Digital banking has disrupted traditional banking to the extent that fintech companies now have tens of millions of users.
And although not all of these customers were “taken” from big banks (many were previously unbanked, or it’s their second or third account), numerous clients did turn their back on incumbents and went to the new players.
The rise of challenger banks, not only in the US but worldwide, rang alarm bells in the headquarters of traditional banks. It was time to modernize, adjust, and adapt to the new reality.
Some banks were more successful than others in implementing a digital transformation. However, there probably isn’t a single bank on the planet that hasn’t started adjusting to digital banking and the competition from fintech companies.
Governments around the world are actively dropping the fences around traditional banks and encouraging fintech firms to come in and disrupt the status quo.
The US is no exception to the point that it’s now one of the most competitive banking industries in the world. So, let’s see in what ways did the top mainstream banks adjust to the new reality and to what extent have they transformed their organizations.
Zelle was launched in 2017 and was previously known as clearXchange. The payments network is owned by Bank of America, Truist, Capital One, JPMorgan Chase, PNC Bank, US Bank, and Wells Fargo through Early Warning Services, LLC, a private financial services company.
Zelle, just like Venmo or Cash App, lets users instantly send money to others via a dedicated smartphone app or through a mobile banking app of its partners (over 1,000 institutions).
This was a game changer for banks as they were finally linking to each other to make the transfers instant and free, making them a viable alternative to fintech P2P mobile payments apps.
The instant payments service from big banks finally put to sleep the extreme fragmentation of credit unions and banks, putting more than a thousand institutions in a network and making life easier for their users.
Not to mention that costs went down considerably for both customers and the banks and credit unions enrolled in the program.
A payment network like that is nothing unheard off. In fact, many countries and have a similar or even better system. Canada and the EU come to mind with their Interac and Single Euro Payments Area (SEPA), respectively.
Apart from Zelle, some other US banks are launching their own versions of instant payment networks that are trying to compete with a lower fee structure. Alloy Labs Alliance, a mid-sized banking association, launched Chuck – a competitor to Zelle that gives financial institutions another option for instant payments.
To illustrate how important Zelle was to traditional banks, in 2021, the transaction volume was $490 billion. On the other side, Venmo had a transaction volume of $230 billion.
Bank of America
Bank of America’s online and mobile banking has been around for a long time. In fact, as early as 2007, you could use your cell phone to check balances, pay bills and transfer money between Bank of America accounts.
This was done using the browser on your phone and not an app, mind you. The mobile app wouldn’t come out until later in 2008, which coincidentally corresponds with the start of Fintech 3.0, as well as the financial crisis and, more importantly, the rise of smartphones.
BofA was always keeping up or even leading in the digital technology it brought to its customers.
In 2014, when the fintech sector finally started attracting the attention of regulators, consumers and investors, the bank rolled out a suite of new mobile banking products, including mobile check deposits, person-to-person email and mobile transfers, and mobile app alerts.
For many years, Bank of America has had a company-wide digital transformation strategy. Its “High Tech, High Touch” approach is strategically used to drive better digital products, services, experiences, and value for its clients.
This digital transformation blueprint warrants spending billions of dollars on cutting-edge innovations such as big data, blockchain, AI, cloud, and biometrics and their successful incorporation and assimilation into Bank of America’s networks, systems, and infrastructure.
Investing in new technology is “easy.” What’s hard is transforming, eliminating, reducing, or simplifying, expensive and massive legacy infrastructure and systems that are a direct result of past technologies and many mergers and acquisitions.
According to BofA’s former CTO David Reilly, this was done by embracing software-defined infrastructure and following core guiding principles.
As of a couple of years ago, the bank was also starting to focus more on Millennials and Gen Z customers by implementing a refreshed and revitalized digital banking strategy.
This was, of course, inspired by the popularity of fintech peer-to-peer mobile payment platforms such as Venmo and Cash App, which have become extremely popular among younger people and now have tens of millions of users.
As a result of focusing on these two demographics, the number of BofA’s digital users reached 54+ million in 2022, adding two million digital clients in a single year.
There were also 16 million active Zelle users making over $231 billion in transactions in 2021 – more than 64% more than the year before.
In 2018, the bank launched Erica – one of the most advanced AI-driven virtual financial assistants on the market. Since then, almost 25 million clients have interacted with this virtual voice assistant, with a 247% YOY increase.
In 2022, the bank’s main app will merge with other services to integrate most, if not all, Bank of America’s services under one umbrella – retail banking, investing, and mortgage services.
It’s easy to see that Bank of America has been extremely successful in its digital transformation journey and has, at least for now, fended off the fintech competition.
Wells Fargo has two trillion dollars in assets and is the fourth bank in the US in that regard, only behind Citigroup, BofA, and JP Morgan Chase.
The bank has been around since 1852 and is known worldwide more than any other US bank. It has more than 70 million customers in 35 countries around the world.
Why am I pointing all of this out? It’s to illustrate that the big banks are here to stay. They aren’t simply going to roll over to fintech companies.
In a world where a vast majority of Americans (78%) prefer digital banking, simply keeping up with the pack isn’t enough. Innovations have to come from within the institutions.
The bank is combining new technologies, such as artificial intelligence, cloud, big data, and more, with legacy systems and brick-and-mortar branches to work with customers wherever and however they prefer.
The bank is the number one in the country in the number of bank branches and is closing more branches than any other bank. In 2021, the bank closed more than 270 branches.
This, of course, is a deliberate strategy as footfall in branches keeps falling and customers move their banking online. It’s also a great way to cut overhead costs freeing more money for modernization.
One of the key components of Wells Fargo’s digital transformation strategy was to move its legacy system to an end-to-end, flexible, and cloud-native platform that could scale as the business required.
This cloud-based operating system allowed the bank to accelerate digital transformation within its commercial banking and corporate and investment banking businesses.
Small business owners finally got quick access to capital without having to visit a branch, and the whole process is done on a single platform that streamlined the entire lending process for origination, underwriting, and portfolio management.
JP Morgan Chase
The largest bank in the US by total assets ($3.7B), JPMorgan Chase started its digital transformation journey of moving away from legacy systems around 2016.
Within 2 years, the company’s efforts to scale up the technology and prepare for the next generation of banking showed some very tangible and encouraging results:
- 48 million active digital customers (top competitor BofA had 36 million users)
- Mobile active users jumped 12% YOY
At the end of 2021, the number of active digital customers shot up to 59 million, growing 6% YOY.
So, obviously, the modernization efforts were working as intended. It’s no wonder since the company was spending $12 billion on technology, with half of that going to regulatory-related and modernization efforts.
It’s obvious that the bank is committed to an aggressive digital transformation and is investing in innovative ways to attract customers and deepen customer engagement, satisfaction, and, of course, profitability through the use of digital channels.
Chase rightfully deducted that the wait-and-see approach to doing things would let fintech companies steamroll them. Instead, the company built its entire strategy around the desire to deliver an end-to-end digital experience with capabilities across the lifecycle through the clients’ channel of choice.
Leveraging technology is critical as corporations look to upgrade their payment platforms. Technologies like cloud, API, and AI are no longer thought of as new and are instead becoming a staple for organizations in their payments infrastructure.
In its quest for digital transformation, JP Morgan has managed to go further in one field and is, in fact, playing a leading role in it. I’m talking about the blockchain space.
The bank is going as far as to launching JPM Coin, which uses blockchain technology to represent deposits held with JP Morgan.
It has also launched the Interbank Information Network (IIN), which is based on distributed ledger designed to enable information exchange that addresses challenges throughout the payments transaction process.
More than 400 banks registered to join, including more than 150 banks in the Asia Pacific and 100 that are live and participating in the network.
The corporation is also notable for its around 50,000 technology professionals at the bank, which is more than most technology companies in the world have.
Citi is present in over 160 countries and jurisdictions and has around 200 million customer accounts. This banking giant has made it its priority to increase and improve its digital offering by devoting serious amounts of attention and funds to it.
The bank has been leveraging technology to stay ahead in the modern digital economy. The use of AI, big data, automation, and powerful machine learning, among others, enabled rapid and seamless virtualization of the planning, running, and scaling of its digital technology performance tests.
By being able to test things more efficiently than others, the company can bring innovative products to the market faster than ever before. One of these innovations is the new CitiDirect Experience.
Citi is investing heavily in a large-scale transformation of this banking and cash management platform. This had to involve a global team of developers to replace a legacy framework of tightly coupled applications with a flexible, cloud-capable, microservices-based modular structure.
What the transformation ultimately achieved was a cloud-powered platform that used cutting-edge technology to provide a customized user experience according to their persona, usage, and habits.
The company’s digital transformation hasn’t gone unnoticed. The bank has won numerous international awards for its continued work and was touted as the World’s Best Digital Bank by Global Finance magazine for the 20th consecutive year.
Citi has some excellent numbers to show for it as well. In 2021 alone, users of CitiDirect grew by 12%, mobile users by 19%, 125% more digital account openings, and 97% growth in instant payments transaction volume YOY.
The top mainstream banks still have thousands of physical branches across the nation. US Bancorp, or US Bank, is no exception. With over 2,000 branches, it’s one of the top banks physically present in the communities.
However, how many times can a person visit their branch? A couple of times per month? Per year? On the other side, we log into our mobile banking apps hundreds of times per year, if not more.
It’s no wonder banks are slashing their branches by the thousands each year. After all, their fintech competitors don’t even have physical locations, and they’re doing just fine. In fact, they’re thriving as they don’t have the overhead and their customers are comfortable using the apps anyway.
US Bank, like other traditional banks, has recognized this fact and invested heavily into digital transformation and a big tech approach to scaling – increasing the number of digitally active users, the number of their transactions, and new ways of monetizing.
Although personal customers are an important part of the equation, so are the business customers. That’s why US Bank acquired Silicon Valley software company Talech.
Talech’s main product is a simple and powerful POS system with 100+ features that is suitable for small and large businesses alike.
Restaurants will love the table layout and split checks features, retailers real-time inventory tracking and barcode printing, and service-based businesses appointment scheduling and employee timesheets.
By connecting this powerful software with commercial bank accounts, US Bank’s clients will have the ultimate control over cash flow and every other financial and organizational aspect of their business.
The Talech acquisition means that the bank is stepping on the toes of one of fintech’s biggest names – Square, and its well-established POS system.
It also means that traditional banks are more than capable to compete with fintech when they focus their energy on expanding beyond traditional banking.
Although many pundits have already written death certificates and eulogies for incumbents, as we can clearly see, it’s far from over for them.
Traditional banks have near unlimited resources they can throw at basically any problem they encounter. Fintech companies are just another hurdle in the road they need to hop over, sidestep, power through, or buy out.
Big banks in the US and elsewhere still enjoy great confidence from most people, and they mostly have no alternatives for wealthy clients.
Fintech companies are still fairly new, and rarely will people keep tens of thousands of dollars in a digital banking account. That’s just the facts.