What will the future of digital banking look like?

Today there are tens of millions of under-banked and unbanked Americans.  At first glance, this statistic may be surprising, but when you dig into the underlying reasons, it’s not hard to understand why.

For the typical American, they walk into their local bank branch, open an account and, then each month deposit $1,000 into their account.  Month after month, they watch the fees start to pile up. For a basic checking account provided by large national banks, if you are not meeting their minimum requirements you’ll get stung with a $10 – $25 monthly ‘account keeping’ fee. Which is really code for ‘you aren’t making the bank enough money, so we are going to charge you to keep your money in our bank’ fee.

As a broad rule of thumb; the criteria to qualify for a free account (in the absence of having other business with the bank), is maintaining $1,500 minimum monthly deposit, or $1,500 minimum daily account balance. Translated, this means that anyone earning New York minimum wage, would be unlikely to qualify for a free bank account.  

Think about it: bank fees are being charged to the exact group of people who can’t afford the fees!

A reliance on checks

It’s no surprise then, that for those millions of people, the check cashing ecosystem is their only option. Paid by their employer via check, they head to their nearest check cashing to convert that check to cash. Bills are often paid at these locations or in person, and perhaps if they need to buy something online they’ll buy a pre-paid single use Visa or MasterCard from CVS.  Or they’ll purchase phone credit on a pre-paid basis to avoid linking a bank account for automatic payments.

This lifestyle of checks, cash, and pre-paid services is often the profile of the under-banked consumer; and you can now see why there is so many check cashing locations, and who buys that pre-paid visa and MasterCards from the grocery store other than at Christmas time.

The reality is that traditional banks have a high break-even cost per customer. Reading between the lines if a customer is depositing $1,500 per month or more they are profiting. At less than $1,500 per month it is costing the bank, and therefore they need the customer to cover the costs.

Digital alternatives

This is where digital banking services like ChimpChange offer value. Without the considerable overhead of the brick and mortar big banks, companies like ChimpChange can consider a customer profitable if they deposit just $50 per month, thereby removing the need to charge fee to customers, whether those are minimum balance, service or overdraft fees.

Imagine that, actual no fee banking, regardless of the customer balance threshold.

Pricing is just the first of many value propositions of a digital bank. FinTech tools that digital banks can create provide better visibility and money management than a traditional bank. When you look at the auto-categorization and graphic representation of your spending in the ChimpChange iOS App, it makes you wonder why banks hadn’t provided this to customers 15 years ago.

The future of consumer banking

While there is a valid argument that the Durbin amendment lends itself to smaller banks earning more interchange revenue than larger banks. You need to question whether abolishing the Durbin amendment would result in big banks passing on the benefits to customers, or taking the benefits as additional profit. I would put my money on the latter.

There is no doubt that we are in a macro-transition towards digital banking.  The most efficient way this plays out is for banks to acquire the technology and people from the innovators; and roll out the product, technology, and culture to their wider customer base. And this outcome is a win for the digital banking service providers, the incumbent banks and the wider community as a whole.

In the true nature of banking the digital transition is slow; but as more people find value in one of the many value propositions digital banking providers offer, product adoption is natural for more and more people. Whether it be saving money on fees, access to superior money management tools, or the appreciation of more personal communication from your digital bank, liking the way your digital you end up with a bank account with all the same security and consumer protections that you get from a traditional bank, but with a superior product.

Today anyone can get from A to B in a vehicle with four wheels; but would you rather take a cab or an Uber?

Written by Ash Shilkin

Ash Shilkin is the founder of ChimpChange