The End of Checking As We Know It

Long Live Transactional Accounts!

Will checking accounts go the same way as physical checks? With an annual decline of ~20% it’s probably safe to say that the check’s days are numbered. But still, for most people, the checking account remains a critical staging post for funds that are destined for other purposes. This blog considers the evolution of checking accounts into transactional accounts and why banks need to elevate them as an essential point of brand engagement.

The relationship between consumers and checking accounts is longstanding. There is debate about exactly where and when the first accounts appeared; some experts suggest their roots trace back to Mesopotamia circa 1800 B.C., while others suggest the concept was invented by the Romans around 352 B.C. The idea really caught on in the early 1500s, when Holland became a major center for international trade.

The concept of writing and depositing checks as a method of arranging payments soon spread to England and elsewhere. Checks have certainly been with us for centuries.  But, as anyone in banking must know, a proud heritage is no guarantee of future success. With so much change in banking, will the humble checking account survive?

A checking account is what a checking account does: It offers immediate access to funds and traditionally comes with a physical checkbook. Although still very much in use, checks are in decline everywhere. In the U.K. alone the number checks issued by businesses and consumers has been in steady decline for the last decade, with a steep 20% reduction in 2019 to 272 million.* This pattern is largely replicated around the world. Checks are increasingly viewed as old fashioned, and are rapidly being replaced by alternative payment methods that are more convenient and economical. If checks are moribund, will checking accounts go the same way?

The One Constant is Change …

Checking accounts have already changed significantly since their inception. People access and transfer funds through a choice of banking channels, and thanks to open banking these accounts can be accessed – and payments made – increasingly through third-party apps and aggregated services –  available 24/7 and on a range of devices. Clearly the core purpose of giving individuals instant access to their funds for making payments to others remains relevant.

From a consumer’s perspective, the checking account is still normally the primary account for receiving salary, paying bills, gift-giving, and other miscellaneous everyday uses. From a bank’s perspective, the checking account is a major point of customer brand engagement – the very heart of the banking experience from which everything else flows.

In a modern banking relationship, the checking account is also where a bank can gather data to elevate the customer experience and play a bigger, more active role in the life of its customers. As such, like all aspects of banking, checking accounts are very susceptible to disruptive forces.

Rise of the Challengers

Prior to 2009, the universal drive was towards free banking: At one point 76% of banks offered totally free checking in the U.S., but with regulations and financial reform this dropped to and has hovered around 36-40% over the last 5 years.** Since then, fee structures steadily increased (such as overdraft charges and ATM fees), especially for interest-bearing accounts.

The upward trajectory of checking-related and overdraft fees eventually reached a tipping point a few years ago (largely thanks to challengers), and the tide is now turning into a sea-change. Challenger and neo-banks consistently offer low fee and fee-free alternatives that have proven very attractive to consumers, and now some incumbent banks are following suit with reduced fee structures and the elimination of certain fees altogether to remain competitive.

Open Banking and Customer Empowerment

Open banking marks a new age of consumer sovereignty. Customers have high expectations and expect banking their way. They want easier ways to shop, whether online or in person; tools to help control spend; and accounts that are not at the forefront of our minds, but in the background, supporting the rapid transactional activity to support daily life events.

The overall message is clear: Traditional checking accounts are inadequate in the digital age. The new world requires a fast, dynamic, free way of transacting – and go-forward transactional accounts that seamlessly support the life events of the consumer.

The adoption of open banking is accelerating with one-stop-shop marketplaces, cryptocurrency becoming more mainstream, and personalized banking and wealth management aligned to life events. These will continue to be the main drivers in 2022 and beyond as banking and financial institutions respond to continually evolving customer requirements and expectations. Traditional banks need to keep up as we evolve into the open banking world.

Traditional banks and credit unions are feeling the impact of deposit displacement, with significant funds being diverted from traditional checking accounts to alternative transactional accounts.

It’s worth noting that the Top 10 banks in the U.S. continue to dominate the market. Of those switching accounts:

• 78% switched to or between the big banks ***
• 65% switched to get access to mobile banking ****
• 78% of Americans would not open accounts that don’t provide mobile access ***

Banks with a vision and strategy to improve customer propositions will increase engagement and build loyalty. Think outside the box, and expand your bank’s propositions with shopping tools, cashback offers and other loyalty schemes. And keep in mind that to build enduring success in an open banking environment requires technology that’s also open and flexible. Modern technology empowers banks to get closer to their customers and harness the power of data. In my next blog we’ll consider how to make this happen.

* https://www.ukfinance.org.uk/system/files/UK-Payment-Markets-Report-2020-SUMMARY.pdf

** https://www.ftpartners.com/fintech-research/challenger-banks

*** https://hs.crnrstone.com/whats-going-on-in-banking-2019

**** https://www.gobankingrates.com/banking/banks/americans-dont-know-banking-basics/