other FIs Need to Do About Big Banks’ Deposit Domination?

The Wall Street Journal reported that:

"In 2017, 10 of 22 major regional banks experienced declining U.S. deposits, compared with only two the year before. The smallest U.S. banks have also seen deposits decline. The declines could mark the start of an important industry shift where deposits become less plentiful and Main Street banks do more to compete for them. The three biggest banks added a combined $118 billion in U.S. deposits last year. As a group, the nearly two dozen regional banks added a net amount of roughly $55 billion."

The problem isn't that deposits are becoming less plentiful--the problem is where the deposits are going. And the challenge for regional, mid-size, and small banks and credit unions goes beyond the dominating market share of the megabanks. The challenge is a longer-term trend called deposit displacement.

Deposit displacement is the displacement, or diversion, of funds away from traditional checking accounts into other accounts. Examples deposit displacement include:

  • Health savings accounts. There's close $44 billion sitting in health savings accounts, more than three times the amount in those accounts in 2012. Where's all that money coming from? It's being diverted from checking accounts during the payroll direct deposit process.
  • P2P payments. You've heard about Venmo's growth in users and payment volume, but did you know that Venmo users have $2 billion just sitting in their accounts? That's $2 billion that used to sit in checking accounts. Deposit displacement from P2P payments is a lot bigger than that, because Apple's P2P service doesn't put money back into bank accounts--it keeps it in an Apple prepaid debit account. Deposit displacement from P2P payments could climb into the tens of billions of dollars: In consumer research Cornerstone  conducted, 44% of Millennials said they would be very likely to use a PayPal general use debit card--and might even make it their primary payment card. That's not just deposit displacement--it's payments (and interchange) displacement.
  • Merchants. Starbucks' customers have more than $2 billion sitting in their loyalty accounts, as well. Finally, other merchants are waking up to this approach. The fastest growing mobile payment app? Walmart Pay. In a recent survey, half of Walmart Pay users found it to be more convenient, faster, and more secure than swiping a debit or credit card.

  • Robo-advisors. AT Kearney estimates that by 2020, robo-advisor accounts will have $2 trillion in assets. What's important to this discussion, is that the consulting firm expects half of those assets to come from funds currently sitting in deposit accounts.
  • Amazon. In the consumer research we conducted, 43% of Millennials said they would open a checking account from Amazon if the retailer offered one. But three-quarters of the 43%--and three-quarters of the consumers from older generations who said they'd open an Amazon checking account--said they would open that Amazon and keep their existing bank account open. So banks and credit unions won't necessarily see much account attrition from an Amazon account--but what they will see is deposit displacement.

Checking accounts have become "paycheck motels"--temporary places for people's money to stay before it moves on to bigger and better places.

"Better mobile banking" isn't going to stop this trend. Deploying chatbots to provide AI-based customer service isn't going to stop this trend, either. Reinventing the checking account is what mid-size banks and credit unions need to do to reverse this trend.

How do non-megabanks reinvent checking? Bundling other services would be a good start. The Amazon-related data from our consumer survey provides a clue on why this might be a successful strategy. I mentioned that 43% of Millennials said they'd open an Amazon checking account--but that was an account bundled with other services. When asked if they were interested in a free checking account from Amazon without the other bundled services, across every generational segment, fewer consumers were interested.

Ron Shevlin
Director of Research
Cornerstone Advisors