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Successful financial technology (fintech) innovators are not directly competing for traditional checking or savings accounts. Instead, they’ve discovered a powerful strategic advantage: delivering integrated payment experiences that seamlessly combine debit cards, buy now pay later (BNPL) options, digital wallets, and peer-to-peer (P2P) transfers into unified platforms.
Recent data from J.D. Power reveals that this “deposit disruption” is already leading to measurable customer attrition for traditional financial institutions. Despite this clear trend, many banking executives hold outdated beliefs about who uses these modern payment products and why. Banks that fail to adapt and integrate competitive debit rewards, flexible BNPL solutions, and advanced payment features risk accelerating customer losses, making decisive action critical to defending their deposit bases.
Payments: The New Gateway to Primary Banking Relationships
Fintechs have acutely identified and exploited a fundamental vulnerability: payments can serve as the direct pathway to establishing primary deposit relationships. As Sean Gelles, Vice President of Banking and Payments Intelligence at J.D. Power, explains, “What fintechs did is they realized that payments were a backdoor to the actual deposit relationship and they exploited that. The brand that can get in there and control that everyday spending and everyday transacting is very much a threat to the incumbent.”
The severity of this threat is not just theoretical; it’s measurable and intensifying. J.D. Power’s extensive payments data and churn studies confirm that fintechs are systematically drawing customers away from traditional banks by offering what Gelles terms “full spectrum” financial applications. These innovative platforms merge essential payment tools—debit cards, BNPL functionality, digital wallets, and P2P transfers—into cohesive, user-friendly experiences that many banks have yet to fully emulate.
Crucially, this is an act of encroachment, not direct conversion. Fintechs are not pressuring consumers to close existing bank accounts. They are simply providing superior payment capabilities that gradually redirect primary financial activities away from traditional institutions. By the time banks recognize the resulting deposit drain, the damage to the customer relationship is often already substantial.
The rapid pace of fintech innovation creates a significant challenge. Large banks, by nature, often iterate slowly, frequently viewing payment advancements as mere digital add-ons rather than strategic imperatives. Fintechs, unburdened by legacy systems, can deploy new products swiftly as opportunities emerge. Gelles warns, “That’s going to be tough. We’re going to see some tumultuous years ahead.”
Three Costly Myths Banks Must Abandon
Many banking executives operate under misconceptions that directly contribute to their competitive disadvantages. Gelles highlights three pervasive myths that J.D. Power data conclusively disproves:
Myth 1: BNPL Users Are “Lower-End” Consumers Banks Don’t Need to Prioritize
Many senior banking leaders mistakenly believe that buy now pay later is exclusively for financially stressed individuals or younger demographics outside their core customer base. However, the data paints a different picture. “Buy now pay later consumers are increasingly looking like your average American, your average U.S. consumer,” Gelles states. “They’re pretty much identical. We’re seeing buy now pay later become mainstream.” While younger demographics may have pioneered its adoption, BNPL has transcended age and income brackets. Today’s typical user makes deliberate payment choices for specific purchases. Banks that once dismissed this segment as unprofitable are now losing valuable mainstream customers they previously considered secure.
Myth 2: BNPL Users Cannot Qualify for Traditional Credit Cards
This assumption, in particular, surprises Gelles, given the available evidence. “Most buy now pay later users already have credit cards,” he emphasizes. “They’re using buy now pay later because they feel it’s a more competitive product for the use case they have in front of them.” Consumers are choosing BNPL because it offers superior value for certain transactions, citing its cost-effectiveness, predictability, transparency, and enhanced budgeting control. Considering that 50% of Americans do not pay off their credit cards monthly, a fixed BNPL loan with a known cost often appears as a more responsible choice compared to the uncertain interest of a revolving credit card. “It’s not that these consumers are irresponsible,” Gelles clarifies. “It’s actually that they’re being fiscally responsible. That’s why they want to use buy now pay later. That’s why they want to use debit cards.”
Myth 3: Debit Card Experiences Are a Commodity and Don’t Matter
Perhaps the most dangerous misconception is the belief among many incumbent executives that debit cards are undifferentiated products largely forgotten by customers. “When you look at the J.D. Power data, debit cards are the most frequently used payment method in the United States,” Gelles reveals. “It’s used more frequently than cash and credit cards.” Savvy fintechs recognize this reality and are leveraging it. They offer highly differentiated debit cards featuring compelling rewards programs, intuitive budgeting tools, and integrated functionalities like embedded BNPL. Companies like Affirm and Klarna have even designed debit cards with built-in installment payment capabilities. These are not minor product enhancements; they are strategic instruments for capturing and retaining primary banking relationships. “To ignore that debit card experience is perilous,” Gelles warns, “because that’s how the challengers are getting in, that’s how they’re unseating the incumbents.”
The Incumbent Response Gap
Currently, only three of the top ten U.S. banks by deposits provide fixed installment purchase plans that genuinely compete with buy now pay later offerings. Furthermore, not all of these aggressively market their solutions. While most banks now offer Zelle or similar P2P capabilities, they often treat them as isolated features rather than strategic tools. They are available within the app but rarely promoted with substantial marketing investment.
“It’s in the app, it’s there, and you’re one and done,” Gelles notes. This passive approach reflects a fundamental misunderstanding of the competitive landscape. Fintechs view payment features as crucial customer acquisition and retention tools, worthy of significant marketing investment. Banks, by contrast, frequently treat them as mere table stakes functionality requiring minimal promotion.
The consequences are evident in churn data. Banks that actively match fintech payment offerings and market them effectively are successfully defending their deposit bases. Those that hesitate are experiencing measurably higher attrition rates. “The brands that are staying ahead of this and that are meeting these fintechs head on, they’re not suffering as much from the attrition,” Gelles observes. “The ones that are dragging their feet are.” Some executives believe they still have ample time to catch up, but Gelles expresses surprise at the slow pace of many incumbents. The window for comfortable adaptation is rapidly closing as consumer behavior shifts fundamentally, and fintechs move quickly to solidify these new patterns.
Defending Against Disruption: A Path Forward for Banks
Banks are not powerless against this disruption. Institutions that are successfully defending their positions share common characteristics:
- They recognize payments as a strategic imperative, not just a tactical feature.
- They invest meaningfully in developing competitive, full-spectrum payment experiences.
- They aggressively market these capabilities, mirroring the proactive approach of fintechs.
The technical requirements are clear: integrated debit rewards programs, embedded or partnered BNPL functionality, strategic promotion of P2P and account-to-account transfer capabilities, and unified app experiences that seamlessly combine these features. The cultural shifts required may be even more demanding, demanding that payment innovation be treated as a survival necessity rather than a mere feature enhancement project.
Looking ahead three to five years, Gelles identifies an additional wave of disruption stemming from AI-powered shopping agents. Platforms like PayPal and Samsung Wallet are integrating AI shopping assistants directly into their apps. While this represents a secondary wave following the current payment disruption, it underscores the continuous evolution of the financial landscape.
Source: thefinancialbrand.com