Banks oblivious to clients’ app-led, shadow financial lives

Information gleaned by Cornerstone Advisors in its recent study reveals “Much of consumers’ day-to-day financial lives take place “off the radar” of the traditional financial institutions that they work with.” Whilst the study carried out in October 2020 is American, it seems likely that the results are echoed in other countries and regions.

To start with, 76% of smartphone owners use fintech-created mobile apps to manage their finances, from companies such as Robinhood, PayPal, and Credit Karma.

The generational differences in use are predictable: “93% of Gen Zers and Millennials (21 to 40 years old) use mobile financial apps, 81% of Gen Xers (41 to 55 years old) are fintech users, and even 56% of Baby Boomers use at least one mobile app to help them manage their financial lives,” the study states.

Banks unaware of new customer behaviour

However, the research does throw up some surprises. It points out that although traditional banks are aware of the growth of consumer use of fintech products, they are much less aware of the ways in which this impacts them. Banks have lost some business to fintechs, but they also share customers with fintechs, and this appears to be something they are blissfully unaware of. Ron Shevlin in Forbes says, “ They think that because customers have an account with them that they’re the only bank their customers do business with.”

That is certainly not true. Consumers “don’t close out and switch accounts—they simply add another account,” the study says, and “Challenger banks – Chime, most prominently – are gaining market share among consumers and are rated extremely highly by consumers on the value they provide.” As a result, a quarter of a trillion dollars annually is flowing through payment mechanisms outside of those provided by traditional financial institutions.

Shevlin also cites the story of HNWI behaviour. One bank CEO urged a client to diversify his $5 million investment account. The client’s response was “you have my funny money—my play money. The majority of my holdings are with a different investment management firm.” This is called a ‘shadow financial life’ that is defined as “Financial behaviors and activities that evade observation from the other financial institutions they do business with.” Mobile apps play a major role in helping to create clients’ shadow financial lives.

For example, , 30% of Americans with an investment account (25 million) also have an account at a digital brokerage or robo-advisor, e.g. Robinhood, Acorns, or Stash. Furthermore, one-third of JPMorgan clients and 27% of Merrill Lynch clients have an account at a digital brokerage or robo-advisor – and the big guys don’t know anything about it.

Another factor in shadow financial lives is the adoption of digital bank accounts as a second string. About 1 in 6 Americans have second bank accounts with digital-only challenger banks, and amongst consumers with three checking accounts, 30% of the third account are at digital banks.

How does this impact on the traditional banks? First, Americans with more than one checking account keep a lot of their money in their additional accounts, as much as 35% of their total deposits. And those with three accounts, keep an even larger amount of money in their secondary accounts. The second and third accounts are also preferred for making payments by 1 in 4 consumers.

Digital banks are not completely immune from shadow banking. Among consumers who consider a digital bank their primary bank, 42% have more than one account—and half of them have that second account with a traditional bank.

Shadow finances change banking scene

One consequence of the emergence of consumers’ shadow financial lives, largely enabled by financial mobile apps, is that the function of a current/checking account has dramatically changed. It also means that the banks with  ‘primary’ account status no longer have the same opportunity to deepen customer relationships, as the customer is now more interested in “best-of-breed features, not accounts,” Shevlin says. Consumers now want the new savings apps, because they don’t want a savings account – the want to save more money, a service the apps supply. Laslty, banks still believe that marketing accounts, savings and other types of accounts are the most important focus, whereas the truth is that for everything they offer, the consumer replies, “There’s an app for that.”

Can Google Plex win over banks and consumers?

It’s only a matter of days since I wrote about the relaunch of Google Pay. Now I turn my attention to Google Plex. With a beady eye on the way traditional banks are lagging in the mobile banking stakes, it has come up with a solution that enables the old boys to keep pace with the fintech challengers, or at least that is what it appears to promise.

Ron Shevlin quotes some observations from the Snark Tank, such as this summary of the Google Plex pitch: “You’re lagging in technology. Your current vendors are years behind. Consumers think you’re irrelevant. We’re hip, we’re cool, we have all the latest technologies, and boy have we’ve got data! Come partner with us on our new checking account!”

And to some extent the potential customers are buying it. Shevlin says “three big banks, four community banks, two credit unions, and two digital banks” have announced that they have formed partnerships with Google to use the Google Plex checking account tech in 2021.

Now let’s go back to Google Pay. Google Plex will be integrated into the app, which now has three new components.

First, it has a P2P and retail payments component that essentially mimics the Venmo model. This will allow users to, “Set up group payments, put multiple people in a chat and let them send and request money from each other. It will also track who has and hasn’t paid their share and let you tap a button to pester them,” according to The Verge.

Users can also use tap-to-pay, which is pretty old hat now, except that Google has added two new features – ‘Get gas’ and ‘Order food’. Apparently the latter refers to a food ordering system that will work with more than 100,000 restaurants. And consumers will be able to use the ‘get gas’ tab to pay for gas and parking via the app in 30,000 locations.

The ‘Explore’ feature will allow Google Pay app users to browse aggregated merchant offers, and they can receive merchant offers based on their spending activity. It sounds a little like Google ads and Facebook advertising all over again.

There’s also an ‘Insights’ tab which is described by Shevlin as “Google’s version of a personal financial management (PFM) tool,” similar to those available on other digital banking platforms.

Why is Google likely to win over banks to using Google Plex: It’s quite simple: Google has access to more data than any bank; Goggle has more merchant relationships, and it has more tech resources.

Of course, while the traditional banks might see Google’s offer as the fast and easy way to catch up with digital challengers, there is one critical factor to consider: will the consumer want a Google checking account?

Google spanks naughty app developers

If you have an app on the Google Play Store, and that app provides for in-app purchases, watch out, because the Big G is coming after you.

Currently, under Google’s rules, if you provide in-app purchases, you must use the Google Play Store’s billing services, which basically means that Google keeps around 30% of your revenue.

This is nothing new. It has always been the case. However, a number of developers have decided to ignore this rule and Google is not pleased. So, it plans to reinforce it. Apple is taking similar measures, so the news for developers is not good.

In response, a coalition of app publishers, such as Spotify, Epic Games and Basecamp, “have announced the creation of the “Coalition for App Fairness,” which hopes to more fair arrangements between app stores and publishers,” Johan Moreno reports. The new organization formalises efforts the companies already have underway that focus on either forcing app store providers to change their policies, or ultimately forcing the app stores into regulation. You can find out more on the coalition’s website, where the group details its key issues, including anti-competitive practices, such as the app stores’ 30% commission structure, and the inability to distribute software to billions of Apple devices through any other means but the App Store. The group sees this as an affront to personal freedom.

They just happen to be some of the developers that have been thwarting Google’s fee rule, according to Bloomberg. They have managed to do this, “by mandating that users sign up for services (and pay) through the app’s website, which avoids the need for in-app purchases.”

The problem for Google is Android’s open nature. It allows users to download third-party apps, whereas Apple has a closed app ecosystem. As Moreno says, “on some Android devices, there may be a third-party app store, operating completely without the guidance of Google.”

App developers may continue to circumvent Google by creating and popularising, “a third-party app marketplace that can be loaded onto Android that may provide more fair terms for developers.”