By David Mitchell
Digital, standalone bank brands are rapidly entering the U.S. marketplace following the success of Simple, launched by BBVA Compass in 2009. Since then, several large banks have followed, including JPMorgan Chase with Finn and Wells Fargo with Greenhouse—and with good reason.
Digital channels are no longer a means to attract only young customers. According to a recent report from the Pew Research Center, 67 percent of baby boomers (ages 54 to 72) own a smartphone. Of Generation Xers (ages 38 to 53), that number jumps to a whopping 85 percent. According to the Federal Reserve, more than half of all smartphone users use mobile banking, and that number rises to 67 percent among millennials.
The most important banking strategy identified by bankers in 2018 was to redesign or enhance their customers’ digital experience, according to one survey. A banking trend study from Accenture also stresses digital delivery, stating that smaller banks are losing millennial and affluent market share to big banks because they deliver better digital experiences.
As consumers increasingly embrace digital’s 24/7/365 access, and as branch traffic falls, financial institutions must respond to demand.
What is a digital brand?
Digital bank brands are online or mobile-only subsidiary banks that are marketed as a standalone solution. Most only offer deposit products and services, a departure from the traditional banking model supported by loan revenue.
Financial institutions can introduce digital-only services through their established market brand or choose to create a separate, distinct brand for targeting niche, lucrative markets. One of the strongest arguments for launching a digital brand is that they can attract tech-savvy baby boomers, Gen Xers in peak earning years and millennials, all without disrupting the financial institution’s current market base.
By avoiding the heavier expenses associated with operating physical branches, the cost savings of digital delivery can be significant. According to BCG research, financial institutions can decrease expenditures by up to 30 percent. However, for many banking executives, one question remains: How do standalone digital bank brands make money?
- Transaction revenue
Following the passage of the Dodd-Frank Act, bankers worried that transaction income would plummet. However, after a 2012 dip in interchange income occurred when the Durbin Amendment went into effect, revenue earned from card transactions has since held steady. In 2016, interchange fees totaled $88 billion. This source of income is also a way for banks and credit unions with fewer than $10 billion in assets to level the playing field with larger competitors, because they are largely exempt from interchange caps.
The debit card market today is already saturated: 90 percent of Americans own checking accounts and 80 percent of those accounts have debit cards. To win market share, institutions must increase service levels and provide a frictionless experience. Strong digital account management is a first step toward winning transaction market share.
Transaction accounts also produce significant fee income from monthly maintenance charges, ATM out-of-network fees, non-sufficient funds penalties and other forms of non-interest income. In 2009, 76 percent of banks offered free checking. According to CEI, that number dropped to 38 percent as of March 2018.
- Deposit revenue
Due to a healthy economy and consumer confidence, the average bank loan-to-deposit ratio has risen to more than 80 percent, according to the Federal Reserve Bank of Philadelphia. Some banks and credit unions find themselves pushing 100 percent loans to deposits and have had to resort to high-interest offers or borrowing liquidity from sources like the Federal Home Loan Banks for new deposits. Digital brands provide much needed funding at a much lower cost.
Today’s rising interest rate environment means banks will finally once again earn significant income from investments. Digital brands are a way to attract liquidity needed for a balanced investment strategy.
The fact that digital brands provide greater deposit account profitability is exciting on its own, but financial institutions benefit even more from cross-selling loans, investments and other profitable products and services to new deposit account holders. Transaction accounts have long been used to capture market share and serve as an anchor to convert those customers into a more profitable relationship. Digital brands do it more efficiently, and because digital accounts are stickier, more effectively as well.
- New market revenue
Before the digital era, entering a new market meant making expensive capital investments in brick-and-mortar branches. Digital brands eliminate that hurdle and allow financial institutions to expand into markets beyond their current geographical footprint—a diversity that increases the size of their potential customer base. Additionally, standalone digital brands can target a niche market that is drastically different from a financial institution’s existing customer base without compromising their traditional core business.
How to succeed
A digital-first strategy represents a paradigm shift in financial services that other industries have already embraced. Standalone digital bank brands are a great way for traditional financial institutions to dip their toes in fintech waters and begin the transformation required to attract tech-savvy consumers and remain relevant in the future.
It’s not just a big bank play—Customers Bank in Wyomissing, Pa., with less than $10 billion in assets, has BankMobile, and $1.3 billion Green Dot Bank has GoBank. TransPecos Banks in San Antonio is one of the newest players. With only $195 million in assets, it recently worked with my company to outsource the operation of its online standalone brand BankMD, which caters to medical professionals.
In order to succeed, financial institutions must understand the differences between a digital-only strategy and the traditional brick-and-mortar banking model. This starts with identifying customer expectations, which are significantly higher. In turn, the value proposition of the digital experience is held to a higher standard. The ability to deliver the features and functions marketed is crucial to the success and survival of a digital bank.
Marketing, however, is more than just promoting the digital bank’s products and services. Content must be targeted to the desired audience, otherwise it may be dismissed. This requires putting together a strategic marketing campaign plan and using the right tools and resources to execute the strategy. To optimize results, many financial institutions choose to outsource digital marketing efforts.
Digital bank brands provide a unique opportunity for banks to generate new revenue while expanding beyond their geographic footprint. Because of today’s ever-evolving digital landscape, a strategy that was once limited to only large financial institutions is now becoming available to banks of all sizes. As more institutions strive to maintain relevancy and look to fintech partners to provide effective solutions, there is no better time to consider launching a digital bank brand.
David Mitchell is president of Nymbus, which provides revenue and technology solutions for financial institutions.