The digital banking surge predates the pandemic

It may be supposed by some that the global pandemic was the kick-starter of the rise in the number of digital bank accounts. However, that isn’t quite true as Ron Shevlin usefully points out in Forbes. 

In 2019, half of all community banks and credit unions opened less than 5% of their new checking account applications in digital channels. But then these banks only account for 15% of the total current account applications last year.

More significantly, it is what the Americans call ‘megabanks’ (Bank of America, JPMorgan Chase, and Wells Fargo) alongside the digital banks that “accounted for roughly 55% of all checking account applications in 2019, 63% in Q1 2020, and 69% in Q2 2020.”

However, one thing is clear; digital account openings are overtaking in-branch applications. For example, “Nearly two-thirds (64%) of the checking account applications taken during the height of the Coronavirus crisis in Q2 2020 for what consumers considered their primary account were submitted either online or on a mobile device,” Cornerstone Advisors report. That’s a 59% increase over the same period in 2019.

The turning point came earlier though; in the second half of 2019 to be precise. This is the moment when digital applications for primary accounts exceeded branch applications.

It would also appear from Cornerstone’s research that the 35% of Americans with more than one current/checking account, are more likely to turn to digital solutions when applying for a second or third account. Shevlin writes, “In Q2 2020, roughly three-quarters of the applications consumers submitted for their secondary checking was done through digital channels, up from 65% in the first quarter of the year.”

And there is more good news for digital platforms: “a larger percentage of consumers who opened an account in the past three years rated their experience on the mobile channel as “excellent” compared with those who used online or in-branch services.

Banks have for some time clung to the idea that consumers want the ‘human touch’, but Cornerstone’s research indicates that while this is somewhat true, “The rest of the experience isn’t as good as it is in a digital channel.” Furthermore, consumer ratings of the in-branch experience haven’t increased in recent years, and in some cases have fallen.

The megabanks have captured much of the millennial market, largely due to a better digital and mobile experience. This leaves the smaller banks at a disadvantage, although there are opportunities for them to become second account providers. They just need to provide a digital account opening process.

Are banking APIs the real revolution?

Application programming interfaces (APIs) have been around for 20 years, but, as Ron Shevlin points out, just one in five community banks in the USA had deployed APIs before 2020, and they aren’t even on the radar of at least 20% of the banks.

Contrast this with Europe, where 97% of UK banks are already using them, and even the lowest uptake country, the Netherlands, has 83% of its banks deploying APIs. The reason for this huge gap between the USA and Europe is the latter’s Open Banking initiative, however Shevlin says that American banks cannot simply use this as an excuse for their low adoption of the technology.

As a result of the lack of API deployment, US banks are missing out on a number of opportunities, including the reduction of time and costs in several business processes, particularly product application-related processes.

The best known API providers include Stripe, Plaid and Yodlee. These three have furthered the connections between financial institutions and fintech companies. However, Shevlin says there are three fintech startups that are “poised to have a significant impact on the banking industry: Pinwheel, Sila, and Codat.”

Pinwheel

Pinwheel, which has just announced a $7 million funding raise, offers an API for payroll data, “that handles everything from income and employee verification to easily switching and managing direct deposit.”

How would this revolutionise banking? According to a Techcrunch article, “For consumers, the main draw is automated direct deposit control, which will allow consumers to control where their paychecks go. For instance, if they want to split a direct deposit into multiple accounts, or regularly move part of their paycheck into a savings app like Digit or Acorns, Pinwheel can help them do that easily.”

Sila

According to Coindesk, Sila, “is an API platform that issues an ERC-20 stablecoin called SilaToken (SILA). Every transaction on the platform is done using the token, which is pegged 100:1 to the U.S. dollar. Sila plans to install card payments, international payments, business ID verification and begin issuing tokens within one business day. Its partner bank, Evolve Bank & Trust, plans to connect to the Clearing House system, a network started by big banks that provides access to instant payments.”

Techcrunch comments that Sila’s API would: “Supplant ACH as the payments choice for companies who need to move money. Sila’s API for identity verification, which empowers developers to identify users and use that info in the company’s banking API, allows users to debit their accounts and move funds from one account to another. On top of that infrastructure, Sila allows for the creation of smart contracts, which should allow for more rapid deployment of financial apps.”

Codat

Codat, which is based in London, has an API focused on small businesses, and is signing up 10,000 new customers per month. According to TechCrunch:

“Codat is building an API that connects with all the systems that hold all the relevant financial data. That type of information is usually spread across multiple systems, and small businesses often use different systems. On the other side, banks, insurance companies and more can speed up their internal processes and give you an educated answer for your next loan or insurance product.”

Codat is especially on point right now as small businesses are struggling and need funds. However, the current lending processes are time-consuming and confusing. Its API simplifies and streamlines the flow of data between small businesses and financial institutions, and could potentially disrupt the way SME loans are handled today.

Blockchain

On the other hand, perhaps APIs aren’t the ultimate answer for a banking revolution. Brian Platz, co-CEO of Fluree, says, “The answer isn’t to build a better API; rather, it is to turn the database inside out and let data escape from the walls that confine it. Blockchain is how data frees itself. It’s time to end the era of data APIs and begin to look into the blockchain.”

Why has Australia fallen in love with neobanking?

Neobanks, or digital banks, arrived in Australia in 2018, dues to a change in legislation, and since then there has been a flurry of activity. Some might even call it a tsunami of neobanks, and this has led to a high level of competition in the country’s banking sector, something that hasn’t occurred for decades.

The neobanks are app-based banks accessed mostly from a smartphone. They don’t have physical branches and they promise clients a ‘touch of the button’ 24/7 service, and most of them have much lower charges than the traditional banks.

Neobanks have been growing in popularity outside Australia for some time, with Europe being a leader, especially the UK. As Jack Derwin points out, the fact that they are doing so well in the UK, and a number of them are registered there, such as Starling, Revolut and Monzo, is a good sign for Australia.

The digital banks are a more recent addition to the Australian banking scene, because until legislation changed in 2017/18, it was extremely difficult to start a neobank. Whilst the previous legislation was intended to protect the consumer, it was perhaps too restrictive, and anti-competition.

In 2017, Scott Morrison, who then headed the Treasury, dramatically simplified the application process to enter the banking sector. As a result, within months neobanks were lining up to enter the market.

Still, entering the banking sector is never easy. Neobanks need a banking licence, a core banking system and a substantial fund of money: one neobank founder told Business Insider Australia that $100 million was the figure needed to start up.

It takes time to raise that kind of money, and to get a banking licence, which can take up to 12 months, as the newcomer must convince the financial regulator to trust the product.

So, what is the advantage to using a neobank? Unlike traditional banks, they are more cost efficient. They don’t have a network of offices and the fact they have lower overheads, means they can pass the cost saving onto the client. Also neobanks have access to the best tech and can therefore optimise their product. It only takes minutes to set up an account, compared with all the paperwork needed for a bank. So, the consumer appeal is there, combined with free accounts and lower charges.

As Derwin says, “From recognising higher than usual bills, notifying you of unused subscriptions, and even helping you switch to a cheaper energy provider, neobanks say they can do banking better.”

That might not be hard to achieve in Australia, where the traditional banks have admitted to extorting fees for non-existent services, to the point they were even charging dead people. They also admitted to lying to the regulators, holding forged documents, failed to verify customers’ expenses when approving loans, and sold insurance to people who couldn’t afford it. And as Derwin says, with four banks controlling 80% of Australia’s business, there was no incentive for them to do better.

All this adds up to a reason for Australians to love neobanking. They now have around five to choose from, including Volt and Xinja, and the UK’s Revolut is testing the market. This is definitely a geographical space to watch for anyone interested in neobanks.

PayPal doubles down on P2P payments

For rather a long time, PayPal has been inextricably wedded to eBay, the mammoth auction site. However, that relationship is in a state of flux, and this has prompted PayPal to look to new partnerships that may take its service in a different direction.

To start with it has paid $4 billion to buy Honey, a shopping rewards platform, and now it is looking at Venmo, a peer-to-peer mobile payments service. Essentially the company offers a digital wallet that allows you to make and share payments with friends. For example, you can easily split a restaurant bill or a cab fare using the Venmo app.

Venmo is distinctly different to PayPal, and yet it complements it, which is no doubt why PayPal’s board considered it such an attractive proposition. By having one partner that covers day-to-day purchases, whilst PayPal covers payments for larger goods, or payments for freelance work, and other types of transfers, it means that together, they more or less have a large swathe of the market covered.

The Venmo app has been showing considerable growth as well. According to its fourth quarter results, published at the end of January, “Venmo processed $29 billion in volume for the quarter, growing 56%. And for the year, volume increased to $102 billion,” PayPal’s CEO, Dan Schulman reported. He also said that it ended the year with 52 million active accounts and revenue in excess of $450 million.

It has grown significantly since its third-quarter figures, which showed it had 40 million active accounts. By the end of 2019 it also, according to PayPal, exceeded a projected $100 billion in payment volume.

How has this happened? Well, PayPal points to Venmo’s deal with Synchrony Bank, which has allowed it to add a credit card to its offering. Plus, Visa will be Venmo’s exclusive network partner for the Venmo credit card, Schulman has revealed.

Future plans for Venmo, that it is predicted will boost growth, include Venmo Rewards, a loyalty program it will run with selected merchants. Schulman told Donna Fuscaldo at Forbes magazine: “Last year, we saw brands like Netflix, Pepsi and Chipotle use Venmo payouts to reward their customers and pay them via Venmo. We are excited to introduce new monetizable value-added services to our Venmo platform over the course of 2020.”

What we can conclude from this is that PayPal’s new direction is heavily skewed towards the peer-to-peer (P2P) payment market, where Venmo is the market leader. That makes sense, and it’s surprising it hasn’t moved this way sooner. Here’s why. According to eMarketer, P2P mobile transactions will reach $396.48 billion this year, up 27.9% from $309.95 billion in 2019. Moreover, it is expected that will be 73.8 million P2P payment users by the end of 2020. And by 2030, who knows how big that user base will be!