Bank Deposits Under Assault from FinTech Digital Investment Apps

App-based investment brokerages like RobinHood, SoFi and Acorn leveraging Debit Cards, Rounding Up, Cheap Online Investment Accounts to Change Behavior

March 31, 2022
Bank Deposits Under Assault from FinTech Digital Investment Apps

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How times have changed, particularly in terms of deposits. As Americans stayed home during the pandemic, they spent less money, and deposits at financial institutions grew by leaps and bounds, reaching $17.1 trillion at commercial banks in May 2021.

Increased deposits were a welcome respite for commercial banking which has been under assault by a thousand cuts. The combination of financing companies, originating mortgages and increased trading in frothy markets by user-friendly apps that act like so-called “shadow banks” represented attacks from all angles.

Meanwhile traditional institutions had to continue their slog through regulation and their own difficult transitions to digital first approaches.

Traditional banks were counterpunching to the point where they were scoring with their own fintech-type services like no-fee overdrafts and early paycheck access. Capital One announced that it would eliminate overdraft and nonsufficient-funds fees for its consumer-banking customers. Bank of America said it would reduce overdraft fees.

The arms race in introducing new, consumer-friendly products is on.

Because of their smaller size and attention on younger customers who are often overlooked by banks, Fintechs have an advantage in tech savvy, speed and leveraging data. 

Fintechs are now using death by a thousand little cuts to go after the core of traditional banking: deposits.

Robinhood is building on its commission-free mobile trading platform with small, simple but ingenious strategies around debit cards, rounding-up strategies and inexpensive online investment accounts. Other investing fintechs like Acorns and SoFi are encouraging small withdrawals that redirect to online investment accounts. One large institution looked at outflows that went to fintechs and saw it had lost $4 billion in only 18 months.

Robinhood’s cash card feature rounds-up investments with a weekly bonus, early deposits and split-check features for recurring investments. The round-up investment feature rounds up purchases to the nearest dollar and invests the difference into a stock or cryptocurrency of their choice. Added features include no overdraft fees, service fees, minimum deposits or in-network ATM fees.

The goal is to make investing as easy as possible for newer investors and to take the intimidation factor out.

For their part, banks and credit unions hope to counter those losses with embedded investing leveraging their own apps and websites and apps like Envestnet. Embedded investing portends a greater number of partnerships and cross-marketing agreements between banks and investment firms.

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