Is It Time For Digital-Only Banking?

With more consumers doing their banking on mobile devices, how willing would consumers be to switch to branchless banking? And could traditional financial institutions create a digital-only strategy without alienating their traditional customer base?

Consumers are depending on their mobile devices to simplify their daily lives more than ever. No place is this trend more apparent than in banking, where the shift from physical branches to mobile banking is unprecedented.

With this shift in banking behavior has come expectations of a seamless banking experience and the delivery of enhanced mobile banking solutions by traditional banks and credit unions. As a result, 71% of those who use mobile banking say that online and mobile banking is sufficient for their needs.

Digital-Only Banking Defined

In a Monitise white paper entitled, ‘The Rise of the Digital-Only Bank: A Challenge or Opportunity for Existing Banks?,’ a ‘digital-only’ bank was simply defined as a financial institution that provides end-to-end banking services through digital platforms. As opposed to a bolted-on channel in addition to branch banking, digital-only banks provide always-on simplicity, accessibility and contextuality consumers receive from non-banking firms like Google, Amazon, Uber and many of the social channels.

Beyond offering just a checking or current account, the next wave of digital-only banks will provide a host of products and services in addition to simplified transactions and digital documentation. While the concept of a digital-only bank is not necessarily new, with firms like Moven, Simple, GoBank, Soon, and others blazing the trail, the next wave of branchless banks are hoping to go beyond these early efforts.

The Appeal of Digital-Only Banking

The appeal of a digital-only bank from a consumer perspective is relatively straightforward. If done well, the simplicity and accessibility of mobile banking is exactly what the digital consumer desires. From a banking perspective, the appeal is also strong.

“For an industry eager to tap into a rich seam of revenue opportunity, it’s a compelling proposition,” says the Monitise report. “It’s not just potential customer value that makes digital-only desirable from a financial stand-point … there’s also a powerful case around cost to serve.”

While there is debate around the specific financial benefits of mobile banking (especially where transactions are not replaced on a 1:1 basis), there is a no doubt that a mobile transaction is significantly less expensive than the branch-based counterpart. For those organizations that remove the branch (or never open one in the first place), the reduction in overhead alone is substantial.

Digital-only specialists also don’t need the vast legacy core system architecture to provide services. As has been seen recently, a new digital-only bank can quickly and relatively cost-effectively leverage existing technology and open architecture to offer streamlined banking services.

Most importantly, digital-only banks can provide a better banking experience, where traditional consumer insight can be combined with transactional, social and even locational insight to provide an enhanced contextual experience. This can include customized products and services as well as personalized offers.

Digital-Only Banking Alternatives

According to Monitise, there are four alternative structures common with the development and deployment of digital-only banks:

  1. Subsidiaries of existing banks – Like some of the earlier direct banks, many digital-only banks are subsidiaries of existing banks
  2. Independent firm with a banking license – A rarer, but growing segment, these are entirely new banks, set up independently to provide digital-only services
  3. Start-ups acting as a front-end to an existing bank – These operations provide a branded digital service layer for deposits held at an existing regulated bank
  4. Traditional banks developing digital only services – Existing operators investing in a strategic shift towards digital

With several early digital-centric banking organizations already going through the test and learn phase of innovation, Monitize believes the time for the next wave of digital banks to make their move may be now. “With regulators lowering barriers to entry in an effort to encourage greater competition, it could be said that for the ambitious digital start-up, there’s no better time to strike,” says Monitise.

Does It Makes Sense To Move to Digital-Only

Over the past couple years, solutions have been created to move virtually all banking interactions from the branch to the mobile channel. This ranges from new account opening, to the servicing of accounts, to even include more complex interactions such as business banking and loans. And this trend shows no sign of abating.

“By 2020, more than 30 percent of banking revenues could be at risk thanks to new competitors and new trends.”
— Accenture

As branch visits continue to drop and the demands of the digital consumer are increasing, should branches be abandoned? For a traditional financial organization, the best answer is, “Not yet.” In reality, despite all of the noise around branchless banking, the older demographic segments still want, and use, bricks and mortar facilities. In fact, for account opening and many servicing transactions, so do the millennials.

That said, digital-only banks, while still having a comparatively minor impact, are continuing to be introduced and are growing. Both Atom in the U.K. and BankMobile in the U.S. are examples of mobile-only initiatives that will have appeal to digital natives.

Traditional banks can’t remain inactive despite the low immediate threat from these start-ups. Instead, it should represent a wake-up call to all financial institutions of the potential and risks associated with digital banking innovation. Those who move first will benefit from the learning as well as the new business generation benefits.

According to Monitise, some of the challenges of moving to a digital-only servicing model include:

  • Doing the basics right: The best mobile banking innovations in the world will not mean anything to the consumer if basic banking capabilities don’t work flawlessly. This ranges from the ability to process daily transactions to the ability to provide digital customer service. Some of the earliest entrants into the digital-first mobile banking marketplace have shown how tough the basics can be.
  • Building value-added relationships: Moving an account out of a digital-only bank can be as quick as a finger touch away. Therefore, it is even more important for digital-only banks to cultivate strong customer relationships with good value, transparency, exceptional service and potentially a sense of belonging (as has been done by firms like Fidor Bank, Hello Bank and Moven. One of the value-added characteristics of many of the early digital-only banks has been the addition of digital money management tools that work seamlessly.
  • Legacy technology: While new start-ups can benefit from building from the ground up, traditional financial organizations are saddled with legacy core systems that were built when branches were king. And the investment in new core systems is not an easy decision.

Moving from a traditional banking model to a digital-only banking model is not the best option for the vast majority of banks. Beyond the cost of new systems and the need to close or significantly modify existing branches, the impact on current customers may be negative.

According to Monitise, “The winning formula for traditional banks may be a middle ground; an offering which wholly embraces digital, providing superior mobile banking to attract and retain new segments, alongside streamlined and refined standard banking services to satisfy a core customer base.

The Next Best Step: Digital-Centric

It is expected that more digital-only banks will continue to be introduced. But, despite the cost efficiencies and positive mobile customer experience that can be delivered, scalability may remain elusive. To date, many of the most innovative digital banks have failed to generate significant customer growth.

In terms of scale, traditional banks benefit from established relationships, brand equity and customer insight that has taken decades to build. Instead of starting from zero, traditional organizations can move with the market, providing digital services that can supplement and compliment current solutions. The challenge for traditional banks is usually the pace of change.

Monitise notes that, while some traditional banks may decide to acquire more nimble digital-only firms (like BBVA did with Simple), other organizations may build partnerships with technology innovators, opening they APIs and creating innovation labs.

The best alternative for most banks will be to build a digital-centric organization, where delivery of services is centered on mobile device capabilities. By being agile and integrating digital and physical channels, financial institutions can provide the best of both worlds. The central focus will need to be the customer experience, however.

According to Monitise, “By evolving retail banking itself, to a point where the branch becomes a customer service function with a focus on quality consultation and cross and up-selling other services, traditional banks may be able to transform their current fragmented service offer into a streamlined, catch-all proposition – where every customer is served in the way that suits them best, and every channel is profitable.”

Monitise continue, “To dismiss the rise of the digital-only bank would be to dismiss consumer demand. There’s an inevitability to digital-centricity and the banks who jump quickest will be best placed to profit.”

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