Banking sucks! But it’s not always going to be this way.

“When the wind of change blows, some people build walls. Others build windmills.” (Chinese Proverb)


One great hallmark of technological innovation is the iPhone, which celebrates its 10th anniversary this June. Since the iPhone came into existence, entire industries have transformed yet banking stands out as remaining largely business as usual. In transportation, Uber has changed how we get from point A to point B, Airbnb how we travel, Netflix how we consume entertainment, and Amazon how we shop. Sure, banks today offer apps which mimic things you used to have to go to a branch or go online for. But left to their own devices, banks are not going to improve the products they offer to be personalized in the way that technology affords. Banks have not — and will not — transform the relationship we have with our money.

Banks are great at building walls


So why hasn’t banking seen a transformation anywhere near that in other industries? There are three fundamental reasons why banking has not changed in any material way.

1. Banks do not get paid to get you a better deal

The first lies in the banking industry’s fee structure and the fact that banks get paid at the expense of their consumers:

  • Approximately 60% of a bank’s revenue is earned from what is called the Net Interest Margin, the difference between the interest rate you are charged on a loan and the interest you are paid on your savings account. Most savings accounts pay <0.1% interest. While paying you that nominal interest rate, banks take that same money sitting in your savings accounts and lend it out at a 4% to 20% interest rate. And they keep 100% of the difference.
  • The other 40% of a bank’s revenue comes from fees. While some fees (like ATM and bounced check fees) are clearly indicated on your bank statement, others don’t show up at all. These include interchange fees: Every time you tap pay on your phone or swipe your card, the bank takes up to 3% in transaction fees. Because merchants (invisibility) build this fee into the price of their products, there’s absolutely nothing you can do to get rid of it.

2. Banks sell you more, not better, products

Second, banks focus on selling you more products to lock you in, making it difficult to change institutions, rather than on selling you better products. Once you become a customer, the more products they sell you, the less likely you are to leave. The general rule is that if a bank can sell you three products (e.g., checking account, savings account, plus credit card or loan), then you are likely to stay for 50 years!

Not because you love that particular bank — since customer satisfaction expressed through Net Promoter Score for the national banks is below 20 — but because banks have made it so costly to switch to another institution. One simple example is the dip in your credit score from closing an existing credit card or from applying for a new card with a new bank.

3. Banking is impersonal

The third reason for the industry’s stagnation is that banking is no longer personal. When banking began, the person at the bank knew your name and was familiar with your personal situation. Today that connection is broken. Everyone is sold the same products, that familiar menu of bank accounts, mortgages, and credit cards.

Take lending as an example of a great lost opportunity to offer personalized products. While packaged to look different, behind the scenes, 75% of home loans are sold immediately by banks to the U.S. government or to investors. This means banks are qualifying everyone using the same preformatted checklists (for credit score, income, payment history, etc.). Rather than try to understand your unique situation to find you a better or cheaper loan product, most of the time banks seek to create “plain vanilla” loans. They’re not actually thinking, they’re just ticking boxes. Every bank is selling the exact same products to the exact same profile of consumers. And as a result, 45 million “thin file” or “no credit file” Americans aren’t able to get loans because they haven’t borrowed or conformed to the outdated rules required to develop a credit score, which disproportionately affects minority groups like African-Americans and Hispanics.

Silicon Valley is building windmills


In his 2015 Annual Shareholder Letter, JP Morgan CEO Jamie Dimon noted: “Silicon Valley is coming. There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking.”

One beacon of hope within the industry is fintech start-ups, who have made inroads into real change. PayPalStripe, and even CapitalOne are disrupting their respective industry segments, in payments and credit cards. Yet the consumer banking experience remains unchanged. The time is ripe for change and here’s why.

We are mobile-first. We live in a mobile-first world. 90% of people under the age of 35 (no longer use a computer and) only use mobile to access Facebook. Yet no bank today has mobile-only products. It just isn’t possible to use your phone to open a bank account, refinance a loan, or for most bank apps to set up a simple bill pay. Banks need to come to where people are, which is on their phones.

We trust those who serve us best. Millennials don’t trust banks so are more willing to change and are more ready to change than ever. We’ve felt the pain created by the finance industry. We’re saddled with student debt after graduation; high deductible health plans are a new reality; and we’re deeply wary of the impact of credit card debt. We want to take charge of our own finances. We’re ready to go with those who understand our needs and who deliver the same level of innovation that Uber and Amazon brought to transportation and shopping.

We want that personalized experience again. People want things to be both personal and personalized. Personal as in we want to have a relationship with our financial partners, to feel people care and are on our side. And personalized as in being offered products that take into account our individual situations. Start-ups like SoFi and Earnest are doing this, offering student loans and mortgages at attractive rates to those without an established credit history. Today the industry has the data to do this profitably — to know that if something unexpected happens with your job, repayments can be paused while helping you look for a new job rather than sending you directly to collections.

The future I speak of, of a more personalized, data-rich, and mobile banking experience is closer than it seems. It’s already here. A trip across the Pacific Ocean to China gives us a glimpse of this future. AliPay in China combines a bank, Paypal, and an investment firm into a single personalized app on a user’s home screen. And 100 million people in China are using the app every day to meet their financial needs.

At Empower, we want to be a part of the wave of innovation that brings disruption home. We are deeply focused on building a money management app that is highly personalized and fundamentally mobile-first. We will go to bat for our consumers to get you a better deal and to help you meaningfully improve your finances. These are exciting times and I invite you to join us to help shape the future.