SAN FRANCISCO – After the financial crisis 10 years ago, unhappy customers were expected to flee the megabanks for smaller competitors.It did not happen. And the big banks became even more entrenched.
Now another wave of alternative banks are at it again and they say they have learned from the mistakes of the upstart banks that tried — and failed — before them.
Chime, the biggest new name to pop up, has opened 2 million fee-free online checking accounts and is adding more customers each month than Wells Fargo or Citibank.
That has inspired a crop of newer startups, like Empower, which started its first fee-free online checking accounts, with lots of digital bells and whistles, in October.
Venture capitalists are pouring money into American startups that are offering basic banking services — known as neo-banks or challenger banks. In 2018 so far, American neo-banks have received four times as much funding as they did last year and 10 times as much funding as they did in 2015, according to data from CB Insights.
Big players from outside the consumer banking industry, like Square and Goldman Sachs, are also moving in.
“In consumer banking, you have what is one of the largest industries in the United States, in terms of profits, and at the same time one of the least-disrupted industries and the most unpopular with consumers,” said Andrei Cherny, the founder of Aspiration, a neo-bank that has attracted nearly a million customers. “Those three things create a perfect storm for disruption.”
The persistent unpopularity of big banks has been a boon to the newcomers. And they are helped by a new attitude among financial regulators who have grown more comfortable with online banking and young customers who have no hesitation about cashing a check or sending money on a phone.
That does not mean that building a profitable business will be easy, as the first neo-banks, like Simple and Moven discovered. Establishment banks have big budgets to fend off challengers. And the services that many neo-banks are starting with, like checking and savings, are not very profitable. Chime and its ilk all want to eventually move into lending and other businesses.
There is, however, a growing conviction that banking is set to change.
The consulting firm CG42 said in a recent report that it expected the 10 largest banks would lose $159 billion in deposits to smaller competitors over the next year.
The deposits going to startups like Chime and Aspiration are still a drop in the bucket compared with the trillions of dollars in accounts at places like JPMorgan Chase and Wells Fargo. New companies in the United States are also lagging those in places like China and Britain, where a much-greater proportion of consumers have already fled to upstarts.
But fast-growing online banks in Britain like Monzo and Revolut are providing a template for American startups. Both companies have said they want to move into the United States.
Banking regulators recently signaled that they will give the first banking charter to a neo-bank — Varo, a San Francisco startup that is offering fee-free checking accounts without any minimum balances. Another national bank regulator, the Office of the Comptroller of the Currency, has said it plans to begin offering special fintech charters to new companies that want to handle money.
These charters will allow startups like Varo to operate without relying on an established bank to hold their money, which adds significant costs.
Most of the new companies have kept their money and run transactions through partner banks, generally smaller regional banks that don’t have the money or the expertise to build out their own digital services.
Traditional banks are recognizing the threat. Wells Fargo is testing an app-based banking product, Greenhouse, that does away with overdraft fees and service fees.
JPMorgan Chase already offers a similar app, Finn, aimed at younger customers and announced last month that it was building a new fintech campus in Silicon Valley.
The banks are struggling to adapt because they have built an expensive infrastructure of local branches and have become increasingly reliant on revenue from fees. Surveys have shown that a wide array of fees, for everything from ATM use to checking account maintenance, have been steadily rising in recent years.
The big banks have also held on to the interest payments they get rather than passing them along to depositors. That has created an opening for online companies. Empower is paying its customers 2 percent for deposits, compared with the 0.01 percent that Wells Fargo is offering.
One of the most unexpected new competitors has been Goldman Sachs. Goldman took its first step with an online-lending product called Marcus.
It has combined that with an online savings account that is offering customers 2.05 percent for deposits and executives have signaled that they plan to expand to a full-service online bank.
Several other established companies are also moving in.