Neobank valuations continue to rise but only 7% of consumers and 8% of businesses trust neobanks over a traditional bank, according to the 2021 Banking Impact Report released by MANTL, a digital account opening solution for banks and credit unions. Neobanks also ranked lowest on providing personalised service, a positive impact to local communities, convenience and better access to underrepresented communities when compared to community banks, credit unions, regional banks and megabanks.
The 2021 Banking Impact Report, commissioned by MANTL in partnership with Wakefield Research, surveyed bank executives, small business owners (SBOs) and consumers to identify how evolving banking
trends impact the local community and the role that community banks and credit unions play in the US financial system. The report findings underscore the resilience of the traditional banking model in generating trust and delivering personalised service but foreshadow how rising digital expectations among consumers and small business owners might eclipse other banking needs.
Despite low trust levels and the fact that nearly two-thirds of bank executives (61%) observed an increase in fraudulent activity with accounts held at neobanks in the past 12 months, consumers and small business owners are still considering digital-only offerings. Nearly half of consumers (47%) are likely to open an account at a digital-only bank in the next 12 months and 44% of small business owners are likely to open an account with a fintech company in the next 12 months.
“Neobanks continue to score massive valuations but consumers and businesses are not completely sold
on the neobank promise. In fact, they are just as likely to open an account at a community bank or credit union in the next 12 months,” said Nathaniel Harley, CEO of MANTL. “The biggest threat to traditional banks is not a neobank but the opportunity cost of not keeping pace with increased demands for digital banking.”
Online account opening is now table stakes but nearly half of banks, credit unions don’t offer it
Currently, 43% of community banks and credit unions do not offer online account opening for consumers and that figure is even higher for businesses. However, more than half of consumers (58%) and SBOs (57%) will not do business with an institution that doesn’t offer online account opening, regardless of whether they prefer to open an account online or in-person. With 48% of consumers and 50% of SBOs likely to open an account at a community bank or credit union in the next 12 months, this will severely limit new customer acquisition, particularly among younger demographics and high-earning SBOs, for institutions that do not offer it.
“Consumers and SBOs are drawing a line in the sand: online account opening is now a must-have feature and they simply won’t use a bank that doesn’t offer it. This is especially true for Millennials and Gen Z,” said Harley. “Community banks and credit unions must act now to meet the demands of an economy that will be fully Millennial-led by 2030 or risk losing out on younger customers with long-standing earning potential.”
Notably, 77% of SBOs with over 50 employees and more than half of SBOs (59%) with $1million to $25million in revenue also require online account opening to do business.
“Community banks and credit unions have built incredible goodwill with the businesses in their communities. Providing business customers with a simple and intuitive online account opening experience will be critical to growing and maintaining those relationships in 2022,” continued Harley.
Bank executives forecast housing market crash in five years
The MANTL report highlighted the critical role that traditional banks played in covid-19 recovery nationwide. Three out of four consumers (74%) believe community banks and credit unions were important to their region’s ability to manage economic conditions caused by covid-19 and 88% of SBOs agree that community financial institutions played a role in the economic recovery. Furthermore, bank executives report a full quarter (26%) of their business customers, on average, would have gone out of service during the pandemic had it not been for their assistance.
Executives remain positive about near-term recovery from the pandemic: 95% of executives are optimistic about the economic conditions in their local community over the next 12 months. However, a shocking 78% of executives predict a housing market crash in the next five years, signalling caution as housing market prices reach record highs in 2021.
Community banks and credit unions lead in providing financial inclusion and accessibility Consumers, bank executives and businesses emphasise the growing importance of providing access to financial services and financial inclusion, particularly among underserved communities. Half of community bank and credit union executives (48%) said their primary banking benefit was providing financial inclusion for underserved communities and 90% of community banks and credit unions have or are planning on implementing a formal program for financial inclusion for underserved groups.
“Financial inclusion is an important social justice issue and a driver for economic mobility. By expanding access to financial services, community banks and credit unions are helping their communities remain resilient and their efforts are widely recognised and championed by consumers and businesses,” said Harley.
The study shows that these institutions are being recognised for their efforts: the majority of consumers (55%) said community banks and credit unions better serve and provide access to underrepresented communities over neobanks, regional banks or megabanks. Furthermore, one-fourth of community bank and credit union customers (23%) came to their institution after being underserved by a large national bank and 95% of community banks and credit unions have provided a loan for a small business denied by a large bank.
“The report findings suggest that consumers and business owners are becoming increasingly aware of socially responsible banking practices and are making their banking choices based on the institution’s impact on their community and society at large,” said Harley.
Four out of five SBOs said it is important that their bank serves underserved communities.
Consumers do not trust government-backed bank accounts
Lawmakers have proposed legislation around government-backed bank accounts, called FedAccounts, which would give consumers access to digital accounts held at the Federal Reserve that are accessible at
bank branches and post offices. However, consumers are wary of the government’s involvement in their
Nearly three-fourths of consumers (70%) trust a private banking institution over a government-run institution for their banking needs. Gen Z is most likely to trust a government-run institution, which aligns with the generation’s willingness to embrace new ways of managing finances.
“The idea of a government-backed bank account is not new but it has received renewed attention over the last year. Whenever new government financial initiatives are proposed, such as FedAccounts or a digital FedDollar, the government must consider how consumer trust can impact adoption. Some programs might be better executed in partnership with existing institutions who have already earned consumer trust,” said Harley.