Why People Don't Switch Banks Anymore

(Forbes) -- According to JD Power's 2019 U.S. Retail Banking Satisfaction Study, just 4% of consumers switched primary banks in 2018.

This was the lowest level of switching ever recorded by the research firm, down from a 2016 high of 8%.

According to American Banker:

Customers are staying put because banks, particularly large ones, have made banking so convenient that account holders are shrugging off any concerns they may have."

I disagree.

Deposit Displacement is Diminishing the Importance of Checking Account

Checking accounts have become "paycheck motels"--temporary places for people's money to stay before it moves on to bigger and better places.

The cause of this is deposit displacement: the displacement, or diversion, of funds from traditional accounts (i.e., checking) to alternative accounts.

Examples of deposit displacement include:

• Health savings accounts. Nearly 25 million Americans have a health savings account (HSA) with more than $44 billion sitting in those accounts. That’s $44 billion that used to go into checking accounts, but now gets diverted—typically in the payroll processing process—before the money even gets to the checking account.
• Person-to-person (P2P) payments apps. In 2018, Venmo processed $62 billion in P2P payments, with Square Cash doing about $30 billion (according to an estimate by Cornerstone Advisors). Users of these two services leave so much money in those “accounts” that both services are branching out into other types of banking products.
• Merchant apps. One in four consumers have the Starbucks mobile app on their mobile devices, and a quarter of them frequently load funds onto the app. That adds up to a lot of money--at least $2 billion. Other merchants have gotten the hint. A third of all consumers have the Walmart on their smartphones and a quarter of them load funds frequently. You can see where this is going.
• Robo-advisor tools. Consulting firm AT Kearney estimates that by 2020, consumers will have more than $2 trillion sitting in robo-advisor accounts--half of which it estimates will come from funds currently sitting in deposit accounts.
• Savings tools. While banks offer savings accounts, new fintech providers have launched savings services that help people save. Consumers have saved more than $5 billion in 2018 using services like Acorns and Stash--with some of those savings moving to institutions other than the consumers' primary banks.
• Digital banks. A quarter of Millennials have opened accounts with digital banks like Ally and Marcus. The top reasons why: To get better debit card rewards and better interest rates. The result: Consumers keep more than $125 billion in these digital banks.

Let's Not Forget Amazon

This list of deposit displacement examples doesn't include the potential Amazon Effect: Roughly 40% of 30-something Millennials and Gen Xers would open a fee-based Amazon checking account bundled with services like cell phone damage protection and ID theft protection for a $5 to $10 monthly fee.

Based on consumers' self-reported levels of checking account deposits, banks could lose about $100 billion in the wake of an Amazon checking account launch.

What's important to note there are those three-quarters of all consumers who expressed an intention to open an Amazon checking account said they would keep their existing checking accounts open.

Consumers Don't Close Out Accounts--They Just Add New Ones

Bank switching is on the decline because money movement is so easy, not because large banks have made banking convenient.

Banks--particularly the large ones--could try to stem this tide by charging for the transfer of money, but good luck with that. You can imagine the outrage on the part of consumers and a few high-profile politicians that would ensure if that happens.

There's no question that the big banks have made banking more convenient. S&P's analysis of 15 advanced mobile banking features found that the megabanks (assets>$1 trillion) provide an average of 13 features.

In contrast, banks with $50 billion to $1 trillion in assets offer an average of eight features, and banks in the $10 billion to $50 billion range offer just 5 advanced features.

While that does help the big banks attract new customers, the reality is that attrition is low across all banks.

Easy money movement has eliminated the need for consumers to close out accounts--and diminished the importance of checking accounts.