Between 2020 and 2021, the proportion of U.S. consumers
using financial technology grew from 58% to 88%, approaching penetration parity
with traditional banking and surpassing the use of social media. As part of
this trend, fintech firms have become the bellwether for trends in banking
innovation and use of technology as legacy banking plays catch-up.
Data from a new survey shines a bright light on the rapidly
developing trend of consumers using technology to manage their finances . “The
Fintech Effect,” the second annual report by that name from Plaid, in
conjunction with The Harris Poll, highlights the impact the pandemic had on the
significant growth in adoption of digital financial solutions. It illustrates
digital’s increasing integration within traditional bank offerings, the impact
on the access to financial services, and the speed of innovation within
banking.
According to Plaid, “This mass adoption moment signals that
fintech is no longer separate from the traditional financial system. It is
simply becoming the way we do finance, digitally.”
As consumers were forced to use digital services with the
closing of physical banking offices, their expectations changed in an instant,
fueling innovation and enhancements to the way people transacted and interacted
with their financial institution. The following changes in expectations are not
temporary, but part of the foundation of what will be expected by every age
segment in the future:
Ease and Simplicity – Consumers want their financial
apps to be fast and easy to use, with customization to the way they want to
bank.
Interoperability – Consumers want to use multiple
apps, from multiple providers, that provide seamless, connected experiences.
Value – Consumers want a greater value exchange for
their business, including the ability to achieve better financial outcomes
through the use of data, insights and new technologies.
Scalability – As use of digital financial services
increase, consumers expect the benefits and trust in the technology to
increase. This increased engagement will drive future value transfer.
An underlying theme that continues to occur is the embedded
nature of digital finance beyond banking apps. From the ordering of products on
Amazon, the delivery of groceries through Instacart, the ride-sharing with
Uber, and the buying of coffee at Starbucks, finance is becoming increasingly
ubiquitous within our daily lives.
Digital Technology Powers the Future of Banking
The research by Plaid defines fintech, not as a category of
competitor, but as a way consumers transact their banking. According to Plaid,
“Fintech is the intersection of financial services and technology. It refers to
any digital service that a consumer engages with in order to manage their
money, including online banking, payments, investing, savings, budgeting,
borrowing, and goal-setting.”
In the survey, conducted in July of 2021, 69% of respondents
said they use technology as much as possible to manage their money due to the
pandemic. Even when the pandemic becomes less of an issue, consumers don’t
expect to revert to previous ways of doing banking. In fact, between 80% and
90% of those who used digital banking in the past year plan to use it the same
amount or more going forward. Even without the pandemic forcing the use of
digital banks, 58% of consumers said they can’t live without using technology
to manage their finances.
Users of digital banking services stated that use had a
positive impact on understanding finance (44%), progressing to a financial goal
(34%), and improving the management of their finances (29%). The top benefits
mentioned by digital banking users were saving time (93%), more control (81%),
more choice (79%), saved money (78%), better habits (76%) and reducing stress
(73%).
The ability to use financial technology to help reach
financial goals is an important benefit. This includes both saving money for
the future and decreasing the cost of banking. According to the Plaid research,
the adoption of digital savings tools increased 11% over the past year to 57%
of all Americans and digital investing increased 8% to 51%. At the same time,
39% of Americans said they use apps and other digital services because it saves
them money on fees including overdrafts and account minimums.
This is an area of vulnerability for traditional financial
institutions. Where consumers want apps that help them reach their financial
goals, many traditional banks and credit unions have only made legacy products
digital. It is a matter of rethinking banking beyond just checking, savings and
lending, to include the integration of these services to help consumers achieve
a better financial future.
Despite the growth in the use of digital banking tools,
there is still room for growth. For instance, just 28% of consumers who say
they’re not saving enough for retirement use investing tools to reach their
goals, with only 33% of those who cite keeping a budget as a challenge using
digital budgeting applications. Obviously, it will be incumbent on both
traditional and non-traditional financial organizations to encourage the
increased use of these types of tools for future growth to reach full
potential.
The ability to connect accounts and services together has
also become a requirement for an increasing percentage of consumers. The
research found that 76% of consumers said the ability to connect their accounts
was an expectation when choosing their bank, with 69% of consumers saying they
would consider switching banks if this capability was not available.
According to Plaid, “The youngest generations of consumers
lead the way on wanting interoperability – 77% of Gen Z and 80% of millennials
say the ability to connect their bank accounts is a top priority. But across
every generation, at least seven in ten said it’s important to connect their
financial accounts together.”
Digital Technology Positively Impacts Financial Inclusion
While 95% of Americans have bank accounts, use of
traditional banking drops within minority groups, with only 87.8% of Hispanic
people being banked, and 86% of Black households being banked. According to the
Plaid research, Black, Indigenous and People of Color (BIPOC) use digital
banking more than the white population, with the desire to avoid banking fees
and getting employment payments faster being primary drivers. Keeping track of
account balances and credit scores are also important benefits for these
populations.
According to Plaid, “With minority groups growing as a
proportion of the population – and the economy – it’s critical that our
financial system represents all demographics. It starts with establishing a new
foundation that goes beyond expanding yesterday’s solutions to new populations,
but designing new solutions with those specific groups in mind.”
Traditional banking must follow the lead of fintech firms
that have shown how to embrace financial inclusion with highly targeted digital
banking solutions. Few traditional banks and credit unions have made the
strides needed in the creation of low cost services or by providing the
financial education sought by minority segments.
Digital banking has also made the discussion of finances
more social, with 71% saying banking technology has made finances easier to
discuss. Interestingly, people of color are even more inclined to engage
socially around finances with 76% of this segment saying financial technology
makes discussion of finance with friends and family more likely.
The increasingly social nature of digital finance increases
the use of banking services across all demographic segments and results in
higher dependence on advice and guidance from others. According to the
research, more than half of people (57%) use financial technology because of a
friend or family member recommendation.
While digital finance is still more prevalent among the
youngest age segments, Baby Boomers saw the largest leap in overall adoption
among all demographic groups, doubling year-over-year from 39% to 79%. The main
driver of increased usage of digital finance among Baby Boomers was
convenience, with 64% saying they’d use a digital financial tool if it was
easier or faster than what they currently did. In fact, as Baby Boomer usage of
financial technology increases, the usage patterns are beginning to mirror
other generations.
The acceptance of digital finance by Baby Boomers still
hasn’t had a dramatic impact on where this segment desires to open a new
account however. The research found that 91% of Boomers say they’re comfortable
opening a financial account with a traditional bank, compared to only 31%
wanting to open an account with a tech company.
The Growth of Embedded Banking
The increase in the use of digital banking applications on a
daily basis increased from 37% in 2020 to 48% in 2021. Daily use by Gen Z (49%)
and Millennials (55%) exceeds the norm, while use by Baby Boomers is less. That
said, the research found that the average number of financial apps people have
on their phones decreased from 4 to 3.7 over the past year. This decline was
most likely the result of new users, who probably initiated digital banking at
a lower level than established users.
A growing trend is that consumers are also decreasing their
need for continuous ‘check-ins’ while looking for more embedded engagement that
helps them solve more complex financial needs (movement of money for greater
return, increased use of budgeting tools, etc.). This can place traditional
banking in an advantageous position competitively. According to Plaid, “While
people see technology providers leading the pack on innovation and ease of use,
banks still lead on trust – a fundamental requirement for people to take
actions with their finances.”
The desire by consumers to integrate financial solutions
from various providers is increasing as is the desire for banking services to
be embedded within a person’s daily life. Over the past year, this type of digital
banking experience has become a reality for more consumers. What this means for
traditional banking organizations is that the definition of ‘loyalty’ may have
shifted from accounts, balances and transactions to engagement and
interactions. “People want fintech to balance automation and control to benefit
their financial lives”, states the report.
But, as consumers are increasingly combining the use of
financial solutions from both traditional and non-traditional providers, the
level of trust with non-traditional providers continues to increase … including
the consideration of ‘primary account’ status. While trust numbers still favor
traditional banks and credit unions (77% of the overall population trust
financial institutions with their financial information, as compared to 69%
tech companies, 69% retailers, and 63% financial technology companies), the
variances are lower for younger age categories and for consumers who have used
digital banking apps from alternative providers the longest.
The Need for Increased Innovation
The findings of the Plaid survey show the major shift to
digital banking solutions and the increased expectations across all demographic
segments for simplified and seamless management of finances. As this trend
continues, more consumers will embrace solutions that are customized to their
specific needs and delivered seamlessly across channels. The desire for
embedded finance will only increase as will the use of non-traditional
providers.
To respond to these increased expectations, traditional
financial institutions need to leverage emerging technologies for the delivery
of traditional and emerging solutions. Banks and credit unions will also need
to focus on incremental innovation to deliver new solutions in ways that are
still taking shape. The sharing of data with both third party organizations and
the ability for the consumer to control access to data must be made more
transparent.
Finally, traditional financial organizations need to create
solutions that are inclusive to all demographic segments. This should not be
limited to socioeconomic groups, but also to consumers with disabilities and
consumers in higher age categories.
As stated in the report, “The mass adoption of financial
technology represents a significant shift in consumer behavior – changing how,
when and where people interact with their financial information and their
money. It also represents a permanent change in consumer expectations as people
want to do everything digitally.”
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