The bank account's the thing

Consumer behavior is slow to change—especially when it comes to ingrained habits like banking. So how can fintechs use that to their advantage?

Five years ago, when fintech was still in its infancy, the emerging crop of startups were clear on one thing: They weren’t just some neobank. But as the fintech ecosystem has matured, the centrality of the checking account hasn’t changed, and fintech companies are now beginning to rethink that approach.

At Plaid, we’ve long recognized that most consumers’ lives revolve around the checking account—or, more accurately, wherever you deposit your paycheck. According to a 2016 Plaid study, the average consumer has 15.6 connections per checking account. In other words, the institution that owns the deposit account still acts as the hub to which all the other spokes are connected.

So while much has been written (including here on Fin!) about how fintech startups’ deeper moves into traditional banking help alleviate the burden of the patchwork of state and federal regulations that most fintechs are subject to, that’s not the full story. Of course, this burden is part of what’s driven some of these startups to consider pursuing banking charters themselves, as these charters promise to simplify the path to providing critical products and services. Other companies—including Varo Money, SoFi, and Square, which just last week withdrew its application—have taken different paths to more deeply enter the banking system, namely via the industrial loan company charter. This charter, only available in a few states, essentially lets applicants sidestep the scrutiny of the FDIC and its deposit insurance requirements and avoid the state-by-state licensing requirements most are currently subject to.

But it goes deeper than that. Though ample opportunity exists to rethink the entire model around which financial services a startup delivers, consumer behavior changes more slowly than we might think. So finding creative ways to bundle the value-added service and the account itself is still fertile ground for innovation. For fintechs, acting more like a bank account isn’t just about regulations. It’s about owning the hub position for consumers’ financial lives.

A preview of that potential might be seen in how consumers’ usage of their Venmo and PayPal accounts has evolved. The company doesn’t disclose figures, but many consumers hold a Venmo balance to keep it liquid to pay friends. Or, increasingly, to pay the merchants that accept Venmo—something that PayPal is making even easier with the news last month that it would begin issuing debit cards. With the convenience of these changes, we see PayPal beginning to play that hub role that checking accounts have for so long held onto.

Indeed, many startups have responded to this realization with the launch of debit cards—Square, Acorns, and others took that route. But the holy grail, the thing that really cements the customer relationship, is to be the digital source of all outflows. (This is a boon to the bottom line, too. Take PayPal, for example: Some estimates state that PayPal has made some $18 billion in interest from the balances of Venmo and PayPal users.)

That’s why it was so meaningful when the Square Cash app rolled out support for direct deposits in March. Though it did so with the backing of Lincoln Savings Bank, this meant that the app was moving ever closer to parity with the features of a traditional bank account for a certain type of consumer.

Before that, SoFi—which made its name with provocative campaigns like “Even banks don’t want to be banks”—rolled out SoFi Money, a checking-savings account hybrid. Stash was quick to follow suit with another digital-first account. Even Amazon is rumored to be considering its own checking-account equivalent, a move that could have big consequences for the future of banks, too.

After all, the potential for these companies is similar to the promise held for traditional financial institutions: To serve as the hub for the financial life. But it may well be new entrants that take that pole position, or else begin to reshape expectations by serving as the resting place between money’s inflows and outflows.

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