The ‘Overbanked’ and the Threat to Bank Profitability

By Brian Buckingham

If you think fintech and the new hyper-connected environment have transformed banking, just wait. According to Citi, digital disruption affected only 1.1 percent or $9 billion of U.S. consumer banking revenues in 2015. But this is expected to increase to 10 percent, or $105 billion, in 2020, and 17 percent, or $203 billion in 2023.

Indeed, 61 percent of executives surveyed in consumer financial services expect their businesses would be moderately or massively disrupted by digital in the next year, according to Russell Reynolds Associates’ Digital Pulse 2015. An article in Fortune magazine drives home the theme: “Radical change is coming.”

Leading this disruption is a group of consumers we call the “overbanked.” An overbanked consumer is someone we’ve defined as holding open deposit accounts with three or more financial institutions. While better serving the unbanked and underbanked get a lot of rightful attention from bankers and regulatory agencies, the overbanked have the power to transform how banks do business in subtle but significant ways.

The overbanked consume financial services in a wholly new way, unafraid to juggle a variety of service providers to achieve a personalized picture. Starting with both a checking and savings account at a large bank for the sake of convenience and scale, the overbanked usually have several high-yield savings accounts with online banks and an investment account with an online brokerage like Charles Schwab or fintech firms like Betterment or Acorn. Expanding to the credit side, various additional institutions are typically added to the mix, across mortgage, credit card, auto and other consumer lending products.

The overbanked’s predilection to mix and match offerings to create a customized, bespoke portfolio of financial services is supported by technology and market trends. Enrolling at a new bank account is quick and easy: fee-free offers are aplenty, and mobile apps help the overbanked manage and maintain several open accounts with multiple financial institutions in a stress-free manner. The overbanked are also empowered by comparison shopping sites like Mint and Bankrate and easy transfer technologies like ACH.

According to consumer research conducted by Dennis Chira, a principal at Oliver Wyman, the overbanked account for about 10 percent of the banking population and have average household assets of $900,000 (not including a primary residence) and an average annual household income of $170,000.

The overbanked’s behavior—this do-it-yourself selecting and assembling to create a mélange of financial services from multiple providers—threatens bank profitability and growth. The overbanked represent the rising expectation of consumers for personalized service that is seeping into nearly every facet of life, including our finances.

In addition to better mobile banking apps, the overbanked are demanding compelling incentives in exchange for their business. They expect their banks to find ways to add value to their lives, to anticipate their evolving financial services needs and to make relevant suggestions in much the same way that customer service virtuosos like Apple, Amazon and Netflix have been doing. Customers like the overbanked are comparing customer experiences across industries—they’re measuring their banks not against other banks but against the most competitive tech and consumer brands in the world.

The rise of the overbanked also signals the growing infeasibility of financial institutions’ traditional approaches to customer retention, cross-selling and revenue generation. A recently published World Retail Banking Report 2016 by Capgemini and Efma notes that customers are much more likely to refer friends to their nonbank fintech provider (54.9 percent) compared to their bank (38.4 percent). The report also points out that retail banks have failed to translate improvements in customer experience into commensurate levels of profitable customer behavior. The field of service providers available to meet consumer financial needs is growing, in tandem with a willingness of consumers to leverage multiple providers, challenging the reliance on cross-selling that sits at the heart of retail banking customer strategy.

Traditional banks must move from a culture of incremental improvement driven by the competitive landscape and available technology toward a new approach. One that places customers at the center of a culture of innovation to personalize and anticipate needs and preferences—in order to encourage profitable behaviors such as cross sales, loyalty and referrals.

In order to effectively do that, banks need insight into the full breadth and depth of key customer segments like the overbanked, their relationship with the bank—across both the services they use and their interactions—and the relative value they bring to the table. This intimate understanding of bank customers’ activities, preferences and needs, weighed against an understanding of both current and future customer relationship economics, leads to more informed, intelligent business decisions.

This is not just about putting the bank customer first, although that is certainly important. Rather, this is about a partnership of mutually satisfactory solutions: a shared journey for both the bank and the customer wherein increased customer understanding can drive both customer satisfaction and profitability.

In the age of the empowered consumer, banks cannot just compare themselves to their peers and historical improvements, feeling satisfied with making incremental changes that match competitor offerings like mobile banking features, mobile wallets or quick, seamless money transfers. The overbanked have seen it all before, and they want more.

In order for growth and profitability to return, retail banks must move away from a myopic view of competition and innovation. Instead, banks must focus on meeting evolving consumer expectations that are being fueled by technology advancement and disruption in other industries like online retail, ride sharing and hotels.

By thinking big, they can help avoid the risk that the overbanked—today their most profitable customers—walk out the door toward new fintech choices and digital financial delivery channels. Could today’s overbanked become tomorrow’s unbanked? That possibility should be unsettling.

Brian Buckingham is vice president of services for the U.S. market at software company Nomis Solutions.