When we started creating a new bank in the USA, we were keen on having it be the sum of our (Ben & Ed) 40 years of international experience in banking, payments, and fintech.
We went through an exhaustive list of what we perceived as critical failures of US consumer banking and talked to over 300 consumers in the process. The composite image we got of the US Personal Banking sector was horrid and we decided to compile the problems in this preliminary post.
We’ll be coming back with more later post-launch of Unifimoney.
Here’s what we learned over 90 days….
The Big Four of U.S. banking — JPMorgan Chase, Bank of America, Citigroup and Wells Fargo — have a combined $9.1 trillion in assets, or more than half the U.S. total (Forbes). Yet they offer some of the worst value for money and little product differentiation in the market. Consumers have been targeted with the banks’ enormous marketing spend for decades, convincing them of their imagined value. The big 4 spend a combined $10bn a year (if you add Capital One and Amex, it’s over $15bn) — an incredible amount for what is a commodified utility service.
Much of the problems stem from a top-heavy, static market.
From 1990 to 2008, over 2,000 new banks were formed. More than 100 per year.
From 2009 to 2013 only 7 new banks were formed. Fewer than 2 per year.
What sped up the destruction of new banks in the USA was the Dodd-Frank Act, but we won’t go too deep into that for this analysis. Instead, we want to focus on the ways that the banks have let down the average consumer.
Our team has spent decades in banking and payments seeing these issues first hand. We’ve seen a decade of innovation boiled down to dark UX design tricks and slick acquisition offer marketing to entice customers. We believe banking can be truly different.
But to get to the solution, you first have to understand the problem: the big banks put profits over people.
2. Banks rely on marketing spend not product innovation for competitive advantage — JPMorgan Chase spends more on marketing in the US than Apple does globally each year (in 2018, the bank spent $2.51 billion on US advertising). And the biggest banks have been fined hundreds of millions of dollars in fines for deceptive advertising.
3. Banks employ acquisition tactics based on bait and switch — relying on consumer inertia that ensures customers put up with poor value for money, generic product propositions, and customer experience.
4. Banks hide their pricing, promoting the idea of “free banking” — if banking is free, how are the banks bringing in record profits? Consumers are subsidizing banks in the form of ultra-low-interest checking and savings accounts.
5. “Savings accounts” are a misnomer — the difference between the average checking and savings accounts in the US is 0.03% APY. Incredibly, 2 of the top 10 banks have the same checking and savings APY.
6. Digital dividends enjoyed by banks have increased their profits — but that money is passed to shareholders rather than consumers.
7. Banks have focused on innovation theater rather than true innovation — like coffee shops, fancy apps, and advertising to provide the veneer of change.
8. Almost 50% of affluent millennials have over 5 financial apps to manage — banks have made money management an insanely complex pursuit.
Source: Unifimoney survey April 2020
9. Banks exploit the fragmented nature of the market. They’ve made it complex, time-consuming and repetitive to manage money for optimal return — it’s the banks that profit off consumers’ losses.
10. Banks have made money management overly complex. >25% of affluent millennials spend over 3 hours a week managing their money while 20% spend less than an hour. The complexity is making people spend too much time on their finances — or discouraging people to the point where they spend no time at all.
Source: Unifimoney Survey April 2020
11. Banks have made money management stressful. 72% of affluent millennials report having a medium-to-high level of anxiety about how they manage their money.
Source: Unifimoney Survey April 2020
12. Banks’ economic interests put them in competition with their customers — the money consumers don’t receive in interest becomes the banks’ profits.
13. Banks have trained consumers to expect poor value and undifferentiated propositions — the same way we were trained to have low expectations for taxis before Uber changed the model.
14. Banks make their best customers pay for their inactive ones — it can cost over $1,000 to acquire a customer and many become inactive very quickly leaving the rest to cover the costs of acquisition. The best customers are therefore penalized for their loyalty and engagement, subsidizing the exorbitant cost of acquisition and unprofitability of inactive accounts.
15. Banks use hyperbolic discounting to trick their customers — we’re psychologically wired to find immediate small rewards far more powerful than larger ones that are further away. Banks have taken advantage of the fact that we overvalue immediacy.
Hyperbolic discounting means we are hard-wired to make terrible money decisions.
16. Big Banks exploit human psychology; FinTechs typically ignore it. Most FinTechs assume that they can change consumer behavior; we’d rather acknowledge the reality of consumers’ relationships to financial planning and work within those bounds: creating an effortless solution.
17. Banks have made it increasingly difficult to understand how hard your money is working for you — interest rates are complex and hidden, returns are buried, benchmarks are selective, information is scattered across multiple providers, and credit card rewards are delivered in proprietary currencies (double points! how much is a point?). Consumers are kept in the dark for a reason: your money isn’t working for you.
Not designed for ease of access — if you don’t know your checking APY its because your bank is not advertising it and its either no/or low and you will need to try hard to find it.
18. Credit card companies rely on unredeemed rewards and benefits for the profitability of their portfolios — costing consumers more than $16bn a year — the system is built with the expectation that a third of consumers won’t ever cash in all their benefits. They call this the “breakage rate.”
If you have any more ways in which banks might be taking advantage of consumers, feel free to shoot us a tweet @unifimoney. And if you’re interested in a solution to these problems, do check out what we’re building.
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