How Citizens Financial used an iPhone plan to create a nationwide digital bank

Citizens Financial Group Inc. launched its Citizens Pay iPhone upgrade plan in 2015 as an early form of the “buy now, pay later” concept that’s in vogue in the payment space.

The idea was to take the Citizens CFG,
Brand as a credit provider and combine it with Apple’s AAPL,
iPhone to help customers avoid hours of rush hour queues that usually happen when a new iPhone is released.

“We helped introduce a digital-first way to buy iPhones so people can get in line digitally,” said Brendan Coughlin, executive vice president and head of consumer banking at Citizens Financial Group. “This program has given us national recognition.”

The effort helped transform it into a coast-to-coast digital bank under the Citizens Access brand, though it only has branches in the eastern United States. Citizens now has three million customers in its regional bank branches and more than three million in its national non-industry customer base.

Citizens Access’ digital banking unit is part of a seismic shift towards mobile financial services as banking technology has moved from its origins in mainframes behind bank walls to the cloud.

With lower barriers to entry for offering financial services, everyone seems to want to get into banking.

Goldman Sachs GS,
The firm may be known as a white-shoe M&A investment bank, but it has also gained prominence by offering traditional retail banking services under its Marcus brand.

Starbucks Corp. SBUX,
would qualify as a major bank if it only counted the amount of money stored in its customers’ loyalty card accounts.

Also read: Starbucks has more customer funds on cards than many banks have in deposits

Apple offers tons of financial services on its platform — with more said to be coming to the home.

Walmart Inc. WMT,
has been talking about expanding its consumer financial services offering for years.

While the giants Wells Fargo & Co. WFC,
JPMorgan Chase & Co. JPM,
Bank of America BAC,
or Citigroup C,
continue to operate the majority of branches, the financial services battleground has shifted to the internet, with national and international dominance all but tangible.

As the saying goes, you have to fish where the fish are. And the fish that want banks are mostly swimming around on their mobile devices downloading apps from Zelle, Chime Financial Inc., Square Inc., or SoFi Technologies Inc. SOFI.

The opportunity to create a dominant, national digital bank offering online services continues to drive both lenders and fintech competitors to spend billions on technology and marketing.

Although big challengers like SoFi and Square are often referred to as neo-banks, all banks are now neo-banks in some sense.

“Banks are becoming utilities for money movement and regulatory purposes, and other brands are taking over the customer relationship,” said Kathryn Petralia, co-founder of Kabbage, a lending platform acquired by American Express Co. AXP in 2020.
“Consumers don’t care which bank the bank account is held with. They only work with Chime. In the long term, it will erode the customer relationships of the big banks.”

Banks also face major infrastructure challenges and processes to deal with regulators.

“It’s not that they don’t want to do anything, it’s just harder for the banks,” Petralia said. “Fintechs are regulated for the product they offer. If you’re in the money transfer or payment processing business, you have rules for that. But you are not regulated as extensively as a bank. Most just do one thing – and then gradually add one more service at a time.”

To stay competitive, traditional banks continue to pour money into technology, partner with fintechs, or sometimes acquire or own it either alone or with a group.

Bank of America Corp. BAC,
Truist Financial Corp. TFC,
Capital One Financial Corp. COF,
JPMorgan Chase & Co. JPM,
US Bank USB,
and Wells Fargo jointly own Early Warning Services LLC, which operates, for example, the popular cell digital payment service.

The COVID-19 pandemic accelerated the trend. According to a study from the end of 2021, about one in three consumers said they started using digital payment tools in the last six months opinion poll from JPMorgan Chase on banking preferences.

A 2020 JPMorgan survey amid the COVID-19 lockdown found that 54% of consumers said they were using digital banking tools more than they did in 2019 because of the pandemic.

When last checked, Chase had 60.2 million digitally active customers as of March 31, up 6% from the year-ago period, and 46.5 million mobile active customers, up 11%.

Rhett Roberts, CEO of LoanPro Software LLC, a tech company streamlining U.S. lenders’ lending and collection capabilities, said fintechs have managed to attract customers, but many of them are yet to turn a profit. However, they have forced banks to innovate and adapt more quickly to customer demands, such as B. reducing overdraft fees, he said.

“Regardless of the success of neo-banks, they have forced traditional financial firms to be more agile and build better products,” Roberts said. “Neobanks meet customers where they are … customers who like skateboarding or who went to university. The successful ones focus on the user experience.”

All this noise around banking has caught the attention of regulators.

To level the playing field between banks and non-banks, the Consumer Financial Protection Bureau (CFPB) said in April it would use a largely unused legal provision of the Dodd-Frank legislation to investigate non-bank financial firms that pose risks to consumers.

“This authority gives us the critical agility to act as quickly as the market, allowing us to conduct audits of financial companies that pose risks to consumers and stop harm before it spreads,” said CFPB Director Rohit Chopra . The CFPB also invites public comments on a rule of procedure to make its review process more transparent.

Faced with more agile competition, banks have turned to a tried-and-true tactic: build mass through acquisitions.

Ellen Hazen, chief market strategist and portfolio manager at FL Putnam Investment Management Co., said banks’ desire to become national digital brands was a big motivator behind the creation of Truist Bank in 2019 from BB&T Corp. and SunTrust Banks.

“This will increasingly drive M&A in the banking sector,” said Hazen. “This will continue to be very important for banks.”

Play on many levels

Banks are finding themselves reinventing their expensive brick-and-mortar retail network to better adapt to the digital world.

Citizen’s acquisition of 80 East Coast branches from HSBC includes more than 60 banks in the New York City area that have been rebranded.

“We believe in branch banking, but in a digitally guided way,” said Citizens executive Brendan Coughlin. “If you add brick-and-mortar locations, the purpose should be to offer sophisticated financial planning and advisory services.”

Digital banking allows banks to maintain a thinner branch network while incorporating face-to-face and interactive ATM kiosks.

While Citizens traces its origins back to 1828 in Providence, RI, its relationship with Apple helped launch its digital business earlier than many.

Citizens’ journey began more than seven years ago when Coughlin was working on banking products for college students. Originally, Citizens helped Apple set up a loan program to get MacBooks into the hands of more students. By 2015, that effort morphed into Citizens Pay credits for iPhones.

Today, the bank’s two major digital entities include Citizens Pay – the bank’s wholesale financing program with some 45 major customers including Microsoft Corp. MSFT,
— and Citizens Access, its national digital bank.

Customers who purchased a mobile device or Xbox with Citizens will gain access to Citizens Access, the bank’s platform that offers deposits, student loan refinance and mortgages, and plans to add checking account services.

Coughlin said Citizens’ status as a regulated bank offers a structural and security advantage over fintechs. This is because the bank holds loans on its own balance sheet rather than selling them in the lending market, meaning a private investor like a hedge fund can end up holding the loan from a fintech.

“We’re willing to take the risk and stand behind the risk,” Coughlin said. “If you don’t have a banking license, you don’t have a bank balance sheet and you usually can’t hold the loans in the same way… Your product innovation is driven by a capital markets style of holding debt.”

Just a decade ago, banking convenience was defined by the density of physical locations like branches and ATMs.

Now it’s all about digital presence, especially for people under 20 or 30 years old. This target group remains available for both traditional banks and a growing universe of fintech challengers.

“The intensity of the competition is increasing,” Coughlin said. “It will be the banks and the fintechs that create more value for customers and that can scale that will ultimately win.” How Citizens Financial used an iPhone plan to create a nationwide digital bank

Brian Lowry

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