It may seem that the old-fashioned checking account is falling out of fashion, but that doesn’t mean banks should give up on it just yet.
Sure, the rules of primacy are changing. New digital services, targeted customer treatments and other products from banks and non-bank players mean that customers can form deep relationships with institutions in many ways. And there’s no telling how a primary relationship will be defined in the future.
For now, however, checking accounts are still the workhorse of the retail- banking relationship. That means banks need to revitalize those accounts in order to stay competitive with the influx of alternatives that offer customers ease and whiz-bang features.
Many U.S. institutions have already recently started redesigning their checking accounts as a way to defend deposits and rev up customer acquisition. But many more should consider revolutionizing the traditional cash-management product in new and creative ways.
TOMORROW’S HORSE AND BUGGY?
The simple fact is that many of the traditional functions of a checking account are becoming obsolete. Check-writing has significantly decreased in the past decade. The product’s close ties with the branch for deposits and withdrawals have been replaced by remote deposit capture and mobile person-to-person payments capabilities. The convenience of transferring money between linked checking and savings accounts is moot with the emergence of alternatives like Zelle that make it easy to move funds between banks.
Furthermore, the proliferation of robust credit-card rewards and retailer payment apps diminish the value of the debit card.
Meanwhile, alternatives from competing banks, retailers, and fintech firms are disrupting the cash-management lifecycle. In fact, research conducted by Novantas in recent months has found that 65% of millennial and Generation Z consumers say they would be likely to open a personal checking account with Facebook, Apple, Amazon or Google, if they were to offer the product.
Competing with Silicon Valley for the new generation will be tough for banks. Is winning the checking account still worth it if it’s becoming obsolete?
In short, yes. It is absolutely worth it as long as banks adapt to the new-world checking account.
STILL VALUABLE TODAY
Owning the checking account is still extremely valuable, especially if it’s the primary relationship with the customer. Research conducted by Novantas has repeatedly found that capturing the checking account has benefits for share of wallet, pricing and customer lifetime value.
Today, consumers allocate about 60% of their cash to the checking account, representing more than half of their share of wallet. From a pricing perspective, about 80% of savings accounts earning less than 50 basis points are tied to a checking account.
In fact, two-thirds of consumers who have established primacy with a financial institution will seek advice and other products from the same bank, extending their customer lifetime value. These are the customers that accept 20% higher rates on loans and 20% lower rates on deposits than their non-primary peers.
ACQUIRE NEW CUSTOMERS
The good news is banks already have a head start with the right architecture in place. Now they need to weigh the right approach to pursue a checking redesign.
For some, the redesign can be built on the foundation of existing products through simplification and the creative bundling of services and products. Much of it will depend on the business objectives.
To improve acquisition, banks can open the floodgates by removing the hurdles to create a free checking product. Novantas research finds that there is generally a 10-20% lift in acquisition when transitioning to a free checking product.
To encourage relationship deepening, banks can establish appropriate product tiering and bundling to optimize customer relationships and to incentivize desired financial behavior. An interesting example of optimizing for certain customer relationships is Chase’s Sapphire Checking product that offers Sapphire rewards points for high balances.
This creates a creative “product tier” by using a currency to attract the desired customer base. Generally, most banks need to simplify their product suite with migration and grandfathering strategies, especially through decades of product augmentation. A clean-up of the existing product also will create better transparency for both prospective and existing customers.
GO BIG WITH A BREAKTHROUGH PRODUCT
Of course, banks can also shake up the industry by creating a breakthrough product. Bank differentiation used to be driven by branch location, but product-led differentiation is critical at a time when a growing number of disruptors are making the cash-management space more fragmented.
Why not be bold? Although there are more than 6,000 institutions in the U.S., consumers can count the number of differentiated checking products on one hand.
This is the most opportune moment for banks to channel their inner creative and innovator to develop a breakthrough checking product that not only meets the evolving needs of existing customers, but also provides a compelling proposition for new customers.
A breakthrough checking product is an acquisition vehicle that helps banks achieve brand distinctiveness in the long run. But it is also a big challenge to do well.
This strategy will require extensive deposit data and consumer research on financial behaviors to find fertile opportunity areas. It will also demand a methodical and measured plan to create a winning concept that fits the bank’s core values.
Building a breakthrough product requires going back to the basics of consumer needs and desires, rather than just building off the bank’s existing rails. This is where fintechs have an advantage because they build from scratch based on what they see as customer needs.
A breakthrough product carries the longest lasting financial and brand impact, but will require execution with creative agitators, organizational alignment and an actionable roadmap that balance creativity and pragmatism.
THE RIGHT TIMING
It is inevitable that banks will cede ground in the checking landscape as disruptors enter the fray and a new generation of customers embraces non-bank providers. Redesigning the traditional checking product will be critical for banks to compete. Banks need to insulate their best customers and ensure that the value is not hollowed out these accounts. Banks also need to have something distinctive to drive new customer growth in an age where branches will no longer be the driver of acquisition.
It is time to get creative and kickstart a checking renaissance.
Principal, New York