Opportunities in personal banking
Today’s bank has little to do with a building with columns out front.
At a glance
The market for consumer banking products is fundamentally changing. New entrants to the space like fintech startups are creating innovative solutions to consumer problems, and audience expectations are changing as customers expect better quality and more value from their banking relationships. Two demographics, millennials and the underbanked, are increasingly important. Non-traditional banks show how design can find solutions to solve the needs of this audience in new and delightful ways.
Digital product design for consumer banking in 2017 seems like a set of solved problems. The basic functions of a bank, accepting deposits, tracking transactions, offering several ways to pay bills, are extremely well accepted and understood, and all of the big banks have invested millions over the past decade to understand consumer needs and create digital products that are highly usable. For most consumers, the choice of Chase vs. Bank of America vs. Citi is almost certainly less about innovation in the digital products of these banks, and more about a particularly timely marketing appeal or proximity to a branch.
Traditional banking services are commodities today, largely distinguished most easily by marginal differences in price. It’s precisely because of this that a host of companies—many of them small fintechs—have begun to map the financial lives of banking customers and identify opportunities for improvement. The incumbents, generally bigger banks, are acutely aware of this new pressure from non-traditional competitors: in Chase’s 2015 annual report, the word “disrupt” appears almost twice as often as “checking.”¹ This phenomenon is driving and being driven by enormous opportunities for digital product design—opportunities that had not been previously recognized by the incumbent players.
Consumer financial is a broad and varied sector, but several specific problem spaces and demographic groups continue to attract a lot of attention.
It’s no surprise that millennials are the most desirable targets for banks. As of last year, we are the largest demographic group in the US² and our cohort has yet to achieve its peak purchasing power. In banking—same as in retail and other sectors—the term “millennial” is a red herring in that it literally means everyone born between 1980-ish and 2000-ish. With such a broad demographic in mind, “appeal to everyone” is a strategy that’s too broad to be actionable.
We have come to realize that the question, “How do we design banking for millennials?” is really code for, “How do we make the banking products that were conceived and designed over the last 25 years viable for the next 25 years?” That subtle shift is important: The problem is about change in the broadest sense, and the youngest generation of banking customers just happen to be agents of that change. Traditional banks’ early digital products were essentially direct analogs of the paper tools they’ve offered their customers to pay their bills and track their finances for the last 100 years. These metaphors simply don’t make sense to younger people. “I’ll write you a check” is almost as archaic as “I’ll dial you.”
So how then do you approach design for millennials? As always, in digital product design the first challenge is identifying and understanding the potential user as completely as possible. When we consider design for millennials, of course we think about Snapchat, and we think about the 2008 market crash and the financial climate it has created, and we think about the sharing economy. These broad changes in technology, finance, and culture have affected all Americans to some degree, Millennials not least. Design practices offer the research and innovation methodologies that allow us to understand user need as specifically as possible so that we may design strategies and products to service that need.
Unbanked and underbanked
Unbanked and underbanked Americans have received far more attention from financial services companies in the last decade than ever before. This group includes almost 29% of US households. That’s more than 65 million adults that conduct at least part of their financial lives through money orders, check cashing, payday loans, pawnshops, and other “alternative financial services” providers.³ This continues to be a rich opportunity for traditional banks—not only are there significant opportunities for growth, but there are also real opportunities to improve the financial lives of Americans who rely on expensive, sometimes even predatory, non-bank solutions.
This population by definition has substandard or no access to traditional banking experiences. Successful products must offer superior service design that accommodates and supports banking customers in unfamiliar and uncomfortable moments. For instance, this population disproportionately relies on prepaid cards to live their financial lives.⁴ To use their cards, prepaid users have to be able to load funds into their accounts. Products like GreenDot and Bluebird allow a customer to walk up to any cashier at Walmart and load cash or checks into their accounts. In doing so, these products subvert traditional banking behaviors in several ways, not least of which by replacing a bank teller with a cashier and by replacing the bank with the checkout line. The service design opportunities here are significant, and the challenges are substantial.
Almost 10% of American households used a prepaid card (a card that can make payments and accept deposits) in 2015, and those numbers rise to 27% of unbanked and 15% of underbanked households. While prepaid banking products represent one of the biggest service opportunities, they are certainly not the only ones. As far back as 2008, the FDIC sponsored a two-year pilot program with dozens of regional banks to understand how to better offer small-dollar loans to the underbanked.⁵ Although the pilot program was successful, its impact was limited, and millions of Americans will use payday loans this year to bridge short-term payments gaps. Although these payday loan providers fill a vital role in our financial system,⁶ there is certainly an opportunity to design new products that fill this niche in a more user-centered way. Innovations in developing countries, like Kenya’s M-Pesa which allows cash to be loaded into cell-phone “banking” accounts for text-based payments, also illustrate a way forward. There’s no reason for new banking products to have to follow the decisions made by traditional players.
How might research help banks find new ways to reach customers?
Moment has worked with the product design team at American Express to design and improve the top-rated Bluebird and Serve prepaid banking products. Strong service design and user support through strong onboarding were recurring themes of our work together. When we were asked to help the Serve team design a new feature that encouraged customers to deposit their tax refund checks to their Serve accounts, we started with research to understand how this moment impacted the lives of Serve customers. What we found—that the refund check is often the biggest single deposit of the year—helped us to design a feature that saved customers money over non-traditional service providers and introduced opportunities to start good financial habits.
The rise of the “bank”
Back in 1994, Bill Gates said, “Banking is essential, banks are not.” The statement was prescient: Our sense of what a bank is today doesn’t necessarily have anything to do with a building with columns out front. People’s relationships with their bank have changed dramatically, and design plays an important role in helping people adapt to these new relationships.
The online-only bank is a great example. Pioneers like Ally bank, an actual chartered bank that doesn’t have any physical locations, and Simple, a non-chartered “bank,” realized that the key to success is designing their service around the user. These products have the challenge of converting users from physical banking habits (branches, checks, and ATMs) to digital (apps, p2p payments, fewer ATMs). Each has found success by focusing on a relatively simple product thesis, for instance, Simple’s “Safe to Spend” and Ally’s goal-based multiple savings accounts.
There are plenty of other bank-like services that focus on specific pieces of a user’s financial life. PayPal is an obvious example: they processed $282 billion in payments in 2015,⁷ but they also have as many funds on deposit as many traditional regional banks.⁸ Starbucks is a less-than-obvious example: they have $1.2 billion “on deposit” in Starbucks giftcards.⁹ The challenge of these “bank-likes” will be to find ways to encourage customers to engage in a broader range of activities, while also not diluting the core value of the service. This is a design challenge foremost—once the technical capabilities are built, these companies will have to design products that continue to meet and exceed users’ expectations today, while introducing new features and new modes of conducting their financial lives.
Most recently, the federal agency which regulates banks has announced that they will begin to offer charters to fintech companies in the lending space, but also potentially in the consumer banking space.¹⁰ This change signals a huge opportunity for innovators, who now have new freedom to identify and solve for specific types of banking behaviors without having to partner with (and pay) traditional banking institutions.
2017 and beyond
The coming few years will see a proliferation of new banking companies and new banking products. There will be innovation that meets needs that we don’t even recognize today. Design will offer the tools for unlocking these new opportunities.
Gordon Smith, the CEO of Consumer Banking at Chase, sums up our current situation well:
“Many of these disruptors are tapping into an exceptional experience or user interface that customers like. Across industries, whether retail, transportation, or banking, companies have excelled at removing customer pain points with simple experiences. The experience itself has created loyalty.”¹¹
The affinity, loyalty, and trust that consumers once felt when visiting their local branch has been replaced by an earned trust in the value of the experiences offered to them. The changing technological landscape and loosening regulatory environment have created white space for innovation and disruption. Digital design will help financial services companies, small and large, fill these spaces with products that meet real user need.
¹2015 JPMorgan Chase & Co. Annual Report
²Millennials overtake Baby Boomers as America’s largest generation
³,⁴2015 FDIC National Survey of Unbanked and Underbanked Households (p.10)
⁵A Template for Success: The FDIC’s Small-Dollar Loan Pilot Program
⁶Reframing the Debate about Payday Lending
⁷PayPal Q1 2016 Fact Sheet
⁸,⁹Starbucks has more customer money on cards than many banks have in deposits
¹⁰Regulator Will Start Issuing Bank Charters for Fintech Firms
¹¹Gordon Smith 2015 Letter to Shareholders