Banking Sector Faces Fragmented Account Relationships and Promotion-Driven Churn
Traditional banks are facing a significant challenge as they risk losing their primary deposit share due to fragmented account relationships and promotion-driven churn. The banking landscape is undergoing a transformation, as customers, especially younger ones, are increasingly opening multiple financial accounts instead of just sticking with one bank. This shift is causing disruption in the banking sector, with traditional banks struggling to retain their primary deposit share.
Chime Captures 13% of New Checking Account Openings in Q3
According to the J.D. Power Financial Services Churn Data and Analytics report, Neobank Chime outpaced major banks in the third quarter, capturing 13% of all new checking account openings. This was more than the new accounts opened at national bank brands such as Chase, Wells Fargo, and Bank of America. This increase in Chime’s market share demonstrates the growing appeal of neobanks among consumers, who are attracted by their convenience, promotional offers, and no-fee policy.
Open-Banking Shifts Reshape Attraction of Direct Deposits
Open banking is driving changes in the banking sector, reshaping how banks attract direct deposits. The J.D. Power report detected a trend whereby many customers are expanding their relationships with additional banks or fintechs rather than completely switching from one to another. This trend, referred to as “soft switching,” involves customers moving their primary accounts to other institutions without closing prior accounts or formally severing ties.
Emmett Higdon, director of digital banking at Javelin Strategy & Research, suggests that this trend is largely driven by the growing number of younger financial customers. These customers, accustomed to a fragmented financial marketplace, find it easy to open a second account, thereby contributing to the phenomenon of “silent churn.”
Chime’s Growing Influence in the Banking Sector
Chime’s influence is growing, as seen in its Q3 performance. While the neobank has not yet released its third-quarter earnings, its first earnings report since going public earlier this year showed a 23% year-on-year growth in active members to 8.7 million. Chime defines active members as consumers who have initiated a money movement transaction on the platform within 30 days. Furthermore, 67% of these consumers use Chime as their primary financial account, demonstrating the neobank’s success in attracting and retaining customers.
Ryan King, co-founder of Chime, stated that their ambition is to become the largest provider of primary account relationships in the U.S. The surge in new members, most of whom previously had direct deposit relationships with traditional banks, suggests that these members are seeking a better experience, which they find with Chime.
Chime’s Customer Acquisition Strategy
However, Chime’s success also comes with challenges. Its high customer acquisition costs, driven by payouts and promotional offers, could be a potential issue. Yet, King sees this as an investment into what he hopes will be long-term customer relationships. Furthermore, the ease with which customers can open and close financial accounts also means that customers can leave as easily as they arrived, posing a challenge for the neobank.
Higdon believes that the ease of open banking that attracts customers to Chime could also be a challenge for the neobank. He stated, “It’s super simple to give a slice of that [market share] to Chime, but it also makes it really simple to take it away from Chime and give it to someone else like SoFi or Revolut. That’s called open banking.”
As the banking sector continues to evolve, it will be crucial for banks to adapt to these changes and find ways to attract and retain customers amid the growing popularity of neobanks and open banking.
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