The banking industry sure is changing! There is now a slew of new banking service companies challenging the traditional banks giving them a run for their money.
Aptly referred to as challenger banks, these new banking services offer a new dawn for the American consumer: low-cost or no-fee accounts, early access to wages, no overdraft fees, automated savings and more.
What's more, many challenger banks aren’t actual banks but rather banking services that depend on other banks to facilitate their transactions. In fact, only a very small number of challenger banks actually have bank charters in hand—Varo, Marcus and Ally are a few that come to mind. Just don't expect their local branches to pop up any time soon!
Mainstreaming of all digital banking
While the world went fully digital in 2020, challenger banks like Chime, Varo, Current, SoFi, Current, and Aspiration came out big winners attracting new consumers whose needs, simply put, weren’t met by traditional banks. Meanwhile, megabanks like Wells Fargo, Chase, and BofA all lost market share of primary bank customers in 2020.
Source: Cornerstone Advisors, StrategyCorps
And if you're wondering how challengers make money... the vast majority of them do so via interchange fees that merchants pay to banks when customers use their debit or credit cards. And beware, some also make a hefty buck charging out-of-network ATM fees.
If you haven’t yet jumped on the challenger bank bandwagon, should you?
If you’re not quite sure whether you want to open an account with a challenger bank, here is what it boils down to:
🌟 Fees. If your current bank requires you to maintain a minimum deposit, or you're paying high overdraft fees and other bank charges, you should consider switching. Fees can creep and add up. In fact, the average US household pays $329 per year in bank fees alone.
🌟 Cash access. Many challenger banks allow you to get access to your wages two days early, and some others allow cash advances. Is this something you need now or think you'll need later? When pandemic lockdowns thurst millions of Americans into unemployment, quick and easy access to money became even more attractive.
🌟 Supporting a mission. Not all challenger banks support a higher cause, but some do. Aspiration, a banking alternative, offers socially-conscious and sustainable ways to spend or save money. How much does it matter to you to be mission-aligned with your bank or bank service?
🌟 Access to useful tools and features, like in-app budgeting, credit builder resources, auto-savings into customized buckets are just a few examples offered. If you use a separate paid budgeting app, you may be able to save yourself some money. One Finance and Empower are two challenger banks that come to mind offering budgeting tools within their app.
Our take. The journey to modern, low-fee digital banking services has only just begun. According to Cornerstone Advisors, by the end of 2020, 15% of Gen Zers and Millennials considered a checking account from a challenger bank their primary account, up from 4% in Jan 2020.