With banks struggling to remain profitable, digital banks are disrupting the way the industry functions

Suparna Goswami Bhattacharya

June 29, 2015: The one industry which has gone through a sea of transformation in the last decade is the financial industry. It all started with the opening up of ATMs and the addition of online banking option. And now, the physical bank may not exist at all for the concept of online-only banks is fast catching up in countries like China, US and UK.

Basically, financial institutions opting for branchless banking will not have any kind of physical presencein any of the markets. However, they can offer all standard retail banking products, including current accounts, credit cards, savings accounts, personal loans, insurance and mortgages.

With the cost of managing a physical branch increasing and banks struggling to remain profitable, the new entrants in the space are trying their best to disrupt the way the industry functions. In US, Atom Bank, Ally Bank, Bank5 Connectare all internet-only banks with a focus only on smartphone interface. Similarly, in China we have WeBank, which has launched its online-only banking services, while Huangzhou-based MyBank will soon launch a similar service. In fact, the usually conservative China Banking Regulatory Commission has given its nod to these new lenders.

Over the past decade, online banks have established a significant and growing presence in the consumer deposits market. In the UK, First Direct, an internet-based retail bank, has around 1.25 million subscribers while in the US, the Ally Bank has just under 1 million users. Even in Japan, these banks have gained traction.

So what exactly has lead to a spurt in demand for online-only banks when traditional banksoffer online services as well? Though the large traditional banks still control the majority of market share globally, thenew entrants —online-only banks and online lending platforms — are growing quickly and starting to see broader acceptance with better products and more focus on customer service. Lower cost base, similar product portfolio at competitive rates, services tailored specifically to online only engagement are some of the factors leading to growing presence of such banks. In the US, for example, online only banks typically undercut traditional banks on maintenance fees.

“I’d argue that the recent banking scandals, in which the reputations of many leading banks took a hit, creates an opportunity for new, agile online-only players who might be perceived as offering a new approach,” says Windsor Holden, Head of Forecasting & Consulting, Juniper Research.

For online-only banks, with no expensive branches to manage, operating costs are lower and, hence, more profitable. US-based Ally Bank has enjoyed annual double digit growth in both retail deposits and customers, recently surpassing $50 billion in deposits. “Our lower operating costs allow us to pass the savings along to customers in the form of competitive rates, products and services. This customer-centric approach has been a factor in our leading position in the marketplace and overall growth,” says Diane Morais, President and CEO, Ally Bank.

In fact, these banks rely a lot on analytics to improve customer experience. “Removing the physical branch is only the beginning.  True value is driven by better analytics and technology that allows you to cater products for specific individuals and provide a better experience than one in the branch,” remarks Al Goldstein, CEO, Avant, a Chicago-based startup which provides online personal loans. The key is to create real time processes and transparency to empower the consumer rather than forcing them through cumbersome steps (online or brick & mortar), says Goldstein.

These banks realise that convenience is important to customers. “In addition to the latest digital technology for phone, tablet and computer that allows customers to conduct banking activities at anytime from anywhere, we offer live 24/7 customer care via phone or web chat,” says Morais.

So, will all banks go this way or are online-only banks just a wave that will soon lose its force? Even the most optimistic of the lot agree that there is still time till these banks completely replace the traditional ones. “Over time, we will take a massive amount of market share from traditional institutions.  I would predict 50% over the next 10-20 years,” says Goldstein.

“Feasible, yes, but not for decades. You need to provide engagement channels to cater to all your customers. If you remove physical locations, you run the risk of seeing your customers churn elsewhere. In Western markets, I’d say it’s highly unlikely to occur before most of those who predate ‘Generation Y’ – and who have less of an affinity with digital channels – have passed away,” remarks Holden.

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