How Consumers Are Actually Using Fintech Apps [Research Report]

Chime's Hidden Fees, LendUp Settles, Illinois Bans Lending Over 36% APR

Hey all, Jason here.

Hope your 2021 is off to a great start! Here in the Netherlands, yesterday, a 9:00pm curfew went into effect, which I guess means even more time for me to research, read, and write about fintech.

This week, I’ve gone in a bit of a different direction, and commissioned my own survey panel to better understand how and why consumers use certain “challenger” banking products. Full results below!

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Report: How Are Consumers Really Using Fintech Apps?

Insiders working in banking or fintech tend to think in clear delineations - payments vs. checking account vs. lending.

The reality is that consumers’ financial lives are anything but clearly delineated. This is especially true in the low/moderate income (LMI) and income volatile segments that many consumer fintechs target as customers who are “winnable” from incumbent financial institutions.

To better understand customer attitudes and behaviors, I decided to run my own survey panel focused on six popular fintechs.

Some notes on methodology: I used a site called Pollfish (which uses an approach similar to Google Consumer Surveys) to survey 1,297 respondents (1,000 of whom had used one of six listed fintech apps).

A key shortcoming of either of these is the sampling frame (surveying only online/mobile users) and response bias (where certain kinds of users are more likely to respond than others - skewing the result). Results have been weighted by age and gender to match the US population.

All that said, there is still value in understanding who is using these apps and why, even if caution should be exercised in generalizing these results to the entire population. 

To understand user behavior by app (or app category at least), I screened for respondents who had used one of six popular fintech apps in the past month.

For the purposes of this post, I’ll refer to “payments” apps (Cash App, Venmo) and “banking” apps (Chime, Green Dot, Dave, Varo).

Payments Apps Hold Broad Appeal

Unsurprisingly, Cash App and Venmo are more commonly used, as their payment functionality appeals to a broader audience than the banking apps.

Overall, 77% of respondents had used at least one of the mentioned apps in the past month. Note that subsequent metrics are based only on respondents who had used at least one of these apps in the past month.

Looking at usage by app type, ~52% used only payments apps (presumably as an “accessory” to a traditional bank account); ~38% used payments and banking apps; and ~10% used only banking apps.

Achieving “primary account” status and/or growing “share of wallet” is a concern for each of the fintechs included in the survey given their business models are heavily dependent on transaction fees (interchange or instant deposit/cash out fees).

Do Users Consider Fintech Apps Their “Primary” Account?

So, I was eager to understand to what extent users considered any of these apps to be their “primary” account.

These results admittedly surprised me (and I take them with a grain of salt).

The question asked was if users considered an app to be their primary account that they used for day to day spending. I purposely omitted the word “bank,” which may have colored the results; it seems unlikely that ~50% of those who have used Cash App truly use it as their primary account.

Are Apps Capturing Direct Deposit?

A key path to achieving primacy and growing share of wallet is capturing a user’s direct deposit. Cash App, Venmo, and various banking apps have gone to great lengths to encourage this, particularly for users’ government stimulus payments — with reasonable success. 

Respondents indicate ~62% have had some kind of direct deposit into a payments or banking app; however, in drilling into the “Other” responses, it seems likely there is some confusion about the term “direct deposit,” with many “Other” responses indicating they considered any inbound payment to fall into this category. 

The broader trend -- of more users of banking apps adopting direct deposit vs payments apps -- is logical and should hold. Anecdotal reports of Chime suggest ~50% direct deposit adoption rate, which is consistent with these results.

Many Users Prefer Existing Accounts

The answers from respondents who didn’t consider any of the apps to be their primary account are more telling.

Trust and features are issues for these apps, but the biggest hurdle is convincing users to switch from products and services they’re currently happy with.

“No Fees” Has Broad Appeal (or, it’s easy to sell “free”)

Looking at the features that have attracted users is also revealing.

“No fees” is understandably appealing to everyone - and, no doubt, poses a challenge to these apps’ paths to profitability.

Segmenting by app type (payments vs banking) reveals a more nuanced story, where payments users obviously care about the ease of transferring money, but banking users’ priorities are more dispersed, with even ‘early access to pay’ a top priority for only 17% of respondents.

App Users More Likely to Buy Now, Pay Later

I was also interested to understand to what extent users of these apps use other financial products as complements; for instance, “buy now, pay later” products.

While by no individual BNPL offering is dominant, 48% of respondents reported using one of the named BNPL services for a purchase in the past month (much higher than the general population).

Users of a banking app or of Cash App were more likely to have used a BNPL product vs. Venmo users, likely driven by demographic differences of Venmo users (generally skew higher income/higher credit score).

Finally, for all the positioning of consumer fintech as providing better / cheaper / more ‘transparent’ options to consumers, I was curious to what extent users of these apps still relied on legacy “alternative financial services” -- and the response was surprisingly high.

App Users Still Use “Alternative” Financial Services

The response rate for all of these AFS products is wildly above what is seen in the FDIC’s Economic Inclusion survey (2019, conducted in person or via telephone), which reported just 1.5% of households using payday loans, 1.3% using pawn loans, and 11.9% using money orders, for instance.

From this question alone, it’s unclear to me if these results are due to the sampling frame/response bias, or if users of fintech apps actually are using alternative financial services at such high rates. (For “check cashing,” it’s possible respondents interpreted this to include remote check deposit, rather than fee-based check cashing.)

Opportunities for Fintech Apps

My key take away from these results is perhaps an obvious one: end users, particularly those who have been less well served by big banks, are willing to operate across multiple apps that offer unique benefits in order to conduct certain banking activities while avoiding fees.

However, if use of traditional alternative financial services is anywhere near as widespread as the last question indicates, it suggests fintech apps / “challenger banks” have opportunities to expand their offerings to better meet these user needs (eg BNPL, small-dollar lending, bill payment).

Want the Raw Dataset?

There are plenty of other insights that can be teased from this data set - if you’d like the full cross tabs, drop me an email - it’s the least I can do to support the fintech community!

Other News This Week

Update: LendUp Settles with CFPB

In early December, the CFPB filed suit against online lender LendUp. LendUp quietly settled the matter for $1.25 million ($300,000 redress and $950,000 civil monetary penalty) on January 19th -- likely choosing to put the suit behind them rather than face unknown and potentially greater scrutiny from a Rohit Chopra-led CFPB.

Illinois Bans Loans Over 36% APR

On the last day of the lameduck session of Illinois legislature, it passed the Predatory Loan Prevention Act, which bans open- and close-ended consumer credit products from charging more than 36% APR, as calculated on an “all in” basis akin to the Military APR.

The bill was supported by Lending Club and the Marketplace Lending Association, which includes Affirm, Avant, Sofi, Upstart, and others.

While the law contains an explicit carveout for banks…

“Banks, savings banks, savings and loan associations, credit unions, and insurance companies organized, chartered, or holding a certificate of authority to do business under the laws of this State or any other state or under the laws of the United States are exempt from the provisions of this Act.”

…there is some concern among lenders that partner with banks to write loans above the 36% APR cap that the bill threatens their business model.

Chime’s Hidden Fees

This Axios story claiming Chime earns ~21% of its revenue from customers using out-of-network ATMs made the rounds this week (if you haven’t yet, give it a read).

Without seeing the data reviewed for the story, it’s impossible to determine the accuracy of the claim, but one metric cited in the story seemed to undermine the claim: that an out of network ATM transaction would cost Chime only $0.10 (while charging the user $2.50). 

The bigger takeaway for me is the undermining of one of Chime’s core value propositions - “no fees” - as a meaningful chunk of its users are getting hit for withdrawing cash at out-of-network ATMs.

Reminder: Fintech Growth Summit

I’ll be speaking at Mobile Growth Association’s Fintech Growth Summit on The Evolving Consumer Credit & Payments Landscape. Other speakers hail from Plaid, Credit Karma, Current, and Tally.

Use my code, MIKULA30, to get 30% off your registration.