Banking Industry, Pt. 1

Part
01
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Part
01

Banking Industry Overview

Banking on a whole is experiencing tremendous growth, especially with the rise of technology and the loosening of regulations. Banking platforms and aggregators were first introduced to the scene in the 90s with products such as Microsoft Money and Intuit Quicken. Since then, increases in technology, such as the introduction of the iPhone, has spawned a golden age of online banking technology.

The Banking Industry

  • Currently, there are 4,708 FDIC-insured commercial banks in the United States.
  • The four largest banks in the United States are Bank of America, JPMorgan Chase, Wells Fargo, and Citigroup.
  • By market capitalization, JPMorgan Chase is the largest bank in the US, followed by Bank of America.
  • After the 2008 financial crisis, major regulations such as Dodd-Frank were put in place to offer transparency and offer some accountability for their actions. Even though it wasn't completely repealed, many other regulations were eased or scaled back which resulted in a more robust banking sector compared to before the 2008 financial crisis.
  • Just as the lack of new regulations is speeding up growth in the banking industry, technology is turning into a large driving force. Many banks are undergoing digital transformation facets such as cloud adoption, data management, AI-powered analytics, and system modernization.
  • Technology is a major disruptor and driving force in the banking sector today. Many disruptors in years past have already been made commonplace in the banking industry, including blockchain.
  • In 2018, the Office of the Comptroller of the Currency said that it would begin accepting bank charter applications from fintech companies.
  • Commercial banking is set to bring in a revenue of $734 billion in 2020 and achieve annual growth of 5.7%. Investment banking, on the other hand, brought in a revenue of $40 billion from 3,400 establishments in 2018.
  • As digital transformation gains ground at banks, the risk that banks face is also rising. Risk management has become a much more important part of banking these days.
  • A major trend seen in the banking industry is the rise of fintech and challenger banks.
  • Challenger banks, which give consumers online access to many features not offered by traditional banks, are raising record amounts of money. Upstarts like Chime and Varo Money raised a lot of money in the last two years.

Platforms and Aggregators

Part
02
of five
Part
02

Request title: Banking Industry - Notable Events

Six of the most noteworthy events as it relates to banking aggregators and platforms include Robinhood's launch of its Cash Management platform, Chime raising $500 million in cash, Dave launching its banking platform, Varo moving closer to attaining a national bank charter from the FDIC, NCR banning aggregators due to hacks, and Visa buying Plaid for over $5 billion. Banking platforms were defined as a layer that brings a bank's services to an extended customer base. In this research, this definition applied to platforms that were built to indirectly offer services by banks to consumers.

Robinhood Rolls Out Cash Management Service

Chime Secures $500 Million in Funding

Dave Launches Credit-Building Banking

Varo Moves Closer to Attaining Bank Charter

NCR Corp Bars Mint and Other Banking Aggregators

  • NCR Corp., a software and hardware company that handles transactions for banks and other sectors, banned banking aggregators such as Mint and Quickbooks Online from accessing its online banking platform, Digital Insight.
  • Digital Insight is used by hundreds of major financial institutions, and aggregator apps such as Mint were using its data to function.
  • However, cybercriminals used aggregation sites and apps to take over victims' bank accounts and withdraw all their money. NCR was quick to respond, as they shut down access after one week of reports of several dozen customer accounts being hacked.
  • NCR blamed the aggregator services because it did not offer proper prompts for multi-factor authentication when someone was trying to access the account. The hacks weren't as complex as other hacks as the perpetrators only re-used stolen passwords from other breached sites.
  • Even though it was not as severe as breaches past, this story was chosen because NCR is a major player in the banking industry and it quickly moved to contain the problem before it got worse.
  • Intuit, owners of Mint and Quickbooks, worked with NCR to resolve the problem. The issue has since been resolved.

Visa Acquiring Plaid for 2x its Private Valuation


Part
03
of five
Part
03

Banking and Financial Wellness Impact

There is limited information on how different types of bank accounts in an individuals' portfolio impact his or her financial wellness. Acorn allows people to invest money from linked accounts into diversified portfolios covering 7,000 stocks as well as bonds with as little as $5. Acorn reveals that its path to a diversified investment grants financial wellness that should be available to everyone.

Helpful Findings

  • There is limited information available on how a diversified banking portfolio impacts financial wellness, credit score, improves financial health and well-being. The majority of financial wellness programs are implemented based on the customers' needs or are integrated with employee benefits.
  • Acorn helps people invest in diversified portfolios covering over 7,000 stocks as well as bonds with as little as $5.
  • Acorn also offers round-ups and investing services that help users invest each time they make any purchase from a linked account, debit, or credit card. Their balance is rounded up to the next dollar, while the change gets invested.
  • Expert-level reports reveal that there is a degree of simplicity associated with the types-of-credit categories of an individual to their credit score. However, it's "complicated to quantify" the exact effect on the score.
  • Bank of America recently unveiled a wide range of guidance for personal finance on topics like investing, saving, debt management, and more at a Better Money Habits Retreat. The bank reveals that individuals cannot rely solely on savings accounts to save their way to "financial independence." The bank recommends a diversity of portfolios to "minimize the risk of loss" to an individual's overall portfolio.
  • A Future Advisor app provides a "free analysis on an individual's portfolio." However, the app charges management fees when providing portfolio management services that help people to boosts their "financial wellness."

Testimonial

  • One testimonial example of a customer enjoying a diversified banking portfolio is that of "Sean Potter." It took Sean Potter a great while to save up to $500 by the age of 16 through odd jobs. Sean narrated his life before and after he ventured into different types of bank accounts to impact his financial wellness.
  • At age 16, Sean Potter opened a retirement savings account in 2006. Afterward, he asked his parents to create a brokerage account in his name, and by 2013, he had his modest, periodic contributions reach $25,000. He has grown his portfolio significantly and has a checking account and brokerage accounts.
  • Sean reveals that he currently saves about $35,000 every year, and his yearly saving is more than 60% of his after-tax salary. His net worth has increased more within the past nine months compared to the past nine years. Sean Potter reveals that his diversified savings in different bank accounts have positively impacted his financial wellness. He is "free to live life" as he pleases and would retire with huge savings.

Research Strategy

We began our research by looking at the impact of diversified banking portfolios on financial wellness, credit score, and the types of account combinations that improve the financial health and well-being of individuals. This strategy also examined customers benefiting from this approach. This strategy included integrated reports from Bank of America and other banks. Using that approach we were able to find insights about how the bank helps people invest in various portfolios, credit risk management, as well as "emotional and financial wellness." We tried to uncover any connection between the analyzed investments and how they improve financial wellness but we were not able to find any correlation between the two.

We also visited databases containing scholarly and academic publications like KFOV. This strategy examined how a diversified banking portfolio impacts financial wellness, credit score, and the types of account combinations that improve the financial health and well-being of individuals. Financial-wellness literature published by KFOV discussed individual experiences related to the management of student bank transactions, we were not able to find specific case studies of account combinations that improve financial health and well-being.

We also tried to find information by going through financial associations like the American Association of Individual Investors (AAII) and the American Psychological Association (APA). While there was a lot of helpful information about investment and managing a customer's portfolio, most of the publications on maximizing an investment portfolios was only available to registered APA members.


Part
04
of five
Part
04

Banking Industry - Customer Demographics

Almost all US adults have a checking account. Those that do not, the "unbanked", are more likely to be young (under age 34), poor (making less than $15,000 per year), single females with children, non-White, and living in the South. While data was limited, assuming that those without financial advisers and those that use mobile or internet banking are most likely to use online financial platforms and aggregators like Nerdwallet and CreditKarma, it was determined that consumers most likely to use online financial platforms are young (under age 44), male, making between $50,000-$150,00 in annual household income, White, and living in urban or suburban environments.

Age

  • Most Americans (88%) have a checking account. Of those Americans that are "unbanked" (no checking or savings account), most are aged 15-24 years old, followed by those aged 25-34. Therefore, older Americans are sightly more likely to have a checking account than younger Americans, however, most Americans have at least a checking account.
  • Persons aged 18-24 are most likely to use mobile banking, while only 29% of smartphone owners aged 65+ use mobile banking. Second to persons aged 18-24, persons aged 30-44 were also likely to use mobile banking.
  • Millennials are the primary demographic for NerdWallet and Credit Karma; however, these sites are popular with a broad range of US adults.
  • Younger Americans (under age 55) are most likely to manage their finances themselves, rather than use a financial adviser. Therefore, it is assumed that younger Americans would be looking for financial advice and would be more likely to use platforms like NerdWallet and Credit Karma.

Gender and Family Makeup

  • Unmarried female-headed households are the most likely to be unbanked, followed by unmarried male-headed households and single men. This means they are the least likely groups to have a checking account.
  • Men and women use mobile banking at about the same rate.
  • Men are much more likely than women to seek out financial advice from any source.

Household Income

  • Those with less than $15,000 in household annual income are the most likely to be unbanked, i.e. have no checking account. Those with $50,000 were the least likely to be unbanked, i.e. most households with over $50,00 in annual income have at least a checking account.
  • Higher income households are more likely to use online banking.
  • Those with more than $150,000 in annual income are most likely to work with a professional financial adviser, while those with under $50,000 in annual income are most likely to not manage their financial life at all. Therefore, it is concluded that those with an annual income of between $50,000-$150,000 are most likely to use banking comparison and educational platform sites, as these people would be looking to manage their finances but also would not have the advice of a professional.

Race/Ethnicity

  • White and Asian Americans are much more likely than Black and Hispanic Americans to have a checking account, keeping in mind that the majority of all Americans have checking accounts.
  • Hispanic and Black consumers were more likely to use mobile banking than White Americans.
  • Black Americans are more likely to rely on family members for financial advice than White Americans.

Geographic Region

  • Americans living in the South are least likely to have a checking account.
  • Americans in the Midwest are most likely to use a financial adviser. People on the Pacific Coast are most likely to manage their finances on their own.
  • Urban and suburban Americans are more likely to use internet banking.
Part
05
of five
Part
05

Banking Industry - Consumer Motivations

Consumers’ motivations for opening a bank account include the need for easy access to money, the need to save money, the need to save for retirement, the desire to invest money, and the desire for better rates, rewards, tools, and services.

Need for Easy Access to Money

  • It appears the majority of consumers open a bank account to gain easy access to their money. Based on a survey recently conducted by GoBankingRates, 88% of adults in the United States have a checking account. Given that checking accounts are designed primarily to provide consumers with “easy, day-to-day access” to the money deposited into these accounts, it is likely that the majority of consumers open a bank account for this exact purpose.
  • Checking accounts are meant for everyday banking, such as transferring funds, making cash withdrawals, and depositing checks. They offer consumers bill payment options and a paper trail, and they help consumers keep their money safe.
  • According to Lauren Hargrave, a Credit Karma contributor, savings accounts and money market accounts also offer easy access, but there are limits to the number of withdrawals or transfers that can be made in a month. With money market accounts, for example, the maximum number is six, but automated teller machine (ATM) or in-person withdrawals or transfers are typically excluded from the count.
  • It appears consumers prefer a checking account. Of adults in the United States, only 52% have a savings account, and only 10% have a money market account.

Need to Save Money

  • It appears some consumers open a bank account to save money. GoBankingRates’ survey shows that the second and third most common types of bank accounts in the United States are the savings accounts and the money market accounts.
  • According to Hargrave, savings accounts and money market accounts are designed primarily to provide consumers with a way to save money and earn some interest at the same time. Unlike most checking accounts, they come with a minimum balance requirement, and they offer interest.
  • They help consumers establish long-term or short-term savings goals and set aside cash for emergencies, big ticket items, or unexpected expenses.
  • Aforementioned statistics suggest that adults in the United States prefer savings accounts over money market accounts despite the relatively higher interest rates that money market accounts typically offer.
  • In 2019, adults in the United States had the goal of setting aside more money for the following items: regular savings (34%), emergencies (48%), house (21%), vacation (25%), and luxury purchases (10%).

Need to Save for Retirement

  • It appears some consumers open a bank account to save for retirement. GoBankingRates’ survey indicates that the fourth most common type of bank account in the United States is the bank individual retirement arrangement (IRA) account. Seven percent of adults in the United States have a bank IRA account.
  • The IRA account is designed primarily to provide consumers with a way to save for retirement and earn tax savings.
  • As it is the savings vehicle that the Internal Revenue Service (IRS) has created specifically to help individuals save for retirement, eligible individuals who want to save for retirement contribute to this type of bank account.
  • In 2019, 34% of adults in the United States had the goal of setting aside more money for retirement.

Desire to Invest Money

  • It appears some consumers open a bank account to invest their money. Based on GoBankingRates’ survey, six percent of adults in the United States have a ‘certificate of deposit’ or CD.
  • Certificates of deposit are designed primarily to enable consumers to make a low-risk investment. They allow consumers to invest their money for a predefined period of time at a fixed or variable interest rate. CDs with a fixed interest rate are considered low-risk because, unlike brokerage accounts where the value of stocks can go down, they guarantee a fixed interest upon maturity.
  • Compared to savings accounts, they offer higher interest rates. CDs have high fees for early withdrawal because money invested in these vehicles are not meant to be withdrawn.
  • It appears consumers prefer the lower-risk CDs over brokerage or trading accounts as their bank account of choice for investing money. Compared to 6% of adults in the country who have a CD, less than 3% of adults in the country have a brokerage or trading account.

Desire for Better Rates, Rewards, Tools, and Services

  • Some consumers open a digital-only bank account to avail of better rates, rewards, tools, and services. Cornerstone Advisors’ survey of adults in the United States shows that the top reasons for opening an account at a digital-only bank are to avail of better financial management tools, to avail of better debit card rewards, to try the digital-only bank out, and to avail of better interest rates.
  • Digital-only banks or neobanks, such as Ally, Chime, BankMobile, Aspiration, and Simple, are emerging to challenge traditional banks and address unmet banking needs.
  • Though the users of these digital-only banks are in millions, statistics show that consumers still prefer to open primary accounts at traditional banks. Only 3% of millennials, 1.5% of Gen Xers, and 0.8% of boomers have opened a primary checking account at a digital-only bank.
  • Accounts at digital-only banks are opened mostly to supplement primary accounts at traditional banks.
Sources
Sources

From Part 02