FinXTech’s Need to Know: Direct Deposits

For many banks, direct deposit information is the key that turns a new account into a long-term successful primary relationship.

Direct deposit is a conduit to a customer’s life — and their information. Customers tend to use the account that receives their income; accounts without these recurring deposits risk sitting idly.

However, most customers don’t actively think about their direct deposit account. It’s not table stakes after they open the account; it doesn’t make or break their banking experience. But for banks, it’s crucial they get customers to switch. Research from Harland Clarke and Javelin Strategy & Research in 2017 found that 81% of bank customers who received a paycheck used direct deposit; of those customers, 91% used only one financial institution for it.

Banks with technology that makes it easier for customers to switch their direct deposit over when opening a new account have an edge in the fight for primacy.

Some of the financial technology companies that offer this type of solution — Atomic FI, Argyle, Pinwheel and ClickSWITCH, among others — can embed it directly into a bank’s digital banking interface. Customers have a self-servicing option, and bankers can use the tool on the back end. And, when opening a new bank account, it can automatically prompt customers to switch over their direct deposit as part of the account setup.

There is room for banks to improve in this area. Harland Clarke and Javelin also noted that out of those that opened a checking account between 2016 and 2017, only 70% recalled being asked to switch over their direct deposit enrollment.

Application programming interfaces (APIs) facilitate the actual switching of accounts. The APIs, which function as passageways between software systems that enable data exchanges, can also be used to verify income and employment data, which can help the bank identify other products the customer might qualify for.

In addition, some fintechs also offer a service called “paycheck linked lending,” which allows bank customers to pay their loans directly from their paycheck before it’s deposited into their account.

Newer digital startup banks — or neobanks — may have these types of tools built into their infrastructure. But for many smaller or community banks, the act of switching direct deposits is still a highly manual task that falls primarily on the customers, which could deter them from making the switch.

Here are five benefits a bank could experience by implementing a direct deposit switching tool:

  1. Capture more customer data. As customers switch their direct deposit, banks have an opportunity to collect more income and employment data to use in marketing campaigns and fraud detection.
  2. Automate manual tasks for both the customer and bank. APIs handle the account switch once the customer gives them permission to do so.
  3. Cater to customers in the gig economy workforce. Customers can switch one or multiple direct deposits to your bank, or split their paychecks to go to multiple accounts.
  4. Cut the time it takes to switch direct deposit accounts. APIs can conduct changes and verify data in real time — no paper forms involved. Atomic FI claims that its switches can take effect within a customer’s current or next pay cycle.
  5. Create stickier relationships with new and existing customers. Capturing direct deposits jumpstarts account activity and longevity with customers. If a customer considers your bank their primary financial institution, they may be more likely to turn to the bank for other services.

Q2 Software, the digital banking provider that acquired ClickSWITCH in April 2021, has an online ROI calculator to demonstrate the potential growth banks could see in adding a direct deposit switching tool.

It’s never been easier to open a new bank account. But newly opened accounts don’t promise a source of activity and recurring deposits. If your bank has never incorporated direct deposit as a key step in the customer acquisition process, now may be the time to reconsider.

Argyle and ClickSWITCH are included in FinXTech Connect, a curated directory of technology companies who strategically partner with financial institutions of all sizes. For more information about how to gain access to the directory, please email finxtech@bankdirector.com.

How Community Banks Compete on Digital Account Openings

In 2019, over half of all checking accounts were opened via digital channels. In 2020, this number rose to two-thirds.

In 2019, megabanks and digital banks were responsible for 55% all checking applications. In the first three months of 2020, this figure reached 63% — and climbed to 69% in the next three months.

Meanwhile, community banks and credit unions accounted for 15% of applications in 2019, and even fewer than that in the six months of 2020. What’s happening here?

It’s a trend: More accounts are being opened online. But digital account openings are only one piece of a steady shift in the financial services industry, one where consumers do more over online and mobile channels. Megabanks and digital banks are riding this wave, using powerful online offerings to draw consumers away from smaller institutions.

Moneycenter banks have strong digital operations that allow them to expand into communities where they may not have a single branch. Digital offerings have also opened the door for new players like online-only challenger banks, big tech companies and fintechs that are successfully luring in younger customers with payments, investing and even cryptocurrency services. Make no mistake: if community banks aren’t already in direct competition with these digital players now, it’s only a matter of time before they are.

Who Are The New Players?

In the past, community banks’ primary competitors were primarily each another or a nearby regional bank. Today, technology is redefining what it means to be a financial institution, and thereby reshaping the competitive landscape.

Big tech heavyweights like Facebook, Alphabet’s Google, Apple, and Amazon.com have become increasingly involved in financial services in recent years. Their efforts are growing in scope: Google, for example, launching Google Plex, which includes a checking account. Most likely, these firms believe that over time, their expertise in the areas of data and software development will yield a natural advantage over incumbent financial institutions.

Online-only startup banks (also known as challenger banks or neobanks) like Chime and Varo Money are also proving to be a legitimate concern. While Varo’s strategy included obtaining a full-fledged banking charter, which it received in July 2020, Chime relies on partner banks to manage their deposits. And just because they’re startups, doesn’t mean they’re small; Chime boasted 12 million users as of the end of 2020 — 4.3 million of whom identified it as their primary bank.

How Community Banks Compete

As the marketplace evolves, so do consumer expectations. With Amazon and other on-demand services at their fingertips, consumers have become accustomed to digital experiences that are fast, seamless, and personalized.

To compete with megabanks, tech companies and challenger banks for digitally-savvy customers, it’s essential that community banks consider the following strategies:

Invest in speed and reliability
Digital banking solutions need to be fast and reliable to satisfy the high standards that consumers have come to expect. This means efficient processes, minimal to no downtime and speedy customer service. Technology that integrates with your core in real time is key to accelerating customer onboarding and boosting overall user experience.

Play to key strengths
Community banks should lean into the areas where they shine by catering to customers’ personalized needs. Banks should also position their products according to market demand and digital best practices, and configure them for strong customer experience and institutional outcomes.

Seek out the right technology partners
The difference between a good and bad technology partnership is significant; banks often end up disappointed with the performance of a digital solution. To avoid this, it’s important to extensively reference-check technology providers and inquire about the actual delivered (and not theoretical) return on investment of a solution.

Building a Digital Transformation Strategy

As digital banking becomes the norm, it has prompted a massive shift in the competitive landscape. Yet with the daunting task of digital transformation ahead of them, what’s the best place for community banks to start?

One impactful area to focus on is digital account opening. In fact, 42% of banks and 35% of credit unions say they are very interested in fintech partnerships that prioritize digital account opening solutions. Partnering with an account opening provider can help small and mid-size financial institutions position themselves favorably as consumers continue to adopt digital banking.