Digital Banks Take Aim at Primary Accounts With Help of Platforms

The ultimate aim for any FI is to become the home of the consumer’s primary account.

That’s true of any provider — whether brick-and-mortar or digital-only. Get the primary account in place, funded on a recurring basis by, say a consumer’s paycheck, and the potential is there for banks to not only lower their cost of funding innovation but to also set the stage for cross-selling other products and services.

Thus far into the new year, there are continuing signs that neobanks have been finding at least some footing targeting niche audiences that have been either underserved or entirely neglected for debit or basic credit functions.

In Europe, for example, challenger banks have been jockeying for mind and wallet share among the youngest generation. Ruuky, a Hamburg-based neobank aimed at teenagers, filed for insolvency earlier in the year, citing a tougher funding environment, while a slew of other providers have emerged including Vybe and Kard in France and Osper in the U.K. And in many cases, these companies offer prepaid, digital offerings or apps that are in turn controlled by parents.

More Than Just Basic Banking

But for digital-only operators to truly thrive, the key is to be more than just another direct deposit option. If the challengers have historically made their fortunes and attracted customers through lending/credit and through debit cards and interchange revenue, branching out becomes a necessity. Relying on institutional backers has become tougher in an environment where investors’ cost of capital has surged, and they’ve pulled back on loans.

Along the way, there’s the potential to realize ancillary revenue streams as consumers move beyond one or two initial use cases to a more fully realized embrace of everything from checking accounts to checking up on their financial wellness. The headwinds are there for financial providers of all stripes, and staff cuts have been in the offing.

LendingClub, which acquired Radius Bank two years ago, has shown that even an extensible model has had its share of turbulence.

In the most recent quarter, the company said loan originations would continue to face pressure.  But in offsetting that pressure, the company noted, too, that it grew deposits 104% year-over-year, and since the closing of its Radius acquisition, the bank has grown from $2.7 billion in assets to $7.6 billion. A bigger deposit base also helps boost net interest income, indicating reliance on outside investors’ backing of loans and more reliance on a self-funding model.

For the platforms that have an actual bank in the mix, stickier customer relationships are becoming the norm, with the value add that drives the establishment of the primary checking account relationship. As we detailed in our own coverage of SoFi’s earnings, personal loans, direct deposit accounts and “cross-buy” opportunities are fueling resilience, but there’s also evidence that the primary relationships are being established.

Total deposits at SoFi Bank grew 46% sequentially during the fourth quarter to $7.3 billion. Management said on the conference call that 88% of SoFi Money deposits — across checking, savings and SoFi Money cash management – came from direct deposit members. Management noted that roughly half of newly funded SoFi Money accounts set up direct deposit within 30 days of setting up the accounts.

The accounts, of course, are the means by which members transact, and average spending grew 25% sequentially. CEO Anthony Noto reported on the call that the increases in deposit activity “bolsters and diversifies our sources of funding, enabling us to offer our best rates on loans while generating impressive returns and improving net interest income revenue.”  And Monzo, as detailed here, is on a near term path to profitability.

Extensible Platforms and Value-Added Insights

The continuing evolution of the extensible platforms, evidenced in SoFi and LendingClub, Monzo too, will be a long-term one. So far, digital banking has just scratched the surface of its potential.  It’s the value add — the higher interest rates on accounts and the insight that spurs more intelligent financial decisions that can grow savings, investments and pay down debt, that will be key differentiators.

In the report “How Consumers Use Digital Banks,” a PYMNTS and Treasury Prime collaboration, if we strip out PayPal and Venmo, only 25% of consumers have used a neobank, digital bank or FinTech with bank-like services in the past 12 months. Drill down a bit, and just 10% of respondents say that their primary bank accounts are with digital banks.

And yet there is interest in switching to purely digital channels to conduct daily financial life. Our research shows 56% of millennials, 54% of small business owners and 54% of freelancers — are at least somewhat interested in switching to a digital bank.