What Credit Unions Are Learning From Venmo and Zelle

The other day, I heard from a woman who is completely frustrated with her banking experience. She has one account at her local bank and another at a global institution. While she loves the neighborhood feel and personalization of the smaller bank, she was quick to point out the disparity of mobile features between the institutions. One provided her the ability to make her car payment, pay her cable bill and send money to her daughter’s account at another bank using Zelle. The other, a smaller institution, offered little in terms of these convenient features. As a result, she wastes a lot of time navigating between these two banks. If her local bank offered better digital services, she said she’d be happy to give up the other account.

Her complaint is emblematic of the challenge facing smaller banks and credit unions: Consumers want to bank local but can’t bring themselves to sacrifice the convenience of full-service digital banking. This disconnect between consumer desire and the type of banking experience smaller institutions can afford to provide poses an existential threat to regional banks and credit unions.

It’s no secret that in the past 10 years, banking has undergone a tectonic shift. Consumer expectations have been irrevocably altered by Amazon and other online services; they now demand financial transactions that are frictionless, secure and nearly instantaneous. With the advent of Venmo, which profoundly disrupted the financial world with a fun, intuitive and easy platform, consumers became less willing to accept digital banking in which P2P transfers were difficult and money movement took days. The big banks responded with Zelle, and since then the digital payment battlefield has been overwhelmingly dominated by fintech startups and the top 25 banks.

There are over 7,500 banks in the U.S. alone, and the middle market is facing enormous pressure to follow the leaders. According to a July company report, 29 financial institutions are live on the Zelle Network, with an additional 119 under contract – representing 56% of the U.S. demand-deposit accounts market. In the second quarter of 2018, Zelle handled 100 million transactions, totaling $28 billion. During the same period, Venmo reported $14.2 billion in payments. In this new ecosystem, institutions without digital capabilities look positively prehistoric to consumers.

Traditionally, the cost of investing in cutting-edge technology has posed an insurmountable barrier to entry for smaller institutions, particularly credit unions, and that’s why they rely on a mash-up of various legacy digital services, and payment and money movement providers. But the latter are often rigid, cookie-cutter solutions, which creates friction in the user experience and prevents an institution from creating a unique, fully integrated experience for its customers or members.

The possibilities of a truly custom, frictionless banking app are tremendously exciting. For example, credit unions can create a user experience as fun and youth-friendly as Venmo by allowing members to send emojis, selfies or even video thank-you notes with each P2P transfer. To encourage savings, the app could be GPS-sensitive, so every time a member leaves their home or office, a certain amount of money could be automatically transferred from their checking to their savings account. The app could also highlight the institution’s local community outreach efforts, send personalized notes on members’ birthdays, and swiftly connect members with questions to local branches rather than sending them to chatbots or call centers. Ultimately, the goal is to make banking more convenient, simple and seamless for members.

The need for local and regional financial institutions to challenge the digital supremacy of the big banks is urgent. The shift from in-person to digital-based banking is irreversible and gaining momentum; according to a report from NACHA, P2P transactions totaled $29.4 million in the second quarter, a 24.1% increase year-over-year. Moreover, financial institutions rarely get a second chance to woo a consumer they’ve lost due to a lack of mobile functionality. A 2018 Javelin study reported that 43% of millennials have abandoned their institution’s mobile app because they found it too cumbersome, labor-intensive or slow. Having given up on the app, the next step might be for them to jettison the institution altogether.

Meanwhile, members of Generation Z, who are now entering the workforce and opening their first accounts, have been raised with the expectation that money should move as quickly and securely as an Amazon purchase. But it’s not just young people who demand easy, instant financial transactions. According to that same Javelin study, adults over 40 use online banking at nearly the same rate as millennials, and are steadily embracing digital banking.

In the wake of the 2008 crash and subsequent big bank scandals, there is a genuine consumer hunger to support smaller banks and credit unions that feel more human, community-oriented and ethically sound. CUNA Mutual Group’s 2017 Credit Union Report noted a persistent rise in credit union membership, which many industry leaders attribute to their consumer-centric culture, and customer displeasure with impersonal and aggressive national banks. However, the attraction of a convenient digital experience frequently outweighs other concerns; in an S&P Mobile Money survey, over 50% of respondents said they would switch financial institutions for a better mobile banking app.

The bottom line is that no consumer, having experienced the ease of use of Venmo or Zelle – or even Amazon – will be satisfied with traditional banking for their everyday transactions. It’s not a question of if they will abandon their local bank or credit union, but when. Eventually, the benefits of knowing the branch manager by name or feeling good about supporting a local business will be outweighed by the inconvenience of using 20th century technology in a 21st century economy.

By offering consumers the same digital innovations and accessibility as their larger competitors, smaller institutions will not only level the playing field, they’ll have a competitive advantage. Then, consumers with the same complaints as the woman I met the other day will use a local bank not in spite of its digital offerings, but because of them.

Jeffery Kendall is SVP and General Manager, Global Banking and Financial Solutions for Kony DBX. He can be reached at jeffery.kendall@kony.com.