A rule change in the 1980s opened competition in long-distance phone service, leading to years in which seemingly every other advertisement on TV begged consumers to “switch” their provider.
A similar force is being unleashed on banks, and a Minneapolis tech startup is the reason why.
ClickSwitch Holdings Inc. for the past two years has signed up about 325 banks, credit unions and alternative financial firms to use a service it developed — a combination of software backed by a human service bureau — that lets their new customers move their entire banking relationship with the click of a mouse button or tap on a screen.
To some banks, the 40-person company is triggering an arms race. “An executive at a very large bank told me, ‘We want to move forward but we don’t want to be the bank that started the switching war,’ ” said Cale Johnston, founder and chief executive of ClickSwitch.
As in other industries, banking is being transformed by ever-present wireless access and mobile gadgets. Millions of people are now comfortable using smartphones and tablets for financial transactions of nearly all stripes, from paying bills to getting home mortgages. In the process, they use walk-in branches far less, leading banks to close thousands of them around the country.
Senior banking executives are taking even bigger steps. Just last week, the industry saw its biggest merger since before the 2008 recession. The southeastern U.S.-based banks SunTrust and BB&T said they would join to become the nation’s No. 6 bank, just slightly smaller than Minneapolis-based U.S. Bancorp. And two weeks ago, TCF Financial, Minnesota’s third-largest bank, said it would combine with Michigan’s largest bank, Chemical Financial.
In both deals, executives said they needed to spread rising technology costs, including those for better digital services, across a bigger base of customers.
‘Difficult to switch’
Meanwhile, a wave of upstart competitors has emerged for traditional banks, including online-only banks, new investment services with banking features on the side and even consumer brands that previously had no presence in personal finance.
T-Mobile quietly launched an app called T-Money several months ago that handles basic banking services. In South Africa, the nation’s largest health insurer, Discovery Health, created a “behavioral” bank that tracks customer activities and bases fees and incentives on what it views to be good habits.
But these new competitors have faced a big barrier in attracting customers: Traditional banks long ago locked in customers by accepting paycheck deposits directly from employers and then facilitating automatic bill payments. Millions of Americans have fully automated their banking activity — and changing to a new bank would require undoing that work at an existing bank and setting it up at a new one.
To banks, customers who have their paychecks sent directly into checking and savings accounts by employers tend to be the most loyal and most profitable. They are the easiest customers for banks to steer into higher-value services like credit cards, loans and mortgages. In industry jargon, banks become PFIs, or primary financial institutions, to those customers, and some bankers use the PFI moniker on them.
“The whole point of getting every client to use a lot of products is because it’s more difficult to switch,” said Cyrielle Chiron, managing director for North and Latin America for RFi Group, a London-based financial industry research firm that has measured the value of such customers to banks.
She has not tried the ClickSwitch product. But she said, “A product that helps with this pain point will definitely encourage people to switch more.”
ClickSwitch charges banks a flat fee in the range of $20 to $30 for each new customer they sign who uses the ClickSwitch button. Revenue nearly doubled in 2018, though the company hasn’t released a specific figure, and the firm signed 18 new banks in December, the most in one month.
Since its start in 2014, the company was financed by Johnston, his brother-in-law John Hart and cash flow. It only raised its first outside capital, $3.5 million, in August. Hart transferred his 10 percent stake in ClickSwitch to investors in another company he owns late last month.
Some financial institutions, such as Twin Cities-based credit union Wings Financial, note on their websites that new customers can use ClickSwitch technology to move accounts. Others have implemented it quietly, not wanting to appear to rock the boat in the staid banking industry.
Bootstrapping the product
Johnston was a 26-year-old vice president at Cachet Financial, an Eden Prairie company that developed photo-deposit technology for bank apps, in 2014 when he heard bank executives complain about the difficulty of switching bill-payment services for new customers.
He decided to go off and work on the problem on his own, bootstrapping a software development effort. He hired programmers at Saturn Systems, a project development firm in Duluth, to work on the idea and drove up to visit them every other week during the early stages.
“I had to learn how to be technical,” Johnston said. “When everything was being built, I just tried to entrench myself as much as possible, so I could speak about the product end-to-end from the hosting environment to what kind of code we were writing in.”
The first prototype showed how automatic payments, such as those to utilities or credit card providers, could be migrated. But as he tested it with banks, several executives told him it should also be able to change direct-deposit activity.
“The banks’ feedback was, ‘We don’t just want money going out of their account, we need it going into their account. So come back when you have made it easy for customers to get their deposits coming to us,’ ” Johnston said. “We started moving the ball down the field when we added direct-deposit functionality.”
Initially, the company worked with providers of payroll services to reach out to banks to sell the service. Over the past year, though, the firm has become better known in the industry and ClickSwitch picked up more customers who reached out to it. With more than 5,000 banks in the U.S., the company has just dented the market. Johnston said he expects to soon sign up some very large banks that will test ClickSwitch in a few cities before implementing it broadly.
He said the reawakening of merger activity in the banking industry is also an opportunity for the firm because, as banks come together, regulators force them to consolidate their routing numbers and move deposits together. “When the Fed starts to take those routing numbers, we’ll be there to help,” he said.
Next up for ClickSwitch is a product for the business customers of banks. “We’ll launch brokerage and business switching to easily migrate business checking accounts from one bank to the next,” Johnston said.