By Steve Gelsi
Citizens Financial Group Inc. launched its Citizens Pay iPhone upgrade plan in 2015 as an early form of the buy-now-pay-later concept that’s in vogue in the payments space.
The idea was to take the Citizens (NYS:CFG) brand as a credit provider and combine it with Apple’s (NAS:AAPL) iPhone to help customers avoid waiting in line for hours in the crush that typically happens when a new iPhone is released.
“We helped introduce a digital-first way of buying iPhones so people could get in line digitally,” said Brendan Coughlin, executive vice president and head of consumer banking for Citizens Financial Group. “That program put us on the map nationally.”
The effort helped make it a coast-to-coast digital bank under the Citizens Access brand, even though it only has branches in the Eastern U.S. Citizens now counts three million customers in its regional bank branches, and more than three million in its national, non-branch customer base.
The Citizens Access digital bank unit is part of a seismic shift toward mobile financial services as banking technology has moved to the cloud from its origins in mainframe computers behind bank walls.
With lower barriers to entry to offer financial services, everyone seems to want to get into the banking game.
Goldman Sachs (NYS:GS) may be known as a white-shoe investment bank for M&A, but it’s also been gaining traction by offering traditional retail bank services under its Marcus brand.
Starbucks Corp. (NAS:SBUX) would qualify as a major bank just by counting the amount of money stored on its customers’ loyalty card accounts.
Apple offers myriad financial services on its platform — more of which it reportedly plans to bring in-house.
Walmart Inc. (NYS:WMT) has been talking about growing its consumer financial services offerings for years.
While giants Wells Fargo & Co. (NYS:WFC) , JPMorgan Chase & Co. (NYS:JPM) , Bank of America (NYS:BAC) or Citigroup (NYS:C) continue to operate the most branches, the financial services battlefield has moved to the internet, with national and international dominance pretty much up for grabs.
As the saying goes, you have to fish where the fish are. And the fish that banks want mostly swim around on their mobile devices to download apps from Zelle, Chime Financial Inc., Square Inc. or SoFi Technologies Inc. (NAS:SOFI) .
The opportunity to create a dominant, national digital bank that provides online services continues to drive both lenders and fintech rivals to spend billions on technology and marketing.
Although major challengers such as SoFi and Square often get described as neo banks, all banks in a sense are now neo banks.
“What’s happening is banks are becoming utilities for money movement and regulatory purposes and other brands are taking the customer relationship,” said Kathryn Petralia, co-founder of Kabbage, a lending platform acquired in 2020 by American Express Co. (NYS:AXP) . “Consumers doesn’t care which bank is in the bank account. They’re just working with Chime. Over the long-term it’ll erode the customer relationships enjoyed by the big banks.”
Banks also face greater infrastructure challenges and processes to deal with regulators.
“It’s not that they don’t want to do stuff, it’s just harder for banks,” Petralia said. “Fintechs are regulated for the product they offer. If you’re in money transmission or payment processing, you have regulations for that. But you’re not regulated as widely as a bank is. Most are doing just one thing – and then they progressively add one more service at a time.”
To compete, traditional banks continue to pour money into technology, partner with fintechs or sometimes acquire or own them either by themselves or with a group.
Bank of America Corp. (NYS:BAC) , Truist Financial Corp. (NYS:TFC) , Capital One Financial Corp. (NYS:COF) , JPMorgan Chase & Co. (NYS:JPM) , U.S. Bancorp (NYS:USB) and Wells Fargo jointly own Early Warning Services LLC, which runs the popular Zelle digital payments service, for example.
The COVID-19 pandemic accelerated the trend. About one in three consumers said they started using digital payment tools in the past six months, according to a late 2021 survey by JPMorgan Chase on banking attitudes.
A 2020 JPMorgan survey in the midst of the COVID-19 lockdown revealed that 54% of consumers said they used digital banking tools more than they did in 2019 due to the pandemic.
At last check, Chase counted 60.2 million digitally active customers, up 6% from the prior year period as of March 31, and 46.5 million mobile active customers, up 11%.
Rhett Roberts, CEO of LoanPro Software LLC, a technology company that streamlines loan output and collection capabilities of U.S. lenders, said fintechs have managed to win customers but not many of them generate profits yet. They have, however, forced banks to innovate and adapt more quickly to customer demands, such as cutting overdraft fees, he said.
“Regardless of the success of neobanks, they forced the hand of traditional finance companies to be more agile and create better products,” Roberts said. “Neobanks are meeting the customer where they are….Customers who like skateboarding or who went to a university. The successful ones are focusing on the user experience.”
All this noise around banking has caught the ear of regulators.
To even the playing field between banks and non-banks, the Consumer Financial Protection Bureau (CFPB) in April said it would be tapping a mostly unused legal provision of the Dodd-Frank legislation to examine nonbank financial companies that pose risks to consumers.
“This authority gives us critical agility to move as quickly as the market, allowing us to conduct examinations of financial companies posing risks to consumers and stop harm before it spreads,” said CFPB director Rohit Chopra. The CFPB is also seeking public comments on a procedural rule to make its examination process more transparent.
In the face of more agile competition, banks have turned to a tried and true tactic: bulking up through acquisitions.
Ellen Hazen, chief market strategist and portfolio manager at F.L. Putnam Investment Management Co., said the desire by banks to become national, digital brands was a big motivator behind the 2019 creation of Truist Bank from BB&T Corp. and SunTrust Banks.
“Increasingly that will continue to drive M&A in the bank space,” Hazen said. “This will continue to be really important for banks.”
Playing on many levels
Banks find themselves reinventing their expensive network of bricks-and-mortar retail banking operations to better fit the digital world.
Citizens’ acquisition of 80 East Coast branches from HSBC includes more than 60 banks in the New York City area that have been rebranded.
“We do believe in branch banking, but in a digitally-led way,” Citizens exec Brendan Coughlin said. “When you add bricks-and-mortar locations, the purpose of it should be to offer sophisticated financial planning and advisory services.”
Digital banking does allow banks to keep a thinner branch network, while weaving in face time and interactive teller stations at ATMs.
While Citizens traces its origins to 1828 in Providence, R.I., its Apple relationship helped its digital business take off earlier than many.
The journey for Citizens began more than seven years ago, when Coughlin was working on banking products for college students. Initially, Citizens was helping Apple build a credit program to help get MacBooks into the hands of more students. By 2015, that effort morphed into Citizens Pay credit for iPhones.
Today, the bank’s two major digital units include Citizens Pay — the bank’s wholesale merchant financing program with about 45 major clients including Microsoft Corp. (NAS:MSFT) — and Citizens Access, its national digital bank.
Customers that used Citizens to buy a mobile device or an Xbox then gain entry to Citizens Access, the bank’s platform offering deposits, student loan refinancing and mortgage capabilities, with plans to add checking account services.
Coughlin said Citizens’ status as a regulated bank offers a structural and safety advantage over fintechs. This is because the bank holds loans on its own balance sheet instead of selling them in the loan market, which means a private investor such as a hedge fund may end up holding the loan from a fintech.
“We’re willing to underwrite the risk and stand behind the risk,” Coughlin said. “When you don’t have a bank charter, you don’t have a bank balance sheet and you can’t typically hold the loans the same way….Their product innovation is dictated by a capital markets style of holding debt.”
As recently as a decade ago, banking convenience was defined by the density of physical locations such as branches and ATMs.
Now it’s all about digital presence, particularly among people under 20 or 30. This target demographic remains up for grabs for both traditional banks and a growing universe of fintech challengers.
“The intensity of competition is increasing,” Coughlin said. “It’ll be the banks and the fintechs that create more value for customers and that can adjust that will ultimately win.”