There’s a growing competition in financial services for the attention of lower-income households, and the battle is intensifying between traditional banks and neobanks. While big banks have historically dominated, neobanks, or digital-only FinTechs, are carving out a significant share of the market, particularly among households earning $50,000 or less annually.
Neobanks Are Gaining Ground
Neobanks, like Chime, Varo, and Dave, have become increasingly popular with lower-income consumers, offering easy access to services such as cash advances and fee-free overdrafts. These FinTechs have captured a 47% share of new account openings in the first half of 2023, up from 36% in 2020. Their approach focuses on convenience, minimal fees, and mobile-first banking solutions that cater to the financial realities of lower-income customers.
- Chime: Offers fee-free overdrafts and has reportedly “spotted” customers $30 billion by early 2024.
- Dave: Targets households earning $25,000 to $60,000 annually and provides cash advances deposited directly into users’ checking accounts.
- Varo: Provides credit-building products and serves around 7 million customers with cash advance offerings.
These digital-first banks offer lower-income customers access to banking tools with fewer fees, aiming to build loyalty through financial inclusion and accessibility.
Traditional Banks Expand Their Footprint
In response, major banks like JPMorgan Chase and Bank of America are revamping their strategies. JPMorgan is opening 100 new branches in lower-income areas, specifically targeting regions underserved by traditional banking services. These branches aim to fill the “banking deserts” identified by the Federal Reserve, which are locations where brick-and-mortar banks are out of reach for millions of Americans.
The opening of physical branches in rural and urban communities addresses a key gap, as many lower-income households still rely on paper-based payments, like cash and checks. These new branches, often doubling as financial education centers, offer workshops for small businesses and financial literacy, combining in-person banking with mobile app expansions.
- JPMorgan Chase: The new branches provide access to traditional banking, while expanding digital app capabilities to offer installment payments and eliminate overdraft fees.
- Bank of America: Also expanding its mobile offerings, helping customers with digital access to various services, including installment payments.
Bridging the Digital Divide
The Federal Reserve has found that while most U.S. households have a checking or savings account, lower-income households tend to use more traditional payment methods such as cash and checks. This group is also less likely to use digital payments due to barriers like limited internet access or less acceptance of digital payments by retailers.
Financial inclusion is crucial for reducing income inequality. With only 4.5% of the population being unbanked, access to both digital and traditional banking options can help lower-income households avoid predatory lending and high-cost financing. Offering a mix of in-person services with expanded digital tools could be key to maintaining customer loyalty for big banks.
Different Paths to Financial Inclusion
Banks and neobanks are using different strategies to win over lower-income consumers:
- Neobanks: Focus on digital solutions, low fees, and convenience, often bypassing the need for physical branches entirely. Their products are designed for tech-savvy users, offering credit-building tools and instant access to funds with minimal hassle.
- Traditional Banks: Leverage their long-standing presence and trust, expanding into underserved areas with a physical footprint. In addition to mobile apps, they offer education through their branches to improve financial literacy and access to traditional banking services.
As these institutions compete for the loyalty of lower-income consumers, the differing approaches highlight the evolving landscape of financial services. While neobanks appeal to customers seeking digital ease and flexibility, traditional banks are reasserting their dominance by providing a mix of physical access, education, and digital tools to build long-term relationships with these consumers.