Once a staid and basic product offering, banks are reinvigorating consumer checking accounts.
A number of banks, taking a page from the challenger bank playbook, are adding features to their accounts to please consumers: early access to a direct-deposited paycheck, free overdraft and short-term loans. These changes attempt to match the offerings from financial technology platforms such as Chime and Current, which have been growing exponentially and attracting billions in venture capital funding.
The default consumer checking account is easy to take for granted. Most banks offer them without cost to customers in exchange for a deeper relationship such as a monthly direct deposit or a minimum balance. The hope is that a customer is profitable through noninterest fee income such as debit card interchange fees or through other products the bank can cross-sell to the customer.
But the Durbin amendment, part of the 2010 Dodd-Frank Act, reduced interchange income for banks with more than $10 billion in assets. The Durbin amendment made checking accounts less profitable while digital account opening made it easier for consumers to open an account with a competitor. Checking accounts stagnated, says Alex Johnson, director of fintech research at Cornerstone Advisors. Joining the fray were online-only neobanks like Chime, Digit and Varo Bank, N.A., a fintech that received approval for a bank charter in July 2020 and now has $403 million in assets. They customized their checking accounts with valuable features to gain new customers — including customers willing to pay for some features.
“Investments in digital are not the same as investments in deposits, but they were treated as the same a lot of times,” Johnson says. “Banks said ‘We’re keeping pace, we let people open up these accounts on their phone.’ That’s great, but … are you doing anything new to improve the value proposition there? The answer is no.”
Now, a number of banks are reconsidering their deposit offerings to drum up interest from new customers and deepen relationships with existing ones. Many of them leverage technology, require direct deposit information and are consumer friendly, helping customers avoid overdraft fees. Capital One Financial Corp. and SoFi Technologies— a fintech that has applied to acquire a community bank — offer access to direct deposits paychecks two days in advance, following Chime’s lead. Pittsburgh-based PNC Financial Services Group launched a feature called “Low Cash Mode” within its digital wallet in April; Columbus, Ohio-based Huntington Bancshares rolled out a cash advance product in June for checking account customers with a history of monthly deposits. The offering from the $125.8 billion bank takes a page from Varo’s Varo Advance product and is addition to the bank’s overdraft grace period. Ally Financial, which has $181.9 billion in assets, did away with overdraft fees altogether.
The intense focus on reinvesting in deposit products relates directly to the importance of primacy. Consumers define their primary bank as the institution that holds their checking account, versus the institution with the car loan or mortgage, says Mike Branton, a partner at StrategyCorps.* StrategyCorps works with banks to add services to checking accounts using a subscription model.
Measuring primacy — the number of households or customers that genuinely consider an institution to be their primary one — is hard for banks. Branton says many banks don’t have a set definition or use a definition based solely on banking behavior, such as account balance or debit card swipes; others look at the sheer number of other accounts linked to a checking account. StrategyCorps uses a financial definition for primacy that considers banking behavior and account activity in terms of revenue generation: Primary customers generate $350 or more a year for their bank.
That kind of revenue can be a tall order when banks have offered free checking for decades. Results from cross-selling may prove elusive. But free doesn’t have to be a showcased feature of checking accounts, especially if customers think the services and benefits are valuable. Digit, a fintech that helps customers save money by analyzing their spending and automatically moving funds when they can afford it, charges $5 a month. The fintech Current charges $4.99 per month for a premium account, which includes up to $100 in overdrafts and early access to direct deposits such as paychecks, a benefit for low- and moderate-income Americans who are living paycheck-to-paycheck.
“Products are more important than ever,” Branton says. “I think what banks are learning from the pandemic is that because people are not coming in the branch and experiencing the human touch as frequently, but are interacting with the banking product, they must make their products better than ever.”
*Bank Director founder Bill King is also a founding partner of StrategyCorps.