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This Week in Retail Banking | June 13, 2020

Fintech competitors are playing an important role in the banking landscape during the COVID-19 outbreak, although the lasting impact is still largely unknown. The crisis has placed stress on asset-driven players that rely on non-core funding, but also presents opportunities for those that are trying to capitalize on the heightened needs of stressed customers during this volatile time.

Leading fintechs have already developed creative programs that are resulting in a surge of new checking-account customers. The issue for them is whether these new customers will demand high rates in return for their deposits – a financially-difficult decision for fintechs when wholesale rates are at zero.

For banks, this means assuming the status quo won’t be sufficient. Differentiation, always difficult to achieve, will be even more critical. But for those who figure out how to stand out from the pack (even in distinct segments), the gains can be significant.

This issue of the Novantas weekly retail-banking report strays from the usual analysis of traffic patterns and retail re-openings in order to break down some of the key opportunities and challenges for fintechs and traditional banks in the weeks and months to come.


Several fintechs made aggressive and creative moves to capture new customer accounts in the early days of the pandemic – growth that can help offset declines in debit interchange that they collect from consumer spending.

Many neobanks were already making a big splash in primary checking acquisition before COVID-19 swept the country. About 20% of people who switched their primary checking relationship in 2019 opened with one of the neobanks (largely with Chime or Varo), according to the Novantas U.S. Banking Shopper Survey. This is based on consumer-stated primacy, which tends to be skewed toward transactions like direct deposit and debit-card payments. So far, these institutions haven’t done much on the savings side of the customer relationship.

These new entrants have excelled on distinctiveness, driving efficient acquisition costs (often less than $100 per account compared with more than three or four times that for efficient traditional banks).

Although companies like Chime, Stash and Varo are spending some money on advertising, their distinctive features (such as getting access to paycheck funds two days before the direct deposit drops) are getting unpaid publicity from news outlets. Chime, in particular, received a lot of media attention for providing early access to stimulus payments. This program, which appealed to customers who are financially-strapped and digitally-savvy, generated referrals. Chime says that more than half of their new customers typically come from organic acquisitions and referrals.

This differentiated feature, amplified during a time of crisis, can serve as an instructive lesson to both traditional banks and neobanks that are looking to drive distinctiveness in high-quality customer segments.

Varo Raised

series D funding, citing 2 million banking and savings accounts

Purchase Conversion Rate

Neobanks | 63%
National Banks | 43%
Regional Banks | 31%

Consumers who consider a neobank are more likely to follow through with opening a checking account.

Source: Novantas 2020 U.S. Banking Shopper Survey

The Average Neobank Customer

while traditional banks’ tend to be between 58-60


It’s not all good news for fintechs, of course. With jobless claims reaching 44 million over the last 12 weeks, requests for loan deferral and forbearance has increased significantly. But these forgiveness programs are typically short-lived, increasing the probability of rising defaults. That is especially the case at a time when pockets of the country are experiencing a resurgence in hospitalization rates. Already, Nashville has delayed the next phase of its reopening and other states and cities are also raising alarms.

Traditional banks fund loans from a stable deposit base, and even during this crisis remain well-capitalized with plenty of liquidity, giving them a good chance of weathering the storm. Fintechs, by contrast, must fund loan originations from wholesale investors, who during times of economic stress may demand a higher premium – or withdraw from the market altogether.

Furthermore, several of the leading fintechs have used ultra-competitive rates on deposits as a way to drive up balance acquisition. In a zero-rate environment, this strategy will be seriously challenged. And most fintechs are using third-party providers in banking-as-a-service arrangements, meaning that the rates are keyed to brokered deposit rates, which have been almost 100 basis points lower than rates prevailing from well-known direct banks.

Fintechs also rely heavily on debit interchange, which will continue to shrink in the wake of reduced travel spending, other declines in consumer spending and rising unemployment. Although fintechs work with small banks that have an interchange-rate advantage over larger institutions, the overall pie is still shrinking.


Another big challenge experienced by neobanks has been an inability to drive balance growth. Average balances tended to be in the $500 range which makes it very easy to dismiss the neobanks as non-competitive with the banks. The reality though, is that about 40% of checking customers in traditional banks struggle to break through the $500 barrier, and primarily deliver value to banks via fees. But Chime now boasts more than eight million customers (about half with direct deposit) and Varo now has two million customers – numbers that are no longer insignificant.

The issue is whether they can grow deposits from here. As noted above, these companies historically didn’t need to grow deposits because their primary revenue source was tied to interchange (Chime and Varo experimented with some programs to drive rate-based deposits earlier this year).

Because their deposit valuations are driven by the brokered deposit market, many of these new players recently have been forced to lower rates aggressively – potentially eliminating part of their appeal to new customers.

That could change, however, as players like Varo pursue bank charters, eliminating brokered-deposit barriers and providing more rate flexibility. That will be one of the big tests for these new players in coming months – and one that bears close watching from traditional banks.

Neobank Checking Account Purchase Rate

Before 2019
In 2019

Consumer Segment Definitions (click the plus sign to learn more)

Struggling Innovator (Base N=1153) – Highly comfortable with the unexpected, have a good relationship with banks but are willing to bank with online-only banks.

Confident Innovator (Base N=717) – Highly comfortable with the unexpected, have a good relationship with banks but are willing to bank with online-only banks.

Comfortable Innovator (Base N=2145) – Worried about saving for big goals, but feel in control of their day-to-day finances, and don’t mind banking with an online-only provider.

Uncomfortable Traditionalist (Base N=1838) – Financially insecure about unexpected expenses, but generally can pay bills. Most would not want to use a provider without branches.

Struggling Traditionalist (Base N=1071) – Financially insecure, they worry about current expenses, prefer traditional methods of banking and value branches.

Confident Traditionalist (Base N=663) – Prefer traditional banks and feel very supported by their provider. Generally not worried, and feel very much in control of their financial future.

Note: Before 2019 is the average penetration of neobanks from 2016 – 2018
Source: Novantas Customer Knowledge | 2019 US Shopper Survey

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As anticipated, customer average balances have decreased – as has been the case in each week following an end-of-month period. The pace of stimulus-fund drawdowns continues to slow and balances for all customers who received a stimulus payment remain well above initial stimulus levels.

Savings balances are still rising at above-normal levels, but the pace of growth is slowing. Consumers are continuing to build emergency liquidity buffers, with checking accounts seeing the largest benefit from this phenomenon.

A full weekly deposit tracker is available to CDA clients. Contact Adam Stockton at for details.

Industry Consumer HH Production*

Net Growth


Net Growth

Source: Novantas’ Comparative Deposit Analytics, representative sample of banks submitting weekly
Note: Average reflects all bank branches, does not exclude closed branches


Millennials were the only generation in a recent TransUnion survey who reported an increase in the financial impact that COVID-19 was having on their lives. They also reported the largest shortfall ($1,159.30) among all generations for upcoming bills and loan payments. The survey of 2,064 adults was conducted in early May.

Consumers grew more optimistic about the labor market in May compared with April, but they remain far more pessimistic than before the pandemic swept the country, according to a survey from the New York Federal Reserve. Expectations for income and spending growth improved, but the perceived and expected availability of credit worsened.

CNBC reported that Amazon is partnering with Goldman Sachs to offer a credit line of up to $1 million to small-business merchants who sell on its e-commerce platform. Amazon will share merchant data with Goldman, which will make the underwriting decisions, CNBC said.

Goldman Sachs will stop offering Marcus banking accounts to new customers in Britain after deposits surged close to regulatory limits during the coronavirus lockdown, according to Reuters.

The New York State Department of Financial Services launched a program designed to help fintech companies and other start-ups to navigate state regulations amid COVID-19. The department said it is especially interested in companies that will assist small-business recovery, healthcare solutions and tools that help consumers build their financial futures.

Vanguard is launching an automated service for young investors that doesn’t rely on human financial advisors. The Digital Advisor robo-advisory service will launch by the end of the year.

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