First principles is the discipline of going back to the rudimentary sources of truths for any problem or situation, and then designing a solution only after truly understanding those foundational elements. Musk describes the use of first principles as the type of thinking that would help him launch SpaceX by manufacturing and commercializing space rockets cheaper and better than anyone else.
Getting back to first principles often starts with asking very simple questions — those that people are usually too embarrassed to ask, because they sound so basic.
Questions like, “What is a bank?”
It’s a fair question today, particularly as we observe the blurring of the lines between traditional banks, Big Tech and FinTechs — and as we contemplate the impact that the blurring of the digital and physical worlds has on consumers’ expectations and customer service paradigms.
It’s also an important question, since we think we already know how consumers would answer it — so we rarely step back to ask.
But given the rise of neobanks — FinTechs that are using banking services as the foundation for new ecosystems and Big Tech, which is exploring ways to extend their reach into banking and financial services — we thought we’d go back to first principles and ask consumers that simple question in relation to their primary banking relationship.
PYMNTS fielded a study to a national panel of 1,062 U.S. consumers during the last week of February 2020. The full details of this research provide a brief but fascinating lens into the psyche of a well-informed consumer who understands the financial services landscape far better than we might assume.
Consumers know what a bank is, and pretty much define it the same way.
They know the difference between traditional banks and financial service providers that aren’t banks, but offer banking-like services.
A vast majority of consumers express a passing interest in exploring banking-like services from providers that are not banks, even though only a small percentage of consumers use those providers today in that way.
That said, some banking-like providers appear to be closing the primary banking services gap, particularly regional banks and credit unions (CUs).
Perhaps most interesting, though, is what we learned about the gap between what consumers believe makes a bank a bank, and the services consumers use from their primary bank.
It’s in these gaps where challengers may mine potentially rich veins of opportunity to build new business models and acquire customers — and alternatively where traditional banks must find new ways to fill them to avoid putting their own business models as risk.
Sometimes it pays to ask the simple questions.
Ask the Simple Question, Get the Right Insight
Let’s get back to basics.
According to the Cambridge English Dictionary, a bank is an institution in which people and businesses can securely store and access their money and borrow it as needed.
Nearly every respondent in our study — 99 percent of them, in fact — defined a bank the same way the dictionary does: as a place to store their money, access their money and borrow money if needed. Nearly every single consumer uses an institution that provides all of those services as their primary bank.
Ninety-two percent of consumers count their primary bank as either a national bank, regional/community bank or credit union. Seven percent (7.4) of consumers report that their primary bank is a digital-only bank (4.2 percent) or PayPal (3.2 percent). Those consumers tended to be younger (average age of 35) and more affluent ($100,000+ in annual income). But overall, Big Tech and FinTech usage barely register, and respondents do not regard them as either banks or entities that provide banking-like services — at least not today.
The list of things consumers say an institution must do to qualify as a bank is long, but the list of services that consumers use at their primary bank is short.
Eighty-five percent of respondents expect their primary bank to provide the same three services: checking accounts to store money until needed and to pay bills, savings accounts that earn interest on deposits — and, yes, physical branches.
And in that order.
More than half of all consumers say that having a physical branch is important for a bank to be considered their primary bank. That finding is also relatively consistent across income and demographic profiles, even for bridge millennials (the largely affluent 30- to 40-year-old crowd) and Gen Z respondents.
The need for physical branches tops providing ATM services by a factor of almost four. That’s not surprising, because people don’t need ATMs as much as they once did — back when they used cash more often and had no other way to deposit checks when banks were closed. It also strongly suggests that physical branches are an important touchpoint when consumers have a more specific banking need or a question for which a website, mobile app or ATM service falls short — even though, as in physical retail, consumers don’t step into those branches as often as they used to.
It’s also an interesting insight for digital-only banks that somewhat proudly eschew physical for digital, traditional banks that have physical branch footprints and ATM providers interested in complementing the traditional banking services experience.
For digital bank customers, ATMs are essential, as they represent the only physical touchpoint they have – but they may become a limiting factor as consumers’ banking needs evolve and the digital-ATM combo is no longer enough. Banks and non-traditional providers of banking services must create customer service options that go beyond what consumers can do on their phones – whether that’s via branches with different service models and support staff or via ATMs with capabilities that bridge the physical/digital divide.
The Services Expectation
As I mentioned, there is a long list of services and features that consumers say make a bank a bank. Aside from checking accounts, savings accounts and physical branches, the services on that list aren’t necessarily those that consumers actually use via their primary bank. Some of the things on that list seem rather analog in a physical world (like safe deposit boxes), while others seem quite niche-y (like currency exchange services).
Understanding those gaps, though, provides new insights into how traditional providers and challengers are navigating them and acquiring customers, and reframes how and from where consumers think about getting banking services.
Take loans — auto, mortgage and personal loans.
We see a bit of a disconnect between the share of consumers who say a bank has to offer loans to be considered a bank and the share of consumers who use loans from what they say is their primary bank. Our research shows that 70.9 percent of national bank customers believe a bank has to offer loans to be a bank, even though only 30.4 percent currently have a loan with their primary financial institution (FI). Consumers, obviously, like to shop around.
Credit unions seem more effective at using loans to attract and maintain primary banking relationships with their customers, since they also seem quite adept at capturing savings deposits (more on that later). Three-quarters of respondents (75.8 percent) cite loans as important for credit unions to be regarded as a bank, with 40.3 percent of CU customers also using them to borrow money.
Now take savings accounts.
More than 90 percent of respondents say that a bank has to offer a savings account, with nearly three-quarters of consumers who use national, regional and local banks also having a savings account with that bank. Although that gap isn’t nearly as great as that with lending products, a quarter or more of consumers also don’t maintain a savings account with their primary bank, even though for most consumers it is the second most important service they expect from their primary bank.
These gaps between “must-have” and “I use” for financial services has spawned both innovation and competition for the consumer’s retail banking business.
It’s relatively easy for a consumer to open a new account — checking or savings — with any bank and park money there for any number of reasons. Banks and providers of banking-like services use slick mobile apps, high-interest savings, promises of early access to paychecks or low-interest loans to lure in customers.
And regardless of whether it’s with a bank that isn’t their primary bank or a banking services provider that enables access to loans, consumers seem quite willing to play the field. It’s why digital-only banks want bank charters to accept deposits, why non-traditional players are moving into the personal lending space and why LendingClub made its bid to buy a digital bank. And why loans with alt lenders remain popular alternatives for consumers.
Digital banks, in particular, have given savings accounts a whole new lease on life, and have used high interest rates as an inducement for consumers to open new accounts. PayPal, which offers savings through a partnership with Acorn, provides a savings capability for its users. Big Tech players, like Google with its "smart" DDA, seem to recognize the importance of bank-like features — including a physical branch network and a roster of savings and lending products — to bridge, not just blur, the lines between bank and banking services provider.
The Generation Gap
We also observed what could be an interesting trend in how the banking preferences of younger generations — the bridge millennials, millennials and Gen Zers — could shift over the next decade, and who might be on the wrong side of that shift.
Not surprisingly, FI preferences shift between generations. Bridge millennials are the most likely to play the banking services field, doing business with national banks as well as digital and online banks. According to our survey, 48.2 percent of bridge millennials’ primary FIs are national banks, but 8.1 percent of them use digital and online banks as their primary FIs. Bridge millennials are also the second-most likely generation to use PayPal and FinTechs as primary FIs, behind millennials.
Sixty-one (61) percent of our respondents expressed an interest in exploring banking-like services with some of those providers. Although a small segment of the population (only 7.4 percent of all consumers) use PayPal and FinTechs as primary banks, that could evolve over time — particularly as PayPal and banks alike contemplate ways to address the physical branch touchpoint that is among nearly every consumer’s top three must-haves.
Or consumers could continue to manage their banking services portfolios in much the same way as they do now: using their primary banks for essential services and using other trusted providers — FinTechs, Big Tech and digital banks — more opportunistically, often in response to specific use cases, to fill their banking services gaps.
Consumers in our study seem to suggest that the gap could begin to narrow. Today, 44.1 percent and 37.8 percent of respondents say they are extremely likely to use (or are using) a national or community bank as their primary FI. Another 31.7 and 29.9 say they are extremely likely to use (or are using) credit unions and local banks, respectively, as their primary go-to. Another 23.9 percent report the same for PayPal. It wouldn’t take much, or much time, for the current balance of power to potentially shift.
So what do first principles tell Big Tech and FinTech about competing with banks?
It’s pretty simple: Digital is great. Clever apps and services are too. But people first and foremost want to bank somewhere that they define as a bank. That means a safe place to keep their money, with an easy way to access it and a place to borrow funds when they need them.
They don’t need to get those services from a traditional bank, and their banking services provider could be Big Tech or FinTech. But to be their bank, consumers must be convinced that these new players offer the same basic services that banks have offered consumers for hundreds of years.
How they find inducements for consumers to make that switch? It might pay to mind — and mine — the gaps.