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Where is the money? What you need to know about the impact of deposit displacement

This topic was presented as a live webinar on March 26 with Ron Shevlin from Cornerstone Advisors and explored the deposit displacement phenomenon that is responsible for siphoning funds from your credit union into alternative accounts like retailer mobile wallets, P2P apps, and health savings accounts.

Let’s talk health insurance for a moment. Many employees nowadays are familiar with high-deductible health insurance plans, and these plans likely include the option to open a health savings account (HSA). In 2018, the amount of money in HSAs was $44.4 billion, which was up from $13.7 billion in 2012. That’s a lot of money. Where did it come from? It’s not new money; that money had to be moved from somewhere into these new accounts. And the money likely came from people’s checking accounts.

The trend of “deposit displacement”

The money moved into HSAs is an example of a much broader trend that’s been going on in the industry among consumers for several years. This trend is “deposit displacement,” which can be defined as the displacement or diversion of funds away from traditional accounts, predominantly checking accounts, into alternative accounts, like HSAs. These alternative accounts, now possible because of so many new fintech innovations, have diminished the importance of the checking account in consumers’ financial lives. For example:

  • Fintech. . A little over a year ago, Venmo, a popular person-to-person (P2P) payment tool among younger consumers, held $2.2 billion in its users’ accounts. Square (an easy-to-use credit card processing system) has so much money sitting in users’ accounts that the company was going to start evaluating banking tools Anyone doing payments with ApplePay is not moving that money back into their checking account; that money is just sitting there in their account.
  • Financial institutions. Goldman Sachs’ fintech startup unit, Marcus, has $30 billion in deposits (up from $9 billion in 2016).
  • Future potential. Cornerstone Advisors surveyed more than 2,000 consumers in 2017 and asked, “How likely would you be to use a general use debit card from the following P2P providers?” Out of the four providers offered as options from which to choose - PayPal, Apple, Google, Venmo - 44% of those surveyed said of PayPal that they were “very likely, might use it as primary card.”

The bottom line is that checking accounts have become paycheck motels: temporary locations for peoples’ money to stay until it moves on to bigger and better places.

The trend of “platformification”

It bears emphasizing that deposit displacement has become a phenomenon because of so many new fintech innovations. And because of these innovations, there is a lot of movement in the financial services space toward various institutions and fintech providers attempting to become platforms. Megabanks are building platform toolkits focused mostly on API development and integration, but they’re not really changing their underlying business model. Another growing set of platform-services providers is the meta-platform providers. Meta-platform providers aren’t necessarily platforms themselves, but they are building out the capabilities to enable financial institutions to become and develop their own platforms.

Now, it may be easy to think you already have digital platforms at your financial institutions: online banking, mobile banking, lending platforms, etc. But that’s not how we’re using the term “platform” here; it’s not as a technology construct. We’re using the term as a business model concept. The “platformification” of fintech is the creation of new business models and new technology capabilities around this concept of the platform.

Platform business model: A plug-and-play business model that enables buyers and sellers to connect, interact, create, and exchange value. To be a platform means having three important capabilities: Magnet, matchmaker, and toolkit.

  • Magnet: Institutions must be attracting both suppliers and consumers to their platform to be successful. Your institution could be a magnet for particular lines of business that you have, but you are generally not a “magnet,” attracting other providers of services.
  • Matchmaker: Financial institutions must match the providers and the consumers. Most financial institutions today do a decent job of matching consumers to their own product set, but they are not doing a great job of matching those consumers to other providers’ products and services.
  • Toolkit: Your financial institution needs to enable the integration of those consumers and providers that you’ve attracted into your platform.

The strategy of reinventing your financial products

The strategic question is: If the importance of the checking account is diminishing in the minds of consumers, why would your financial institution be investing time and energy into the user experience of that product? It doesn’t seem like a wise investment of time, money and effort. Also, the budgets of the biggest megabanks are spending more money on technology and research than many financial institutions have assets.

Therefore, to be competitive in this new environment, your small or mid-sized institution must take a different tact. Don’t compete on the basis of user or member experience; instead, compete on the basis of reinventing your financial products. Rethink how products are pieced together; rethink the value proposition around the checking account. Here are a few examples of good “reinvention.”

  • Bundled services. There’s a clear demand for services like cell phone protection, identity protection, etc. In addition, many free checking account holders would switch to a fee-based account if their institution offered it.
  • Savings tools. Practically all financial institutions offer savings accounts. But people don’t want savings accounts; they want help saving money. Cornerstone surveyed consumers about their use of fintech providers: how many people were using them and how much money they had saved. The results showed that people didn’t want a new digital checking account that didn’t have branch access; they are looking for more help in managing their financial lives. They want tools that help automate savings.
  • Financial health services. Who’s helping your members track and measure all the various aspects of their financial health? Rethink the products that you have and redevelop them around financial health management.

To learn more about deposit displacement and how to begin strategizing solutions for your credit union, access the full webinar on demand, and stay tuned for more quarterly fintech update webinars this year.