When competition can increasingly come from anywhere via mobile apps and the internet, can any bank or credit union still behave as if its battles were only taking place on its traditional physical footprint?
“Consumers have been finding their way toward alternative banks with little or no physical presence, and the growth in [such banks] seems to have come at the expense of both regional and community banks,” states a report by PwC. “This shift is even more pronounced by age: Younger consumers are even less impressed by physical branch presence, and they are even more open to alternative providers.”
As a result, the PwC report suggests that geography is becoming less relevant. And, while some banks will be able to double-down on their local branch networks, most will have to seek an alternative. One option is to create digital banks of their own in order to appeal to niche interests without regard to geographic boundaries.
Time to Board the Digital Bank Movement
While banks’ movement in this direction has been going on for several years, in the current economic and competitive climate the need to consider creating a digital bank offering is expected to grow more urgent.
“Clearly, we’re entering a stage where the focus on all elements of your institution’s balance sheet and P&L will become more and more stressful,” says Peter Pollini, Banking and Capital Markets Consulting Leader, PwC, in an interview with The Financial Brand.
The idea is not to simply develop a digital bank presence for the sake of national outreach, but as part of a broader plan that has been crafted for long-term results.
“The starting place is your strategy,” says Pollini. For example, an institution might set up a digital bank to obtain deposits from a national niche market as part of a broader effort to acquire clients from that niche.
“You can then look to grow the product mix by cross-selling those clients with additional products and services,” says Pollini.
Advantage for Incumbents:
A plus to a niche-bank strategy is that consumers still have a great deal of trust in traditional banks. While people want superior technology, having a connection to a traditional bank gives them confidence.
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Pursuing Niches for Growth Via Digital Banks
Pollini says that going after deposits through a digital brand typically is not a niche, but a pricing strategy.
“It’s really a core blocking and tackling approach that any institution might try,” just on a national digital playing field instead of a local or regional one, he explains. “A true niche means going deep in serving the needs or preferences of a certain market or markets.” In other words, more creativity is required.
A growing number of institutions are launching what Pollini calls “internal challenger banks” that are national in scope and which generally attempt to establish a brand of their own, rather than attempting to play off the parent organization’s branding. (Different digital players play up the connection to the parent to varying degrees, as this helps establish confidence in the fledgling brand.)
Some digital brands that have been launched over the last few years include:
Facile, which is promoted as “banking in the palm of your hand.” Pacific National Bank, based in Miami, Fla., started it to serve tech-savvy young professionals. Much of what Facile offers resembles the selection of mobile-based services offered by fintech banking apps, from early wage access to budgeting software to a debit card that can be turned on and off from the app.
Hitched was launched by Iroquois Federal, a Watseka, Ill., savings and loan, to serve the needs of newlyweds across the country via a joint checking account with features designed to help couples handle shared finances and shared financial goals.
Zynlo Bank, formed by PeoplesBank, Holyoke, Mass., offers a mobile banking experience that Zynlo promotes this way: “It’s less about fitting into an idea of what a bank is, but rather, what a bank can be.” Among the features are Zynlo’s matching of the consumer’s roundup savings, where purchases are rounded to the nearest dollar. For the first 100 days all roundups are matched 100%. After 100 days the generosity of matching percentages varies according to account balance.
Other specializations are out there. On the business side several banks are offering national banking services for professions, with a common one being medical practices. Examples of the latter include KeyBank’s Laurel Road, Zions’ Practice Pathways and TransPecos Banks’ BankMD. An unusual specialty was launched by Texas National Bank: Bankers Lender. The niche for that new digital player is bankers who don’t want to borrow from their own employers.
Frequently such digital brands are based on new core systems, separate from those used by the parent banks. Some tech vendors have made a specialty of supporting new digital niche brands and fintechs. Nymbus is one example.
“Bank-wide digital transformation is critical but can be slow and complicated,” states the 2021 Capgemini World Fintech Report. “That’s why a digital-only subsidiary may help incumbents remain in the game.” Success isn’t guaranteed, the report notes, and some would-be digital entrants have been shuttered.
Indeed, Pollini says that even with the technology being easier to support, establishing a new national brand can be challenging. Just hanging out a virtual shingle is not going to drive in business.
Pollini adds that it is increasingly hard to build a niche that is unique, at least not for long.
“Whether you are a fast follower or an innovator, the timeline from innovative idea to people emulating you is shrinking.”
— Peter Pollini, PwC
Even among fintechs, ideas that were fresh a couple of years ago — such as parent-child financial apps — have been much followed around the world.
Getting Started with a National Digital Banking Outreach
While starting a digital bank with a new brand and a new core system has the appeal of a fresh start that avoids legacy systems issues, not all organizations want to take this approach. Frequently this is referred to as a “greenfield” approach. An alternative is what some call a “brownfield approach.” This means bringing the entire institution along, which is a more daunting and intensive undertaking.
“The brownfield approach remains the oldest form of digital transformation and still resonates with bank leaders worldwide,” observes a digital banking white paper by Codebase Technologies and IBS Intelligence. “However, deploying a big-bang approach can be time- and cost-intensive. Moreover, legacy infrastructure enhancements and upgrades can be complex activities.”
The paper, “Building a Greenfield Digital Bank in the Fintech Era,” suggests a four-step process for getting a digital specialist institution going:
- Identify a need. Why does this particular kind of digital bank need to be started?
- Ideate the Three Ws. Who to target? What to offer? Where to launch?
- Initiate the foundation. Build the infrastructure strategy to make it run, likely on a new core. Collaborate using application programming interfaces.
- Implement the new digital bank. Put in its own long-term leadership and accept that there may be cannibalization of the parent bank’s base as the new operation grows.
Both the white paper and the PwC digital banking study favor building the new entity in the cloud, for the sake of agility.
There is a potential middle ground between the “greenfield” and “brownfield” approaches, according to Capgemini’s study. This is the “bluefield.” That refers to founding a new digital bank with its own brand, but that is based on a mix of existing and new infrastructure — basically, a middle ground.
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