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The Primary Financial Institution Problem

November 5, 2020
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The COVID-19 pandemic has hastened trends that already existed in consumer banking, like the move to mobile. A more ominous shift risks the continued existence of smaller financial institutions.

Bank Transfer Day, a day to encourage consumers to move their money from large banks and join credit unions instead, occurred on November 5, 2011, in the aftermath of the Great Recession. In the 12 months following, a reported 2.2 million people opened accounts at credit unions. According to Raddon Research, by 2013, 44 percent of U.S. consumers claimed a credit union or community bank as their primary financial institution (PFI), while 33 percent claimed one of the five largest banks (at the time, Bank of America, Chase, Citibank, PNC Bank and Wells Fargo).

Since then, and particularly in the past two years, the big banks have more than regained their footing.  Today, only 12 percent of consumers claim a credit union as their PFI, with an additional 12 percent claiming a community bank. The six largest banks (currently Bank of America, Chase, PNC Bank, Truist, US Bank and Wells Fargo) now control a combined 59 percent of primary financial institution status, as shown in Figure 1.

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In the forthcoming Raddon Research insights study, The 2020 Challenge, we explore what the largest banks are doing to capture so much primary status. Three factors seem to loom largest:

  • The move to mobile. While nearly all institutions offer mobile banking, its importance has risen markedly, particularly during the pandemic, as 68 percent of consumers say they have used mobile banking now, up from only 50 percent in 2018.  Consumers seem to indicate they associate strong mobile banking capabilities with the biggest banks
  • The decline of checking in importance. In 2015, 81 percent of consumers said their primary financial institution was the bank or credit union where they had their most used checking account. Today, only 54 percent say the same thing. Similarly, rates for most used debit card and direct deposit are down as well. Consumers seem to be willing to define their PFI in varied ways, from transaction accounts to convenience to mobile banking, and that variety plays into the hands of the largest banks that can meet all the criteria
  • Customer service.  According to our study, 41 percent of consumers had been contacted by their PFI during the pandemic, as shown in Figure 2. Major banks reached the greatest percentage of their accountholders, while credit unions contacted the fewest. Those touchpoints bring significant value, as seen in Figure 3. Major bank primary customers had a much greater net improvement in opinion of their PFI than did any other group. Credit unions, often praised for their member service, have seen the least improvement from contacting their members

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The upshot of these three trends is that Gen X and millennials have moved toward the major banks in unprecedented ways. Where in 2018, 47 percent of millennials claimed a major bank as their PFI, today that number is a whopping 73 percent. For Gen X consumers, 39 percent had a major bank as their PFI in 2018; two years later, 63 percent do.

The major banks are attracting massive market share among younger consumers, largely as a result of the perception of superior mobile banking. In the process, they are not losing significant levels of loyalty; in fact, they are growing their loyalty by providing stronger customer service during the pandemic. Smaller institutions are facing an enormous crisis, not only from the pandemic, but from losing their accountholder base into oblivion.