Beyond Primary: Relationship Banking's Big Problem
Financial institutions of all sizes will no longer be able to rely on steady paychecks.
Hi there,
What if I told you that Primary Banking, as we know it, was dead?
Since the old days, the “gold standard” for growing a consumer banking businesses has been relationship banking.
Become the one institution a household primarily relies on. Win outsized share of wallet. Easy to understand. High ROI if you got it right. Primacy for the win.
The playbook was simple:
1. Deliver decent onboarding: Make it easy to walk into a bank and open a primary checking or savings account. Incentivize connecting that account to payroll, and get direct deposits every two weeks.
2. Create consistency: Provide seamless coverage across products with a skilled account manager and a good CRM (customer relationship management system). Cross-sell into higher margin products and services like credit cards and wealth management.
3. Remain relevant: As customers approach major milestones (Getting your first car? Buying a house? Saving for college?) put relevant offers and rewards in their path and cross-sell into a multi-line relationship.
Done right over time, you’ve increased loyalty, earned sticky deposits that provided a low-cost source of capital to grow a lending business, and transitioned a single account holder into primary banking relationship.
But, a few things have changed that are making it harder to predictably win “primacy.” Perhaps even more concerning for institutions, is the possibility that idea of primacy itself may be gone for good.
So what’s changed/changing?
Competition and fragmentation of deposits
A near-zero interest rate environment and explosive FinTech innovation created an unprecedented level of competitive pressure on every part of banking over the past 15 years. Almost overnight, consumers could send money faster, borrow more cheaply and — even with small balances — be offered superior interest rates just for opening up new deposit accounts. Ultimately, while most consumers did not move all of their money to challenger banks and digital wallets, a shift in willingness to have multiple relationships did occur. From new banks, to payment apps, to embedded finance players, consumers suddenly had lots of new places to stash deposits.
More informed consumers with real needs
I recently wrote about the rise of the “bionic consumer” in the context of the shifting power dynamic between providers of commodity services and their customers. One big takeaway was that it’s now easier than ever for customers to understand and optimize all of their purchasing decisions:
Do I have the right financial products (rate, reward, cost, service, values, etc) given what my needs are today?
The even bigger takeaway is that consumers will be able to passively optimize their financial lives; their AI money “agents” will hunt, compare, and analyze choices and changes in the market for them 24/7 across a huge set of factors and dimensions.
Better informed customers navigating a challenging economy will mean more demands on every provider and a greater portion of deposits up for grabs.
Open banking and money servers
As US regulators establish the particulars of what open banking will look like, one thing seems clear: much like in the UK, the advent of open data and seamless account-to-account (A2A) money movement will likely increase fragmentation and impact share of dollars kept in the “primary banking” relationship unless that provider is serving up the very best rates.
How?
Ease of A2A money movement
Rules-driven (aka algorithmic) money movement based on risk appetite, timing of different cash flow needs and yield
In the future your average family may break *all* of their money up into buckets they need to access over 15, 30, 60 and 90 days+, with AI “re-balancing” their money all the time to optimize.
Sounds a lot more like web servers than static financial deposits, doesn’t it?
While this future of an always on, always optimizing version of consumer banking might not be a reality tomorrow, it feels almost certain that financial institutions (FIs) of all sizes will no longer be able to rely on steady paychecks (we didn’t even touch the explosion of 1099 income) into a direct deposit account as a predictor of primacy.
So what, then? A new time calls for a new playbook.
Enter the “Command Center” strategy: Become the very first place consumers turn to when they are even thinking about what to do with their money.
The Command Center strategy has a few key elements that banks will need to address:
From walletshare to mindshare: Moving from simply being a payment method or a place to store money to being a trusted partner and co-pilot
Lead with help: To be a partner, banks will need to create value in non-traditional, non-transactional parts of the journey. Don’t wait until a person is ready to buy a house to compete for their attention with rate and rewards… Give them tools and experiences to make and manage their long term buying plan.
New kinds of partnership models: Consumers have a large and increasing number of FI relationships. Rather than try to get those consumers to switch completely in service of the traditional primary relationship, smart institutions will leverage their institutional platforms to convene partners and create robust experiences; capturing commercials even when they don’t fully own the journey end to end.
We’re all going to need to learn new tricks to serve tomorrow’s customers in a dynamic market with new rules:
“I didn't come here to tell you how this is going to end. I came here to tell you how it's going to begin.” - Neo
You ready?
Cheers,
Ron J Williams
Partner at Co-Created, Empire Startups Contributor
The Empire Startups Contributor Model is a chance for writers and thought-leaders in the FinTech space to share their ideas and expertise with our ever-growing audience. Our model is is merit-based and does not offer monetary compensation.
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