Earlier quoted context omitted.
It's a huge detriment to security. You can break sets of 5-7 characters at a time and combine them instead of having to break the entire password at once.
Seems like a tradeoff. What's more likely - that a bank loses its password database, or that some customers find themselves infected with keyloggers? Also in any bank that's even remotely sane this is just one leg of a 2FA; often a kind of a "delayed" 2FA - where one factor is enough to get you mostly "read-only" access, and any important changes or wiring actual money requires one-time SMS codes.
Any bank that's remotely sane with regards to website security (probably rather few of them) doesn't do this at all and uses standard forms of 2FA. This one doesn't even protect against keyloggers, because they can combine the characters from multiple logins to get the full password (guessing the remaining ones if necessary) and because the password might be reused somewhere else, and they try this at the expense of user convenience (counting characters is annoying) and security in the event of a leak involving password hashes (if they hashed them at all).