Americans whose primary checking account is with a digital bank has skyrocketed since 2020

Consumers and businesses have settled into new digital banking patterns that are disrupting the primary financial status of legacy banks and credit unions, impacting growth and longstanding relationships. To respond, financial institutions must consider new targeting and product development alternatives that may include a national footprint.

One of the major impacts of the pandemic is the increased comfort level consumers have with digital interactions and the decreased reliance on bank branches. This has significantly impacted the array of financial institutions a consumer will consider when they want a financial solution, and where they are opening new accounts. The result is a dramatic increase in the number of consumers who have their primary banking account at a fintech and/or big tech organization.

To respond to this shift in banking loyalties, traditional financial institutions must decrease their reliance on branch footprint, and consider a much broader digital account acquisition strategy to generate new deposit, loan and payments growth. For organizations smaller than the largest megabanks, there will also be the need to target specific customer segments at scale, building differentiated offerings.

Wake-Up Call for Traditional Banks

Financial institutions are realizing that the increase in digital banking use is not a temporary phenomenon caused by the pandemic, but a seismic and permanent shift in the way consumers and businesses conduct daily banking. This shift is impacting the way customer experiences must be enhanced and relationship engagement increased.

According to research from PwC, there’s a large and growing segment of the population that can be considered ‘digital natives‘, with a preference for avoiding branches and conducting all of their business on digital channels (32%). At the same time, there is a shrinking segment of consumers who prefer digital channels but also like having a local branch. The reduction in this segment was caused by some consumers shifting to a digital-only behavior, while others reverted to their pre-pandemic branch-based behavior.

The decrease in physical branch usage began way before the pandemic, with consumers in all age categories embracing digital alternatives to save time. What is different today is that this flight to digital is also beginning to impact the organizations consumers are choosing to conduct business with. More than ever, existing customer loyalty is being challenged by channel agnostic options where data and applied analytics allow a customer to get more personalized solutions when and where they

Consumers Moving to Alternative Providers

Over the past decade, non-traditional financial institutions have entered the banking ecosystem, offering digital-only specialized solutions. The pandemic served to accelerate the shift away from traditional branch-based banks to digital banks, suggesting an increased level of trust and overall comfort with big tech and fintech alternatives.

A study from Cornerstone Advisors found that the percentage of Americans whose primary checking account is with a digital bank has skyrocketed since 2020. According to the research, more than a quarter of consumers aged 21 to 26 (Gen Z) and nearly a third of Millennials (age 27 to 41) now call a digital bank their primary checking account provider. For those who think that only younger consumers are making the switch, the percentage of Gen X consumers (age 42-56) who have their primary account with a digital bank grew from 8% to 22% since 2020.

 “Digital banks aren’t the ‘challenger’ banks, anymore,” states Ron Shevlin from Cornerstone Advisors. “They won. More Gen Zers and Millennials call a digital bank their primary checking account provider than those that consider a community bank or a credit union to be their primary checking account provider – combined.” The research from Cornerstone found that six in ten Gen Z consumers and Millennials whose primary checking account is with a digital bank has that account with Chime, PayPal or Cash App.

The impact of this shift is not equal across all types of financial institutions. Interestingly, the most significant negative impact is being felt by the largest traditional banks. While the top megabanks dominated consumers’ primary checking account assignments as recently as 2020, the percentage of Gen Z consumers whose primary checking account is with a top five bank has dropped from 35% to 25%. Among Millennials and Gen X consumers, the percentages declined by almost half.

Beyond the changes in primary account growth at megabanks, credit unions have also been negatively impacted, with the percentage of Gen Z, Millennial, and Gen X consumers calling a credit union their primary checking account provider declining by roughly 30% between 2020 and early 2022. Interestingly, community banks actually gained share in primary checking account status across four generational segments during this same period, with regional banks being somewhat unaffected.

By Jim Marous, Co-Publisher of The Financial Brand, CEO of the Digital Banking Report, and host of the Banking Transformed podcast