There’s a commonality in financial services — for brick-and-mortar players and for several FinTechs, though the approach may differ: Serving the needs of lower-income households.
The big banks have lost at least some share to neobanks — FinTechs that have been able to carve out a niche serving households earning roughly $50,000 or less.
Digital banks garnered a 47% share of new account openings in the first half of 2023, up from 36% in 2020. Traditional banks’ strategy, to capture some share of new account openings again, rests on building out a physical footprint that has been extant for decades — this time building branches where they’d not been before — opens up the competition for lower-income households on a new front.
As noted here, another report from the Federal Reserve identified the rise of “banking deserts” in the U.S., affecting 12 million Americans, marked by a relatively lower accessibility of brick-and-mortar locations. These are locations where banks are outside a certain radius: two miles for urban communities, five miles for suburban communities and 10 miles for rural towns.
The news that JPMorgan would be opening 100 new branches in lower-income areas — chiefly in rural and urban locations — seeks to seed at least some of those deserts. The branches are reportedly also hosting small business and literary workshops.
The branch approach, we note, speaks to the use of paper-based and other arguably analog approaches to payments (cash, checks, documents) that the Fed discussed in another paper.
A recent report by the Federal Reserve of Kansas City found that just about all U.S households have a checking or savings account, or alternatively, use apps such as PayPal or Cash App. Lower-income consumers tend to use cash or checks more often than their more affluent counterparts. And generally speaking, the Fed wrote, a lower share of digital payments “suggests that lower-income banked consumers may face some barriers to using digital payments, such as less acceptance of digital payments by their transaction counterparties, and lack of internet or mobile phone access to make digital payments.”
JPMorgan and other banks that are also opening financial centers — such as Bank of America — also have been broadening their mobile and digital app presence, offering installment payments and curbing overdraft fees.
Fed data state that only about 4.5% of the population is truly “unbanked” — so financial inclusion means having access to a broadening range of options, and income inequality is reduced. Inclusion has a positive ripple effect on income itself, as households have more potential to escape the vagaries of predatory lending or other expensive financing options.
The Different Approaches
There’s a bit of cross-current here, where banks and FinTechs can and do vie for the loyalty of lower-income consumers but through different approaches.
The branch-as-education center, combined with mobile outreach, bumps up against FinTechs such as Dave, Varo and Chime, digital-only banks that also have products and services geared toward lower-income consumers and expanding access to credit and other offerings. Dave, for example, finds its target client in households earning $25,000 to $60,000 per year, and offers cash advances deposited directly into Dave checking accounts. Monthly transacting members were up 18% year over year, per its latest earnings report. Varo also offers cash advance and credit building products and services to a reported 7 million customers; Chime has said its fee-free overdraft has “spotted” customers $30 billion as of the beginning of this month.
