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Will Financial Health Be the Next Transformation in Banking?

Friday, October 23, 2020

by Marisa Walster,
Senior Director

Recent history has certainly been eventful for the financial services industry. From the Great Recession of 2008 to the rise of smartphones, the industry has been confronted by global catalysts that have changed the face of consumer banking in the U.S. As we face the challenges of the COVID-19 pandemic and financial crisis, there is data to suggest that the consumer banking industry will – and should – transform again.

When more than 700 banks received bailout funds during the Great Recession and the Dodd-Frank Act went into effect, businesses adjusted to limits on fees; predatory lending, marketing, and communications were closely monitored; and regulatory compliance teams took a lead role across companies. Banks transformed.

Shortly after, with the rise of smartphones, fintechs, and changing consumer expectations, banks transformed again. By 2018, 93% of financial services companies had or were in the process of adopting a digital-first business strategy in an effort to reduce costs and improve customer experience.

Will COVID-19 provide a similar catalyst to transform consumer banks? The statistics would indicate yes. We know that:

  • The economy is poised for a larger downturn than in the Great Recession, with more jobs lost, higher unemployment, sharper contraction of the economy, and higher government spending.
  • Consumers need support from their financial institutions. More than two-thirds of people in America were not financially healthy as of August 2020. These individuals are struggling to spend, save, borrow, or plan in ways that allow them to be resilient and seize opportunities over time.
  • Even prior to the pandemic, consumers were looking to their banks for financial health support. In 2019, 80% of customers expected their primary financial institutions to help them improve their financial health, yet only 14% “agreed strongly” that their institutions delivered. Traditional banks are missing expectations.

This expectation gap is leaving the door open for fintechs and challenger banks to disrupt the industry yet again. Today, many digital-only banking startups are focused on offering financial health-centric services. Their focus on products and services such as no-fee accounts, early wage access, and automatic savings tools is making an impact on the market. By the end of 2019, Chime had acquired 5 million customers, and in August 2020, Varo was granted a national bank charter.

There is a strong business case for challenger banks and fintechs to leverage financial health to disrupt traditional banks. A recent Financial Health Network study, showed that customers who believe their financial institution cares about their financial health are “3X more likely to be ‘very satisfied’ with their [primary financial institution],” “3X more likely to recommend their [primary financial institution],” and “5X more likely to be interested in purchasing additional products and services.”

The connection between financial health support and customers’ willingness to recommend their financial institutions to friends and family should be particularly compelling. Also known as the Net Promoter Score (NPS), this measure is tracked by corporations globally and Bain has shown that leaders in NPS grow at twice the rate of their competitors.

The Business Opportunity for Financial Health

With the banking industry NPS average at 34 in 2019, banks that can gain customer loyalty by focusing on financial health stand to outperform their competition.

So will COVID-19 be another catalyst for consumer banking? Only time will tell, but we should all be rooting for it. A shift toward advancing consumer financial health would be a positive for everyone, with consumers becoming more financially resilient and able to pursue opportunities over time, and companies growing and lifting the economy. It’s the kind of win-win that we all need this year.

To learn more about opportunities for financial institutions to fill gaps in customer expectations and build strong relationships, read the Financial Health Network’s recent research paper, “Building Valuable Customer Relationships Through Financial Health.” To hear more about how our team can help you pursue a win-win financial health strategy, visit finhealthnetwork.org/consulting.

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