Chase’s Finn is a Threat to Banks and Credit Unions

After a nine-month test in the St. Louis market, JPMorgan Chase recently took its first step to a national launch of its digital-only bank Finn with a rollout to iOS users. According to Tradesheet:

"Finn’s wider rollout is evidence of the opportunity banks see in serving younger, digitally native users, and a sign that the agile, iterative approach to products typical of startups is making its way to the big banks. The St. Louis experiment yielded three key conclusions: Autosave triggered by rules is a priority for the customer community; a digital-only offering backed by a known, established player like Chase is a reason why customers trust Finn; and a 24-hour-a-day client-support team can replicate most of the functions of a brick-and-mortar branch. Customer feedback has inspired some product updates, including the ability to save a percentage of one’s paycheck, and pre-set autosave rules when customers spend at popular brands like Starbucks."

The "evidence" of the wider rollout is misguided, as are some of the "conclusions" of the STL experiment. But Finn--and other fintech startups like it--does represent a threat to other banks and credit unions.

Millennials are No More Likely to Bank With a Digital Bank than Older Consumers

So who (in the US) wants to bank with digital banks like these? Not who the banks expect if they believe their target market is "younger, digitally native users." When asked which FIs, or type of FIs, they'd consider if they were in the market for a new checking account, just 7% of young Millennials and 6% of older Millennials said a digital bank would be in their consideration set. In contrast, 9% of Gen Xers and 7% of Boomers said they would consider a digital bank.

Interest in digital-only banks isn’t driven by age--it's driven by people's confidence in their ability to manage their own financial lives. To that point, I agree with Chase's conclusion that--for these consumers--"a 24-hour-a-day client-support team can replicate most of the functions of a brick-and-mortar branch."

Nearly half of the consumers who would consider a digital bank said having the best digital banking tools would be important to their decision, in contrast to a third of other consumers. The other big difference: Convenient bank locations is important to just 31% of the consumers who would consider a digital bank, while that feature is important to 41% of other consumers.

Digital Banks Won't Cannibalize the Megabanks

Megabanks currently have more than half of all Millennials' checking account business. Yet, it's consumers doing business with large regional banks, community banks and credit unions who comprise the largest portion of consumers willing to consider doing business with a digital-only banks.

Among the small group of consumers who would consider a digital bank the next time they were in the market, more than a half (55%) currently bank with a large regional, community bank, or credit union. Just three in 10 are with a megabank today.

Accessorizing the Checking Account

The real threat to community banks and credit unions isn't from digital banks replacing them as the primary account, however. There's an underlying change in consumer behavior that will prove to be the bigger threat: Consumers are accessorizing their checking accounts.

In other words, accounts from players like Finn or Chime aren't replacing consumers' primary checking accounts--they're accessories to the primary checking account.

The Federal Reserve's Survey of Consumer Payment Choice provides a clue to what's going on here. In 2015, the mean amount US consumers held in their primary checking account was $4,034. In that year, they also held a mean amount of $1,973 in their secondary checking account.

In 2016, however, although the mean amount in the primary checking stayed level ($4,018), the mean amount in the secondary account grew by 27% to more than $2,500 (the Fed report said that the data for 2017 was moved to the Diary of Consumer Payment Choice, but I haven't been able to find that data yet).

My premise is that consumers are increasingly using fintech/neobank accounts as their secondary checking accounts.

Based on its market test of Finn, Chase concluded that "autosave triggered by rules is a priority for the customer community." I'm not so sure that's a high priority for a majority of consumers, but I can easily believe it's a priority for a (growing) segment of consumers.

What's happening is that the primary checking account has become a "paycheck motel"--a temporary place for people's money to stay before it moves on to bigger and better places.

So, while traditional FIs aren't feeling the pinch from an account perspective, they are feeling the pinch--and will increasingly feel it--from a deposit displacement perspective. And that's why Finn--and other digital banks--poses a threat to community banks and credit unions.

Ron Shevlin
Director of Research
Cornerstone Advisors