Challenger or neo-banks present a menace to credit unions. However, a greater threat for siphoning members and displacing deposits is coming from the big banks, according to one industry expert.
Jeffery Kendall, executive vice president and general manager, global banking and financial solutions of the Austin, Texas-based Kony DBX, heard how some credit unions think they are in danger of potentially losing members, and, just as significantly, deposits, to these trendy fintech entities. “When I think about challenger banks, I think about digital first banks that have come into existence, and don’t have a backing of a traditional bank or charter behind them,” Kendall said.
These neo-banks provide basic digital or mobile-only financial services including checking and savings accounts, payment and money transfer services, individual and commercial loans, and various other financial services.
Dissimilar to credit unions and other conventional financial institutions, challenger banks also characteristically do not have brick and mortar locations, or sometimes even a state or federal charter.
Among the wave of alternative banks are San Francisco-based Chime, which does not have a bank license but is FDIC-protected through a partnership with The Bancorp Bank; and some European models looking to set up shop in the U.S. such as Revolut and Monzo Bank from the United Kingdom, and German-based N26. Players from outside the consumer banking industry, such as Square and Goldman Sachs, are also moving in.
“Digital challenger banks are probably more hype and less of a threat than people think,” Kendall noted. “It is very difficult for a true standalone challenger bank to survive in the U.S. at the moment.”
The biggest challenge for challenger banks, Kendall maintained, is accountholders reluctant to actually shift from their primary financial institution such as having their salaries direct deposited into a neo-bank. “That’s the big point of friction preventing them from truly taking over market share from the credit unions and the banks out there.” One caveat, according to Kendall, “If a challenger bank gets traction, it will probably be acquired by one of the money center style banks.”
Kendall added, on the other hand, big banks are coming after the credit union members. “And credit unions members are converting to the big banks because they want great digital solutions.”
Kendall explained when he talks to credit unions, they are very concerned about deposit displacement and deposit runoff. “Everybody is in a fight for deposits right now.” However, Kendall does not think deposits will run off to the challenger banks. “People who are leaving credit unions are still going largely to the bigger banks like Wells and Bank of America. Yes, there may be some runoff going to the challenger banks, but it is a little bit like worrying about securing the chimney when you have left the door wide open on your front door. The real exit is happening by people coming in and out the front door, not the small opening in the fireplace.”
For example, Kendall noted, the online bank Marcus, backed by Goldman Sachs, in less than three years grew deposits to almost $30 billion. “It’s an example of a big financial institution creating a different digital and product offering. Those assets came from other banks and credit unions.”
Another troubling departure stems from payments increasingly taking place outside of a credit union’s debit card system, Kendall suggested. He explained with PayPal and Venmo and other different payment frameworks allowing for balances to accrue, funds remain there instead of in a checking or share account because of the apps’ convenience as payment formats. “That is where the real threat is versus the challenger banks. It’s the payment, the payment tools.”
Kendall said, the only way a credit union can compete from a technology perspective is to leverage what’s core to them, which is that personal relationship. “When I talk to credit unions about how to compete against the big banks, I tell them, ‘go back to your charter and look at the very reason why credit unions exist.’ Which is all about the members helping each other and having a personal relationship through their credit union.”
Kendall suggested credit unions use their competitive differentiator against big banks such as Bank of America and Chase. “Because with [big banks] nobody expects to have a personal relationship and nor can they support having a personal relationship with the broad base of their customers.”
Kendall said Kony DBX — which includes pre-built native and web apps along with a digital banking platform to help credit unions accelerate digital strategies — developed Kony DBX Engage, a tool within the mobile app that allows members to maintain a one to one digital relationship with their personal credit union representative.