Checking in on Checking During COVID-19
At the typical community-based financial institution, checking account opening volume plummeted more than 200 percent in March and still had not fully recovered by the end of the second quarter of 2020. The slowdown was a reflection of the COVID-19 pandemic putting a pause on many aspects of life in the U.S. As consumers and financial institutions continue to adjust to life during a pandemic, what does “normal” mean for checking accounts in 2020 and beyond?
Checking Account Opening Trends
In analyzing the account data of more than 20 million checking accounts from credit unions and community banks participating in the Raddon Performance Analytics benchmarking program, the precipitous drop in new checking accounts is evident in the chart below. By the final week of March, the number of new checking accounts opened was 32 percent of the level seen just one month prior. By the final week in May, the account opening volume was at only 58 percent of the level seen prior to the pandemic. And while new checking account openings improved in June, they still had not reached prepandemic levels, peaking at 91 percent of the February benchmark. By comparison, 2019 saw new checking account activity increase in June to a level of 120 percent of its February 2019 baseline.
Checking accounts are not unique in this decline. Similar trend lines were experienced in new auto loan and credit card account openings. However, checking accounts are unique in terms of their multifaceted importance to financial institutions. Consider these three ways in which checking accounts bring value to your organization:
1 – Checking Drives Earnings
In addition to providing low-cost funding to fuel margin income, checking accounts generate a significant amount of non-interest income. Prior to the pandemic, debit card interchange revenue and NSF/overdraft fees were generating $165 per checking account for the typical bank or credit union, according to data gathered from our Performance Analytics participants. There is evidence of this revenue being under pressure in 2020, with myriad factors impacting both interchange and fee income.
- According to the October 2020 Fiserv SpendTrend® Report, consumer spending in April 2020 was 34 percent less than April 2019. And while year-over-year sales growth steadily improved in the following months, August was still 10 percent below the prior year. This reduced consumer spending has negatively impacted both debit interchange and NSF/overdraft fee income from the prior year.
- Alongside reduced consumer spending, many institutions implemented fee waiver programs to assist consumers during the pandemic. In a Raddon survey of nearly 200 financial services executives, 65 percent indicated their organization was offering waivers of NSF and overdraft charges
- Checking accounts are flush with cash. Less consumer spending combined with more than $267 billion in Economic Impact Payments distributed to Americans in April and May contributed to a significant increase in overall checking account balances as shown in the charts below. With 75 percent of payments being distributed by direct deposit, the average checking account balance increased by more than $600 during the first half of 2020
2 – Checking Drives Engagement
Historically, the presence of an active checking account has been the best predictor of a consumer’s primary financial institution (PFI). While this is still the case, it’s not as strong of a predictor as it once was. In 2015, 81 percent of consumers identified their primary financial institution as the one holding their most used checking account. By 2020, the most used checking account defined just 54 percent of primary relationships, according to Raddon Research Insights consumer surveys.
The rise of digital banking and fintech disruptors may be at least partially to blame for this decline, as more consumers unbundle their financial services and redefine the entire PFI concept. However, these changes do not lessen the importance of the checking account to an institution’s overall performance. As shown in the table below, financial institutions that have better checking account penetration tend to have stronger performance in many key financial and depth-of-relationship metrics.
3 – Checking Drives Information
No other banking product can compete with the active checking account for the amount of information that can be extracted. Bill payments and other ACH transactions, withdrawals and deposits, and debit card transactions all offer an unparalleled glimpse into the financial life of a consumer. Information gleaned from this data allows financial institutions to better target relevant products at the most appropriate times. As highlighted in this recent Raddon Report article, mining this type of data and identifying patterns should be an integral part of your marketing strategy.
While the name “checking account” may seem antiquated in a world in which paper checks have been largely supplanted by digital payment methods, don’t overlook the contributions they still make to your organization. Even as some institutions rebrand “checking” to “spend” or “transaction” accounts, these accounts are still the hub of consumers’ financial lives and drive earnings, consumer engagement and information for account issuers.