Apps, Cryptocurrency, and Even the Starbucks Card: Deposit Fragmentation has been on a decades-long mission to bring down banking—and it’s still far from done.

With the news of the failure of the Silicon Valley Bank, people are wondering about the safety of our financial institutions. But the reality is, banks fail surprisingly often. The difference with SVB is that its sudden demise has affected a large number famous brands, startups and venture capital firms who fully trust their financial partners. And there is concern that the “herd mentality” could cause other companies to start withdrawing deposits from other financial institutions, creating a domino effect.

So should we care? Yes and no.

The reason banks fund the Federal Deposit Insurance Corporation (FDIC) is to protect against the same situations as Silicon Valley Banks. News Reports are showing that all depositors should get their deposits back without asking for a tax-funded bailout from the Americans. So in the short term, this will (hopefully) be a bright spot on the financial radar and cause great inconvenience to those affected, but it won’t engulf the entire economy.

But what about in the long run? Are the banks healthy?

That is a more complicated question. Over the past 10 years, many non-traditional financial institutions have emerged. We have companies like Robinhood and Acorn, mobile banks like SOFI, Chime, GO2Bank and even crypto. Many consumers are loading their paychecks onto prepaid debit cards that aren’t suitable for traditional banks.

Perhaps surprisingly, even retail apps like StarbucksChick-fil-A, online gaming apps and more are siphoning money from traditional banks.

Deposits are being heavily fragmented and fewer are going to traditional financial institutions. Traditional banks and credit unions have experienced a wave of deposit withdrawals and the consequences are starting to show.

market fragmentation Not It’s all the more worrisome when banks are full of stimulus checks and PPP money. According to the Federal Reserve, consumers save more money during a pandemic like never before as the cost of travel, commuting, shopping, entertainment and other expenses plummet, as well as by saving what they get in the COVID stimulus check- 19.

In fact, during this time, personal savings skyrocketed, with the Fed estimating that American households accumulated about Saving $2.3 trillion in 2020 and through the summer of 2021. All of this has fueled significant institutional growth with historically high lending volumes.

But by the winter of 2021, it was reported that these savings were fallespecially among lower income families who are using these emergency funds to make ends meet.

Soon after, in 2022, the decision to raise rates had hovered until that point. close to zero. Rising interest rates were designed to tame inflation, but they also created a new slowdown in home purchases, discretionary spending, mortgages and revenue streams for banks, creating a period of sluggish growth. abnormal stagnation.

More worrisome – some traditional financial institutions have appeared complacent, despite this shift in financial dynamics. A tumultuous economy, lingering fears of a recession and growing skepticism from businesses and consumers following recent bank bankruptcies mean there’s even less money left. send more to fill the growing gap caused by fragmentation.

Like a piece of glass, once broken, the pieces cannot be put back together. We will not subdivide the banking industry and reduce deposit spreads by eliminating other financing options.

Banks must consider other strategies to attract returning customers. Tactics like personalized savings plans, attractive mortgage offers, and meeting customer needs at the moment of opportunity will be important. They need to improve customer engagement, provide rewards for strong customers, mark attrition faster, and create reasons for customers to stay and grow with the organization.

The recent failures of banks are a warning sign and an example of the impact of the fragmented deposit market on traditional banks and credit unions. Complacency will only lead to further erosion of loyalty and deposits, leaving literally countless opportunities for smaller, nimble challengers to grab.

James White is the general manager of banking at Total Expert.

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