Digital financial services are reshaping consumer banking as younger, digitally focused customers increasingly turn to smartphones and fintech platforms to manage their financial lives. From mobile payments and person-to-person transfers to online lending, consumers have more options than ever to complete financial tasks without relying on cash, checks, branches, or even traditional financial institutions.
Millennials have been particularly influential in accelerating this shift, embracing services such as Apple Pay, Venmo, and online lending platforms alongside—or sometimes instead of—products offered by banks and credit unions. For traditional financial institutions, the challenge extends beyond competing with other banks. Technology providers, software developers, fintechs, and other nontraditional companies are increasingly capable of owning pieces of the customer relationship. As digital banking competition intensifies, banks and credit unions must determine how to remain relevant when consumers have an expanding range of alternatives for payments, lending, and everyday financial management.
Ryan Craine hates carrying cash and finds writing checks to be a headache. He doesn’t do much of either anymore — he mostly uses his smartphone to pay for things.
Mr. Craine, a 28-year-old tech support worker in Washington, D.C., uses Apple Pay at the stores and restaurants that accept it. About 20 times a month, he turns to Venmo, a digital wallet for transferring money from one person to another, to pay his share of rent, meals, groceries and utility bills. To refinance his student loans last year, he went to an online lending start-up, Earnest.
Mr. Craine’s money choices point to the millennial-led shift toward new digital financial services, a change in behavior that threatens to upend the consumer banking industry. The popularity of the services has left the major banks rushing to adapt, even as they have regained their footing after the financial crisis.
If the banks fail to meet the challenge, Brian Moynihan, the chief executive of Bank of America, warned in November, “it may allow part of our industry to be forever taken away from us.”
As the competition continues to heat up for today’s banks and credit unions, the types of competitors are expanding as well. In addition to traditional financial services firms, market entrants increasingly include organizations that can expand their mobile and digital banking and payments footprints as part of their expansion strategies. These firms can range from core and channels systems suppliers, mobile banking and payments solutions developers, independent software vendors (ISVs) and other technology providers, and consulting firms and systems integrators. Collectively, these organizations can create a wide range of challenges for traditional financial institutions, and should be FIs’ radar.
The growing popularity of digital financial services represents more than a change in how consumers conduct individual transactions. It signals a broader shift in who can provide financial services and, ultimately, who controls the customer relationship.
For banks and credit unions, that creates competition on multiple fronts. Consumers who once relied primarily on their financial institution for payments, lending, money transfers, and other services can now assemble those capabilities from a variety of specialized providers. A customer might maintain a traditional bank account while using a digital wallet for payments, a P2P platform to split expenses, and an online lender for financing. Each interaction that moves outside the bank potentially reduces the institution’s role in the consumer’s financial life.
The competitive landscape is also expanding beyond consumer-facing fintech companies. Core technology providers, independent software vendors, mobile banking developers, systems integrators, and other technology firms may all play increasingly important roles in delivering financial products and experiences.
Traditional financial institutions therefore cannot view digital banking simply as another delivery channel. It is becoming a fundamental component of their competitive strategy. Banks and credit unions that provide convenient, intuitive digital experiences can strengthen customer relationships and remain central to consumers’ financial lives. Those that fail to adapt risk surrendering valuable interactions—and potentially entire financial relationships—to a growing field of digital competitors. As younger generations continue to drive adoption, the pressure on financial institutions to innovate will only increase.
Overview by Ed O’Brien, Director, Banking Channels Advisory Service at Mercator Advisory Group
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