The concept of Direct Banking – an online and mobile only bank – delivers serious bottom-line benefits, for those with a well-defined strategy.
Direct banks have become a popular means of driving deposit growth to underpin lending, and to meet customers' increasingly demanding expectations for an on-demand, digital and mobile banking experience. The recent surge in the return to establishing direct
banks over the last two years is a trend that is still in its infancy – particularly as financial institutions continue to battle the soaring costs of deposits in a rising interest rate environment.
Here are five key facts about what direct banks can offer, and why they're becoming so prevalent and on the rise.
FACT 1: Direct banks fuel deposit growth and expand customer reach.
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. The cost of acquiring and servicing customers and
deposits via the Direct Bank model are significantly lower than via a traditional bank, yielding better efficiency ratios for the financial institution. Evidence also shows that customer attrition is often lower with direct banks; they aren't as subject to
the life events that tend to trigger closing accounts in traditional banks.Recent entrants to direct banking launched in the last year cited primary objectives of the potential to rapidly drive deposit growth, to support improved deposit/loan ratios for the
parent organization. In a short time, they have already built wildly successful direct banks which meet both of those objectives.
New products and services can be offered to specific customer segments without the constraints of geographic limitations. Moving far beyond regional name brand recognition, direct banks have national exposure and thus national customer potential.
FACT 2: Direct banks put customers front and center.
Thanks to the combination of today's mobile and digital banking and payment technology, customers know that they don't have to settle for anything less than a truly customer-centric banking experience, and that is exactly what direct banks can offer. Across
all age groups, consumers say that simplicity, trust, control, and digital self-service are the most important attributes in their banking relationships.
FACT 3: Direct banks don't have to cause channel conflict.
Without proper parameters, launching a direct bank could unfortunately result in existing customers swapping accounts to earn a higher deposit interest rate than what their current product offers — but this can be avoided with proper planning and execution.
Financial institutions that have a well-defined Direct Bank strategy can proactively ensure that 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. Direct Banks can be integrated into their existing ecosystem, or be independent, whichever the bank chooses.
Note that some financial institutions want to rebrand their direct bank name (to emphasize being new and different), while others prefer to retain the traditional bank name (due to name recognition and client loyalty perspectives). The good news is that
both approaches can succeed.
Some neobanks also realize they can more effectively penetrate key markets with an omnichannel experience. A café-style branch location where a significant portion of the direct bank prospects and customers live doesn't require the same level of costs, planning,
and infrastructure as a full-scale branch model, but may help direct bank customers gain the peace of mind they need to expand their banking relationship to include more sophisticated products and services.
FACT 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.
• Bandhan Bank uses technology to manage a fully integrated banking and payments platform through a totally outsourced delivery model. This equipped the bank to deliver on its 2 pronged strategy to connect customers in India's rural and urban areas, including
deploying 14,000 handhelds to reach unbanked customers.
• Fincare embraces technology to pursue its mission of engaging rural women in India, along with ESAF Microfinance, whose mission is to provide a human touch behind technology-driven banking processes.
• RGVN (North East) Microfinance has been empowered to work towards its goal of improving the financial state of every person it can reach.
FACT 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 this needs to happen in real-time. The processing system
also needs to be open so that 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, to expand target market and reach, to reinvent the customer experience,
and/or to lower acquisition costs (or all the above) Direct Banking offers the right solution.