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Digital transformation begins with operational transformation


It turns out that it’s not just the banking industry’s conservative nature and relatively slow innovation cadence that makes them a juicy target for fintechs. Banks can also be significantly hindered by their historical operating structures. The related, yet separate, concepts of savings and wealth are a good case in point.

 For quite some time, banks have divided their retail and wealth offerings into two separate groups: the retail bank and the private bank. The construct worked well initially when the vast majority of Americans banked simply, using checking, savings, and maybe even CD accounts offered by their retail bank. The wealth side of the house, on the other hand, focused on higher net-worth individuals with the capacity, desire, and supposed levels of sophistication to invest in more volatile vehicles such as stocks and bonds.

Today, the typical wealth division of a bank has a target minimum account size of around $250,000. While the wealth group might open or acquire some lower balance accounts, they are—according to our customers—typically unprofitable but necessary parts of running the wealth business.

As such, customers with less than $250,000 are supposed to find a home in the retail bank, while their more affluent brethren are serviced via the private bank. Again, this construct worked reasonably well for decades until recently, when fintech companies began to transform the industry, rapidly blurring the lines between savings and wealth in the minds of customers.

This happens for the simple reason that fintechs can target a very specific customer need and then act on it without worrying about political or financial ramifications across their own organization. To date, we’ve seen three categories of savings and wealth fintech providers emerge and begin to siphon deposits from traditional banks.

The first, microsavings fintechs, are companies such as Digital and Qapital that use algorithmically-powered technology to help customers automatically save for their most important goals. Customers love that the solutions enable them to name their goal, assign it a picture and then set the auto-save function. Money is saved and an emotional connection to the goal is secured.

The second group, microinvesting fintechs, is a crowded space with companies such as Acorns, Stash and Robinhood leading the pack in terms of growth and assets. These solutions are very similar to the microsavings firms–except that the money tends to be distributed into automatically managed (or self-directed) brokerage accounts. Again, customers love the automation and simplicity of the offerings.

The third and final group, macroinvesting fintechs, are even more daunting as they include well- funded upstarts that include Betterment and Wealthfront, as well as long-standing but surprisingly nimble, traditional players such as Vanguard and Charles Schwab. Both groups leverage technology to reduce the cost and therefore the minimum balance required to open a digital wealth account.

In fact, all three classes of fintech share  zero-dollar starting balances since they are all highly automated and not burdened by a desire to support past operational constructs—and that’s saying something, given the relatively older players in the mix.

Taken together, we’ve seen that the combination of the leading players in the three categories results in net outflows on average of about 4 percent from traditional retail bank deposits. That means that if your bank is trying to grow 6 percent per year, you’re already 4 percent in the hole every January.

As all three categories of savings and wealth that fintechs grow, they look at adjacent and related services to continue expanding their positions. Macroinvesting firms including  Betterment and Wealthfront are adding savings accounts and goals as new features, while microsavings firms such as Qapital add automated digital investing. Again, they don’t have any divisional conflicts to manage, so structuring their offerings in order to deliver a logical solution to their customer is the only goal.

And isn’t that the point once all is said and done: to deliver a useful offering to a customer? The current bank structure of freestanding retail and private banks, while possibly easier from a regulatory point of view, isn’t optimized to do the one thing that banks want, which is to retain and create more valuable customer relationships.

The good news is that banks have some significant advantages over fintechs.

To start, your bank is a known and trusted entity. You have a physical presence, which adds to that image of stability and trustworthiness. When you look at the data, consumers don’t want to go to unknown, possibly fly-by-night fintechs for banking services. They have to go because the cool competitive offerings don’t exist at the average bank.

Further, banks possess the ultimate secret weapon for pushing new services: mobile banking. This channel is a top five application on every user’s mobile phone, a device looked at more than 80 times a day according to recent reports. It’s a known, secure and already downloaded solution for your customers. The only issue for banks on this front is whether you work with a modern mobile banking provider who can support your desire to add features.

Third, banks have an ultra-low customer acquisition cost because you already have the customer. Each fintech would kill to have a trusted app on every user’s phone. But they don’t. That means they have to spend outrageous amounts to cultivate, convince and retain a customer. Banks don’t have that issue.

Finally, banks actually have a pricing advantage. Microsavings firms need to use services such as Plaid and other aggregation platforms to open and fund accounts. That’s expensive. Fintechs also frequently need to pull data from banks to make their solutions work and that gets very expensive very quickly. As a result, it’s not uncommon to see $5 or even $10 monthly fees for some of these fintech services.

Banks have the built-in advantage of operating their own systems or at the very least, having unfettered very low cost access to it. This allows banks to offer free solutions and still derive significant revenue off of retained deposit balances. While fintechs struggle to “find their model,” banks already have theirs and it works well—so long as you retain your deposits.

The key for banks is to break down the wall between the retail and wealth groups; understand that savings solutions can move upward to wealth; and that wealth accounts can be profitably managed at much lower balances than $250,000. It’s all about the technology you choose and the willingness of both groups to come together to deliver a holistic solution that mimics and serves the customer wants and desires, not the preexisting bank operating structure.

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Drew Sievers is CEO at Harvest Savings and Wealth Technologies.