Direct banks have become a popular means of driving deposit growth to underpin lending, and to meet customer’s increasingly demanding expectations for an on-demand, digital and mobile banking experience. Despite the surge in direct banks over the last two years, this trend is still in its infancy–particularly as financial institutions continue to battle the soaring costs of deposits in a rising interest rate environment.
The concept of direct banking – an online and mobile only bank – deliver serious bottom-line benefits, for those with a well-defined strategy. To help you arrive at the right decision for your financial institution, consider these five key facts about what direct banks can offer, and why they’ve become so prevalent.
1) Direct banks fuel deposit growth.
Direct banks offer the speed to market, reduced overhead, lower acquisition costs and expedited onboarding that can empower a bank to fast-track deposit acquisition, and expand their market and customer base. There’s also evidence that customer attrition may be lower with direct banks; they aren’t as subject to the life events that tend to trigger closed accounts.
The potential to rapidly drive deposit growth and support improved deposit/loan ratios for the parent organization was a primary objective for two of our direct bank clients who launched in the last year. In short time, both have already built wildly successful direct banks.
2) Customers know they’re king.
The combination of mobile and digital banking and payment technology offered by traditional financial institutions, fintech disruptors and direct banks over the years has shown customers that they don’t have to settle for less than a customer-centric bank experience.
Across all age groups, consumers surveyed as part of FIS 2018 PACE (Performing Against Customer Expectations) research said trust, simplicity, digital self-service and convenient locationswere the most important components to their banking relationship.
3) Direct banks don’t have to cause channel conflict.
Launching a direct bank without proper parameters could indeed mean existing customers swap accounts to earn a higher deposit interest rate than their current product offers –but it doesn’t have to. Financial institutions that have a well-defined strategy can proactively ensure they don’t cannibalize their traditional account models with their direct bank. They can also determine whether they’ll stand up their own direct – unencumbered by the existing technology within the bank. It can be as integrated into their ecosystem, or as independent, as the bank chooses.
Some neobanks also realize they can more effectively penetrate key markets with omnichannel based banking experience. A café-style branch location where a significant portion of the direct bank prospects and customers live doesn’t require the costs, planning or infrastructure as a full-scale branch model, but may help direct bank customers gain the peace of mind they need to expand their relationship to include more sophisticated products or services.
4) Direct banks support financial inclusion.
Direct banks give financial institutions the ability to present a new brand identity to an untapped portion of the market, and reach customers who are outside of the branch footprint–including the unbanked.
For example, FIS has helped Bandhan Bank manage a fully integrated banking and payments platform through a totally outsourced delivery model. This equipped it to deliver on its two-pronged strategy to connect customers in India’s rural and urban areas, including deploying 14,000 handhelds to reach unbanked customers.
5) Direct banks can expedite speed to market.
In today’s digital world, a financial institution’s core processing system needs to support customer types across any channel, any device, and in a branch, contact center and back office. Increasingly, all of this needs to happen in real-time. The processing system also needs to be open so it can be integrated across the entire bank’s banking and payment ecosystem.
Whether the business goals are to drive the deposit growth needed to underpin lending, expand target market and reach, reinvent customer experience or lower acquisition costs or, all of the above, Direct Banking is the right solution.