What's driving these fintech companies' deposit grabs?

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Investing startups often tout their success with young customers by offering the latest tech and flashiest features, including cryptocurrency trading and artificial intelligence-powered advice.

But some of these companies are now turning to banking basics in an effort to deepen their customer relationships. Upstarts like Aspiration, Wealthfront and Social Finance have all recently released savings accounts and hinted at moving further into the banking sector.

What’s pushing them is a desire to solidify the relationship with their customer base, observers said.

“They are heavily funded, direct-to-consumer companies that now all have customers and are all in a conundrum,” said Lex Sokolin, global director of fintech strategy at Autonomous Research. “They’ve paid to acquire customers and the strategic entry was to acquire a younger customer who is not profitable. They have to monetize millions of users who have a hundredth of the size of assets in other accounts.”

Aspiration’s new Spend and Save account, for example, removes Radius Bank as the company’s back-end bank and offers a cash account with 2% interest on all accounts. Previously, the company offered 0.25% on the first $2,500 in deposits and 1% after that. Wealthfront’s new cash account offers a rate of 2.24% and SoFi’s is 1 basis point higher at 2.25%.

Aspiration CEO Andrei Cherny acknowledged that switching away from Radius was expensive, but argued it made sense in the long run.

“It certainly costs us more,” Cherny said. “A lot of the technology and the larger team adds costs. But ultimately we are bringing in the revenue that was otherwise going to Radius. … I think that economically this is a much better position for Aspiration.”

Another reason for offering banking is that these startups are seeing a demand for better savings accounts in the feedback they receive from customers, according to Jackson Mueller, the Milken Institute’s fintech lead.

“When you look at Robinhood offering a checking account that ended up being a complete failure, a couple 100,000 customers signed up to receive more information within the first couple hours,” Mueller said. “For banks, they have so much data as well in terms of transactions. They should be able to provide these things.”

For fintechs, offering a high-yield savings account is akin to food companies offering coupons at grocery stores, Sokolin said.

“PayPal originally grew on the back of giving people rebates to join PayPal,” Sokolin said. “When I look at the rates and the benefits you get, that is a marketing expense. That is not part of the financial product; that’s part of the acquisition."

"That may or may not work, but eventually, in the long run, these companies want to be the size of JPMorgan Chase and technology first," he continued. "Once they are at that size, they’ll be out of customer-acquisition mode and in customer management and profitability mode. All of these sweetheart deals will get swept away.”

Wealthfront hopes that down the road customers will direct-deposit their paychecks into their accounts.

This kind of cross-selling is a page from the incumbents' playbook, Sokolin said. While traditional institutions have seen somewhere between 5% and 20% of buy-in from cross-selling, they’ll see maybe a half a percent in conversion rates from advertising online. “A 5% cross-sell in your customer segment isn’t a Hail Mary, but it isn’t a bad thing, either,” Sokolin said.

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