Digital-First Banking

Why One Says Middle-Class Americans Need A New Bank

Middle-class consumers are feeling that they’re getting the short end of the stick when it comes to their relationships with traditional banks, Brian Hamilton, co-founder and CEO at One, told Karen Webster in a recent conversation. For example, his firm’s research found that some 57 percent of customers are pretty sure they aren’t getting the same level of products or services that their banks’ wealthy customers receive — and they may not be entirely wrong.

“The average consumer who works — the salt of the Earth and the bedrock of our economy — they’re just getting choked to death by fees for the financial products they use.”

But as frustrated as many consumers may be, they aren’t leaving their current banks. After all, consumers may be motivated to switch from one traditional bank to another, but will likely get more or less the same offerings.

Or they can pull up stakes and move to one of the many emerging digital challenger banks, but few are doing so. Hamilton said 97 percent of middle-income consumers continue to bank with traditional players.

When it comes to choosing a repository for their paychecks, traditional banks still have their trust. Hamilton said getting such consumers to make as significant a change as moving their primary financial relationships to digital challenger banks asks them to make big leaps of faith. They have to believe that their money will be safe and that making a switch will improve their financial-management experiences.

But Hamilton believes that challenger banks and the “let’s unbundle banking” orientation aren’t offering enough to make financially established consumers take that leap of faith. However, One is hoping it can fix that.

The company aims to bring a new type of digital challenger bank to the market designed specifically to meet the needs of the middle-income consumer and provide a better banking experience end to end.

“I feel like there’s a big opportunity to help the ‘broad middle,’” Hamilton said. “I didn’t come from a wealthy family. I grew up always seeing people that live paycheck to paycheck — and now with COVID-19, that has quickly gotten worse now than ever has been. Folks that have a college degree — have a family — are basically struggling to get by. [Our] goal is to build a bank that actually helps.”

Rebuilding The Banking Bundle 

Hamilton said FinTechs as a group have made a name for themselves over the past decade by unbundling the bank — taking one specific service and doing it very well. Some were specialists in digital checking or digital lending, savings, investing, etc.

The trouble is that focusing on one slice of the financial-services landscape means excluding the rest of it. Consumers can put together a promising roster of financial services if they’re willing to travel across a bunch of silos and manage all of the pieces of their financial lives separately, but almost no one wants to do that.

User experiences for each relationship might be better than their bank counterparts, but the whole is less than the sum of the parts because it’s broken up so much that it becomes more a nuisance than a benefit. Moreover, while all individual slices offer a compelling technological upgrade, none is individually valuable enough to the average middle-income consumer to tempt them to transfer their primary banking relationship.

“A middle-income household is unlikely to move their primary banking relationship just to get paid two days early one time,” Hamilton said.

But he said One was designed under the premise that if one could rebundle all of those improved offerings, that’s a path to building a product that’d be compelling enough to motivate a switch.

What A Better Bundle Looks Like For Middle-Income Consumers 

One’s concept involves building an online checking/savings/credit experience that’s designed to make it easier for customers to meet all of their financial needs in one place. For example, that means offering checking and credit lines tied to a single card (plastic or virtual) and letting consumers choose which line to use instead of requiring them to carry multiple cards.

It also means that consumers who have their pay directly deposited to the account are automatically given a low-interest line of credit equivalent to their pay. Hamilton said that offers the customer a “little cushion for cash flow month to month at a more reasonable rate.”

Should a customer lose his or her job, One works with the person to pause interest payments in a few months instead of simply slashing the client’s line of credit as a traditional credit card might.

Moreover, Hamilton said the product could help the many middle-income consumers who are living paycheck to paycheck build up their savings.

“Half of the country has no emergency savings, right?” he said. “So, the most acute problem that we can help to solve is not about getting consumers to close all their other accounts; it’s about how we can help rebuild your emergency savings as you spend with your card. We let consumers round up their card transactions to a 3 percent savings bucket.”

Hamilton said no one else is offering customers that, or providing a line of credit or “pretty much anything else” as a reward for the “honor of holding their paycheck.”

But he said failing to do so isn’t going to work for mainstream banks much longer, because the competition is only going to get stiffer from here.

Mining The Margins 

He said the financial-services space — and the competition to be customers’ primary financial-services provider — is very active, but not so developed that there’s no room for new competition.

“There’s a lot of runway here — and a lot of value to be given back to this middle-income consumer,” Hamilton said.

Those are customers he believes haven’t been targeted the way they ought to be despite the tremendous underdeveloped opportunity that lays therein. That’s an opportunity that One believes it’s ready to tackle because banks have taken such customers for granted for too long — thus opening a window to tempt clients away with something better.

“In the middle that no one is paying attention to, there’s a pretty fat margin,” Hamilton said. “My favorite [Jeff Bezos] quote applies here: ‘Their margin is our opportunity’ — because even with much fairer pricing, there is plenty there to make a healthy business. And there are a lot of households that could use the help. Traditional banks just are not doing much for them.”

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NEW PYMNTS DATA: HOW WE SHOP – SEPTEMBER 2020 

The How We Shop Report, a PYMNTS collaboration with PayPal, aims to understand how consumers of all ages and incomes are shifting to shopping and paying online in the midst of the COVID-19 pandemic. Our research builds on a series of studies conducted since March, surveying more than 16,000 consumers on how their shopping habits and payments preferences are changing as the crisis continues. This report focuses on our latest survey of 2,163 respondents and examines how their increased appetite for online commerce and digital touchless methods, such as QR codes, contactless cards and digital wallets, is poised to shape the post-pandemic economy.

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