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May 11, 2022, 8:51 a.m. EDT

How Citizens Financial used an iPhone plan to create a nationwide digital bank

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By Steve Gelsi

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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. /zigman2/quotes/207732364/composite MSFT +1.70% — 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.”

US : U.S.: Nasdaq
$ 291.91
+4.89 +1.70%
Volume: 22.62M
Aug. 12, 2022 4:00p
P/E Ratio
Dividend Yield
Market Cap
$2177.03 billion
Rev. per Employee

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