Winning the Battle for Primacy in Banking

0:04 Hey everyone, Matt Snow from Upstart with another episode of Leaders in Lending live from CBA twenty twenty five here in Orlando. Today, I'm joining with Dennis and Way from Oliver Wyman and Kurt from Pinwell. Thank you guys for joining. Yeah, absolutely, maybe we can go down the line with quick introductions. Tell me a little bit about what you're doing today. Yeah. My name is Dennis Tchura. I'm a principal in our retail business making practice at Oliver Wyman. I focus primarily on consumer financial needs as well as deposits. And my name is Wake I'm a partner with Oliver Wyman retovininess banking practice. I do a lot of work on product proposition, innovation, pricing, sales marketing. And I'm Kurtlin. I'm copeender and CEO of a company called Pinweel. We help built soffward to make it easy for bings to win and establish primacy. So things like making it easy to switch your drive deposit, help manage your bills, eventually switch your bills, et cetera, et cetera.

0:54 Great, and so I sat in on the session earlier the three of you were a part of. In terms of primacy and defining that in how it's important and how to help banks establish that. So I was thinking, you know, maybe I'll start a little bit more provocative and like, is primacy even important today if you think about open banking and the choice consumers have, Like, is that still a goal worth pursuing for a financial institution. I mean, I'm happy to start on that one. I think that's a really fair and important question, and I think the answer generally is yes. But then also depends, right. I think there's an option where you don't need that relationship right, where instead you just focus on as cost effectively as possible selling a particular product. But then you become a pure commodity. And I think that the real question when it comes to primacy is how much of the value do you want to actually create that is not simply about a commodity. How much of it's actually about serving the needs of a consumer more holistically, how much of it's about your brand about basically your value is about other things that you provide to the customer, wherein you know, the decision of whether or not to choose to work with you isn't just about the price, it's about something else.

1:56 Yeah, yeah, fair, Yeah, I think there's a there's a math question here because at Dennis in the earlier session was mentioning that maybe like ninety seven percent of the Americans are actually banked. So at the end of the day, you know, the banks are out there and the fintech's out there essentially stealing each other's clients, and primacy is a way of deepening that relationship, and really, you know, that's that's what's probably going to food of growth going forward. Yeah, I think it's hugely important. And the way I think about it is you're trying to build a relationship with that customer and ultimately get them into deeper and deeper into your ecosystem. Right, So the example I always give, I think actually Dentnis had mentioned earlier, is you look at Apple, right, like maybe you start with an iPod or an iPhone and then eventually, you know, you get a MacBook, then you get some air pods, and all of a sudden, like you're in this ecosystem where everything works fluidly because you really like bought into the brand ethos and the product suite, and as a bank, like it's a lot easier what should be a lot easier, I should say, if you have a credit card, a checking account, a savings account, hopefully even with a broken or something, all with the same FI instead of having one of those at four different places, because then they can really understand your holistic financial life and serve you better. Sure.

3:04 Yeah, and that really resonated with me, along with many stats and the presentation. But thinking about the reduction and the number of banks, So if there are so so much fewer banks today and the consumers have choice, like what do they differentiate on besides yield? Like that's what consumers tend to shop, or like what are the other tangible things? Could a bank set itself apart to establish that progacy with a customer? Yeah, I can go first. I think it's largely what we talked about at the end of the session, which was when you think about, you know, how you really differentiate, You really have to think about how do I create a two x five x ten x better banking experience for that consumer. The reality is banking looks very commoditize these days, right, like per your point, unless you're like really, price sends it into I want to maximize my savings yield or I want to get you know, the most amount of points for a certain spend category. The reality is like when you can have a fundamentally different product, people get really excited. Right, So why thing that you know we focus a lot on is this idea of building subscription management? Right? Can I build a whole experience that you know, helps the customer understand what all my bills are, like find ones I didn't realize I was paying for, help me consolidate or find a better rate for something that I already you know, buy, and then kind of curate something that like nobody else is really able to do effectively. If you can do that and find those moments to make that happen, then I think you can really win.

4:25 Yeah, and you mentioned the like mobile check deposit, like that was the last major thing I even remember as a consumer. Like this changes how I think about banking. But so would you say technology like what pinwheels developing or the things you talked about switching deposits, does that make up a bank stickier or does that just make it easier for people to switch and maybe you know, decrease again the need for privacy. Yeah, so I think of it as two classes of products. I think one is around customer activation and portability. That's things like a direct depositive switch or you know, switching your card on file, right, those things are inherently in service of making it easy to to switch and make your account more portable. Those I think will and hopefully it's a good thing that you're increasing competition, right so that people aren't stuck at the same place, because there's just like inertia, not wanting to switch, right even though they know there's a better product out there. And the other part is what I would call like more value creation, so like a subscription or bill manager that really helps you get a hold of your financial life, check all your bills, be able to pay them appropriately so you avoid late ps and what have you. That I think is like something that everybody should have. And it doesn't really make it, you know, make you want to necessarily hop from one place for another place. It's just something that every single FI should have in their making experience.

5:36 Yeah, and you guys mentioned some stats around you know, why would people switch primary financial institution and seem to be between major life events or just being so disgruntled You're like, I never want to do business with this company. Again maybe like double click into that a little bit. What are some of those underlying causes of switching. I mean, I think the reality is when it comes to kind of the quote unquote primary checking account, the one where you're in come comes into and where you spend, there is a high level of stickiness there because it's sort of like electricity. You need it. You can't turn it off, right, you need to have it on. So there's a hesitancy to move that because you know there's friction. But you know, as Kurt mentioned, a lot of the technology that we see today is actually reducing that friction, making it easier to move, so that people, you know, have more choice. But at the same time, it isn't that important for most people. They're not thinking about it regularly. And I think the real challenge that the industry is facing in a sense is this idea where well, historically we always focus on acquisition, let's get the next account, let's grow right. But then I think there's a shift right now from you know, focusing on quantity to quality because quantity is churned mostly now.

6:39 As why I mentioned ninety seven percent of Americans are banked, right, and so if you want to win the next customer to take it from someone else. And the the challenging part right now is to date because of the way, like a lot of large banks or banks in general are structured, like everything all the business kind of product lines are pretty independent, and so you as a consumer there there's limited actual value in terms of consolidating, right Why go to the same place when you see over there, there's an offer over there, an offer over there, And so people tend to go in that direction. But I think that's actually to the detriment in both the individual consumer and also to the provider, because there's a lot of waste, is the short of it. Yeah, yeah, And the other thing that that struck me you talked about you know, the goal should be again focused back on the consumer. So how do you become top of mind or that person they go to for advice?

7:25 And it got me thinking again, like tend to reach for my phone, So like is the phone the new branch? So I have a question and I go to perplexity, Like I want to move money, like I open a certain app. I want to transfer money or pay someone back for a Broadway show ticket, like I use a different app, but like the phone, is like where I go first, and you know, is that what people expect to interact with their How do you think about, you know, who who is the consumer asking questions when it comes to their finances and is that still a traditional bank or who has that right for the consumer. So, you know, if we unpacked a little bit your question, there are a few things. One one is we know we've actually as a firm, we published some research on the gen Z population. Interestingly, we found in that research that the gen Z they don't respect you know, sort of authoritative figures and experts and such like I said, the don't want to listen to like the person that supposedly has the correct knowledge, right, so instead they listen to their peers, right, so they can go on TikTok And if you know, there's an influencer, so I think we should, you know, as financial institutions like kind of marketing to the next generation of customers. That is important whether you're a bank or a fintech. And just recognizing you know that they actually you know sort of almost like a peer pressure and stuff like, you know, there's the peer influence right for for how they actually make their financial decisions and that's important. The other thing I want to call out is the sort of the digital experience side of things, like because you were mentioned in the phone and if you pull up your mobile banking app,

8:56 you know, ninety nine percent of the time it shows you a laundry list of accounts, and so from a behavioral science angle, if you see the accounts, you basically are checking balances and that's sort of the most sort of engaging thing that you could do with anybody's banking app today. But Kurt Worth mentioning that there's other ways of engaging with the customers that might actually get to a better definition privacy, because just checking your accounts is not really primacy. It's a very passive sort of activity to do, right, So I think a lot of the banks actually overlook, you know, how they actually serve their customers in the digital world. Yeah, that's a great point, and you guys also hit on maybe an appropriate balance of that in the industry is risk management. So, you know, how do you think about the view there in terms of, yes, be innovative, find ways to connect with your customers, but knowing that the health of the American economies like underpinned by this industry.

9:52 That's certainly the foundation of banking. Right. This is a gathered deposits of privilege. Right, you need a charter to do it. It's considered to be basically a public good in anyways, and so I think on that end that that needs to stay right and this this industry is unique relative to all industries because of that. But that is not to say that there is not a better way to serve consumers. And I think that the challenge has a little bit been that it is expensive to basically take that next step. Right. I think there's a focus on, you know, how do I drive incremental like kind of progress in the near term. And there are some of these things that we're talking about here that are more forward looking in terms of like, you know, what are the needs that are unmet right now that I think that a lot of consumers actually want, right, because I think that if you ask consumers, are they satisfied with what they have? Yeah? Actually they are generally satisfied.

10:37 That's why they're not moving too much. But do they actually do a bunch of things in order to just kind of curate their needs, Like you know, pick a little bit account here, an account there, and mix it together and you know, serve their needs maybe as a household of you know, a couples for instance, Like yeah, plenty of people do that. And what that really reflects is that actually there's stuff that people are doing that they would love to have streamline for them if possible, Right, why not do one stop, Like if you're able to actually do that in a way that creates more value for the customer, I actually think that there would be demand for that. Right, Building off of that, like to your earlier question around like you know, is there your phone the new branch? Right, there's this thesis that existed for a long time in the industry around like building super apps, right, Like in China, there's all these examples of like there's one app that does everything for you, right, and the fundamental like crux of it actually makes a ton of sense, right, Like whether it was Mint or all these like first wave pfms.

11:31 Everybody would love to see a view of like my holistic financial life in one app, right, like my savings accounts, my brokerage accounts, all my investment accounts, my crypto accounts, Like I want to see everything in one place, and ideally it's like constantly helping me make more money, makes more decisions, et cetera. Right, So, like, I don't think anybody disagrees with that dream. But I think the problem is, going back to your question, a lot of the large fis are structured to be risk management apparatus, right and right fully so, right, like you, when you are relied upon for society to operate, you really can't screw things up, right, Like the cost of that extremely high. So they're doing what they're supposed to be doing. But the downside of that is you don't have a culture of people are willing to take risks because like, if you just don't mess anything up, you keep your job. Everybody wins. You take risks, they don't work out, You create like undue exposure, Things fall apart, people get in trouble. And so I think what you see is like that's why fintech exists.

12:25 That's why companies like us exist, because we can be that extended arm that helps you innovate, prove things out, and if it really works well, you can always bring it inside. Right. So, Like the example that always like to share is like when you look at P to P payments, right, there's menmo there's cash app, and they crushed for a long time, and then the banks are like, wait a second, like we should just create our own system, right, And thus Zel was born, and like Zell does a ton of volume. People don't even realize how how much it proliferates, and it's it's in every bank's app for the most part, right, And so I think like, if you can really prove something that works well, it will eventually get adopted device. And then like if you keep doing that thing over and over and over again, if you get another version of Azel or a tenex better bill pay thing or have you eventually do you think these large fis will start to be super apps? But it's just going to take a very long time because no one, no one internally is innovating in the speed they need to.

13:16 Yeah, well, and you guys did a good job also managing like the you know, the economic side of the city equation, right, because the cost of deposits is what fuels a lot of the ability to lend, right, So in a lot of other technology companies maybe the expense is different. Do you see that always being a part of the equation here or again we've kind of gone back and forth, and separating what should a bank do, what kind of businesses should it be in, and separating those things, and regulation playing apart, Like is deposits always going to be the best way to fund you know, lending or do you see banks separating? And as you were saying earlier, like maybe there's some commoditization necessary and someone just really good at doing a certain lending product or someone's great at savings, and you know that the market starts to break apart, our banks stay as the super app that you're talking about.

14:05 I mean, on the I guess I don't know if I fully understand the question, but I mean, certainly there's I think one of the main challenges in banking, right it's like kind of like the ironies, if you will, is that a lot of the value that's created is through inertia, right, Like when we think about deposits, for instance, like why is there so much so much value is created from deposits. Why Because it's a lower cost of funds for the rest of the bank. Right it funds the balance sheet that otherwise if they had to get through wholesale palk pro funding would be really expensive. But there's this question also fundamentally is like is that actually the right thing to do? Right? And so, I mean you look at some of the lawsuits in the last year right on this topic. I want to name names, but right like the idea where hey, consumer was misled in terms of the rate that they were going to get in their deposits, they should have gotten more look at that big gap. Well you can make that argument for a lot of institutions where you know, like people are being paid like low interest rates on their savings. But there's like that that moves, right and what drives that inner And then one of the things technology has done, of course, is create this kind of more less information asymmetry. More people are aware of and easily aware what that information is, and so like should that happen right on the flip side, like from a regulatory standpoint, right, like that that's not great for consumers, But from a regulatory standpoint, you want kind of those balances to be kind of lower cost and stable at least, right, And so it's a it's a tricky thing in terms of what the right balance is, but I definitely see a shift inevitably where you know that inertia in a sense, it's like kind of similar to that anchoring analogy that I brought up during the session, where I think that

15:36 that anchor is getting later and later, right, Like, there's just more that do more than that. You can't just rely on inertia in the future. Yeah, no, And I think you hit to the heart of the question because the other part of that is, you know, the focus on fees, right, So if banks fundamentally have to earn less money on fees, like the only other way you know to do that is through deposits. Or it can be through other things. I think, because there is a question is are people willing to pay fees for other kind of sources of value? Like that's the real question, you know. And we can say what we want about the last kind of administration in terms of you know, questions around fees, but like I mean, there was a considered push for you know, in a pushing for innovation in a sense where it's like you cannot in a sense still generate as much value from kind of history. You need to create new value, right to continue to do that. And that's a real tough part where it's like are people going to be willing to pay what are the people willing to pay for right, because once something's free, it's very hard to you know, pay charge them for it.

16:29 But just on that note, what's interesting is if you look at the difference between neo banks and FinTechs versus traditional banks. In Chime, which is an example that's being brought up, I mean, they were one of the first to charge a monthly fee and people are willing to pay for it. And at the time, they didn't really offer you know, high interests or whatnot, like it was like the whole whole value proposition was, you know, basically to advance a paycheck and and that's something that people needed and then they're actually willing to pay a fee for whereas if you look at a big bank, it's a different sort of starting point where the majority of the fees are not the monthly fees but rather you know, overdraft than some of the other you know, kind of the fees that are you know, in the previous administration that termed as more nuisance fees and and so so I would say like this, the starting points are different, and the economics model was actually different between the bank side and the fintech side, and it's actually pretty exciting to see what kind of solutions they come up with.

17:23 And in the in the session earlier, we we said there was no there was no unified It's not like the whole industry is converging to one model of you know, like there's here's one proposition to draw primacy. That the FinTechs are actually coming up with different soclutions from the banks. Even within the banks, they're coming up with different solutions. Yeah, this is a really key point. I just want to make sure that we make hit, which is like, yeah, uh, the banks are like the og subscription products. People don't realize la they always charge you monthly fees. It was used the didn't know it because it just like plopped into your like your transaction like flow. One day You're like, oh, it was ten bucks this month, right, but like you didn't nobody really thought about it because you when when you write the brandch by the way, we're going to charge your ten bucks to service the account. Right, you just like got charged.

18:05 But like they've had subscriptions for a very very long time. And the difference that ways language is really important is like there's two kinds of fees, right, there's uh pees that fees that penalize you. And then there are fees that like are value supported, you know you're paying for right, And like. The tallens though, is that like because of free checking historically in the United States? Right, the expectation today from a lot of consumers that like, oh, there's a fee, but I'm gonna you know, that's gonna get waived. And that is true for the majority of large banks, right. It's like a small percentage at least in the US actually get charged that fee. And so like that's the part that's triggy where I think that there are very few people in America today that are willing to pay for those very basic kind of services anymore because they believe that that should be free, just as free training is free now. So the only way to be able to charge fees where it's like more like a subscription model, right or remembers models like you've got to give them something else, right, And the real question is what could that be?

19:00 Right? And I think that in the credit card will you see some of what that might look like? Right, Some of the large credit card issuers, like they have certain models where hey, fees are part of the thing, and many of them have really tried to branch out where they're not just doing credit card anymore. They have savings accounts, they have checking accounts, and they're also doing the same thing as everyone else is doing, which is trying to know, build that holistic relationship, right, because there's a lot of value there. But there is this concept that has been around for decades, like value added checking accounts or like premium checking accounts where you pay for a higher tier or you pay a higher monthly fee or to get more products, right, and so those perform extremely well, right, whether it's getting access to like better interest rates, or like you bundle in like ID theft protection, phone insurance, pet insurance, like triple A, et cetera. Like when you bundle it into the checking account and you start to charge them, you know, ten bucks a month instead of three bucks a month.

19:54 The consumers like, actually the math makes sense if I don't have to pay a triple a somewhere else, it's actually is like still a good deal for for me, Yes, I'll do this, right, And so there's actually plenty of ways that are good for the consumer, good for the FI, good for the ecosystem where you can still charge the consumer fees, and I think we have to get away from this idea of like like like fees are bad. It's just like the fees have to be worth it to pay, right, Like you pay for Amazon Prime, Nobody bats an eye at them. It's like forty bucks a month. You're like, yeah, because I get my packaged tomorrow. Right, It's like I'm totally worth it. Yeah, totally. Well, I think we're running out of times, so maybe we can end with you know, a bold prediction or like if we were to meet again in five to ten years, like who will be the winner in the primary financial institution race, or a characteristic of that institution, like what will have they gotten? Right?

20:41 I mean I think that I think scale does matter in this space, right, So I think the scale players have a big advantage here, and that scale may be in terms of traditional banks, but also scale in terms of you know, non banks as well. That that's there. The country is over banks at the end of the day in many ways, and so that's going to make a big difference. I think. So whoever can make the most of the customer base they have and sustain. And I think the number of banks will continue to decline and credit unisill the kind that's sort of inevitable, and so I think we'll see basically scale players really trying to you know, win basically a bigger share of their customer's wallet. Well, I agree with that point. I am actually pretty excited with the way open banking has had it in this country because unlike other jurisdictions like Europe and Canada, UK, where open banking was sort of pushed by regulators as more of a transparence like you know, kind of data sharing, kind of a mandate, there's a lot of innovation happening in the US, you know, for for better or was, there was a lack of a mandate from the government to do things. And what that actually creates is as a traditional financial services player continue to commoditize their products, the technology players can come in to create that customer experience.

21:56 And that's where the primacy you know question will be answered than I think, you know, maybe five to ten years down the road, we'll start to see true disintermediation where the traditional players are still there to do the risk management stuff, but the customer experience and you know, where the mind share is, where customers actually turned to is where the technology innovators are. My het take, and it's definitely a hot take, is that I think the big brands that have a lot of brand equity with their customers will become increasingly more like perceived as a financial service provider. So I'll give you a couple examples, right, Like, the the amount of spend on Delta's American Express card is like equal to one percent of the country's GDP. It's crazy, right, And that's a co branded card. And so you see this massive movement now of like if as a brand, I can monetize on my customer because of my relationship, but then and they trust me, I can get some of the entertained, it's a big revenue stream for me. Right, Like, you start to see a lot of other brands trying to replicate that model because the're like, well, if Delta can do it, why can't I do that?

23:01 Right? And the other one is like, we just announced a partnership with DoorDash where they're basically trying to take all of their dashers and like create a bank and a whole set of like financial services dedicated to what they need, which is not the same thing as what a chase can provide for example, right, And so I think whether it's because you have a special like set of data and ways to like understand your customer, or you're just a brand that has like, like I don't understand why Airbnb or Nike or some of these brands have a lot of like affinity like aren't moving faster or to create more like financial products for their customers because they would crush it, right, And I think that that is starting to happen and trying to see a lot of these companies really start to like create their own like financial product suites and that will only continue to grow.

23:42 Yeah, very interesting. I like that. It's almost like, you know, what's old is new again. A lot of credit unions start that way, right, like a common membership goal and create financial services geared towards them. So that could be an interesting take. Cool. Well, thank you all for the time. Really enjoyed the session and the chat today, so hope you enjoy the rest of the show. The huge thanks for having us since At