In consumer banking relationships, breaking up is no longer hard to do

Konstiantyn Zapylaie - stock.adobe.com

The longstanding relationship between America's banks and their customers is on the rocks.

Before you dismiss that as idle gossip, consider the facts. For years, traditional banks have been a one-stop shop for services like opening a checking account, transferring money or buying a home. Because banks have become so ingrained into the fabric of our lives, most customers have stuck with the same bank for years. In fact, some say people are more likely to get divorced than to switch banks. However, a closer look at the relationship reveals that trouble may be on the horizon.

As we saw at the beginning of the year, the moment trouble loomed for Silicon Valley Bank, customers were quick to turn their backs on it and secure their money elsewhere. This was not a singular incident — almost four in ten people in the U.S. say they're somewhat likely or very likely to switch banks in the coming year, according to a recent report on the reputation of the financial services sector. Based on interviews with over 10,000 stakeholders, the report reveals what's driving — or damaging — the reputation of the sector today.

Two factors are driving the risk of churn — high prices and the perception that banks don't always act in their customers' best interests. When asked what most dissatisfied them about the financial services sector, more than a quarter of respondents said bank fees were too high. One in five said banks offer products and services that make people borrow or buy more than they can afford and almost one in six said banks provide "complicated or misleading" information about their services.

While churn is a key concern for the banking industry, it cannot ignore its struggling reputation either. Fewer people today are familiar with the industry's largest companies compared to a 2021 survey. For those familiar with these institutions, over a third don't engage through any touchpoint. In short, the banking industry is struggling to get people's attention.

Several factors are driving banking's reputation problem. One reason may be the rise of fintech. The slew of flashy new apps and digital services is simply better at attracting eyeballs.

Market fragmentation is one consequence of that. Just as consumers are replacing cable subscriptions for multiple streaming services, so too are they looking beyond the one-stop shop for their banking needs. Who can blame them? If an app provides same-day transfers for a fraction of the cost, why wouldn't they consider that first? If a digital bank offers better rates for savers, why wouldn't they move their money over?

Fraud

Directors of failed Chicago bank plead guilty to conspiracy

The three former Washington Federal Bank for Savings board members were accused of giving the OCC false information in an attempt to hide embezzlement. They could face up to five years in prison for attempting to deceive the OCC.

By Orla McCaffrey

August 11

Interestingly, this development can't be explained by a generation gap. Yes, younger people tend to prefer fintech alternatives to traditional banking services. But older consumers aren't far behind. More than a quarter of people around the world say they use an alternative service to their bank for online payments, international money transfers and credit purchases.

What makes this competition even harder for banks is their baggage. According to the report, 15 percent of survey respondents say traditional banks are saddled with "negative associations," compared with just two percent for the fintech sector. That baggage includes perceived greediness, expensive services, dishonesty, complexity and having a negative impact on society. Those are all red flags.

First, banks need to improve their digital products and services and give customers something as good as, if not better than, the alternatives. The industry's record isn't great — but the demand is certainly there. When respondents were asked about the most important aspect of their chosen financial services provider, their top answer was easy digital access to their account or payment system, such as through their smartphone. Of course, banking in the U.S. is rapidly going 24-7 — which should give traditional institutions an excellent opportunity to deliver what customers want. They cannot afford to drop the ball.

Second, customer service remains a premium consideration when selecting a bank. Good customer service and overall communication was the second-most important reason for choosing a financial services provider. To reduce the risk of churn, banks simply need to ensure they treat all customers fairly and honestly.

Third, they need to find ways to be more relatable to customers — and show they care about their best interests. In that light, banks may need to rethink their revenue model. Too many people think that banking is too expensive, that fees are too high or — worse — that banks are trying to rip them off, and there is no shortage of stories that give rise to that perception.

Finally, banks need to reconsider their values, ethics and responsibility to society — all areas that respondents pinpointed as the most important for the industry to address. Perhaps they could take inspiration from so-called green banks — which look to bring clean technology and more affordable energy to low-income communities — or rethink which companies and industries they invest in.

For years, banks have enjoyed a reputation for integrity and authenticity — and for being pillars of societal leadership. Today, that's insufficient to retain customers or attract new ones. It's time for banks to fundamentally reassess their relationship with consumers — because the competition is fiercer, the scrutiny is greater and breaking up is no longer hard to do.