It’s been more than 15 years since the Internet shook the business world and predictions abounded that Internet-only banks would eat traditional banks for lunch. Taking stock on these predictions, it’s clear that the impact of Internet-only banks has been less dramatic than anyone would have predicted.
In recent years, the trade press and industry conferences have buzzed with admiration for digital darlings such as Simple, Moven, GoBank and BankMobile. Pundits have celebrated these new players’ slick designs and future disruption potential. Yet while the demos and screen shots at events like Finovate have provided fascinating fodder regarding the future of digital banking, the FACTS show that these buzz-worthy players have had infinitesimal impact on market share.
Gonzo readers, let’s look at the facts. Let’s take a quick tour of the major digital banking players that have had an impact in our industry and what this means moving forward. Here’s the bottom line:
In the past six years (March 2009 to March 2015), the top 10 Internet banks have grown an impressive $175 billion in new deposits. Think about this. The 10 players without legacy cost structures have grown to the equivalent of the 18th largest bank in the country in only six years. Here’s the breakdown of these 10 banks in order of deposit growth:
|American Express Bank||9,350,806||34,512,381||25,161,575|
|Bancorp Bank (Simple/PayPal et al)||1,495,558||4,499,959||3,004,401|
|Green Dot Bank (Go Bank)||28,553||725,719||697,166|
|Total Top 10 Digital Banks||134,268,300||309,893,759||175,625,459|
|*Capital One figures are for Capital One USA direct bank and not the regional bank components.
**EverBank figures include acquisition of Bank of Florida deposits of $1.5 billion in 2010.
There is clearly some fun creative activity going on at digital banks, but let’s put the growth of these top digital banks into perspective:
So here’s a quick summary of growth since the great recession:
|6-Year Deposit Growth
|Top 3 U.S. Retail Banks||$1,271,189,782|
|All Other Banks||1,406,184,759|
|Credit Union Industry||259,952,180|
|Top 10 Internet Banks||175,625,459|
|Total Bank and Credit Union Growth||3,112,952,180|
The key takeaway for GonzoBankers is that digital top disrupters are making their strategies work, and hats should go off to them. However, they are not the only players that have put on their game faces and grown the business. The national powerhouses are proving that the “Occupy Wall Street” mood from several years back did not stop these national brands from scaling, and it’s clear that players like Chase, Wells and Bank of America are scaling their digital customer base very effectively. Mid-size and regional banks have also grown deposits solidly, as has the credit union industry. Both have used street fighting tactics and “good-enough” digital banking strategies to gain local market share. Competition in banking is still very multi-faceted, and the book and music industry analogies are just not completely relevant.
While new digital disrupters are helping banks rethink the customer experience and how they will add value in the future, they have not done enough damage where large banks and other traditional players are feeling the pain. At the same time, no bank or credit union should feel safe from the potential damage that digital players can do to them in the future.
Here’s why. It’s obvious that one factor that has dampened the impact of digital banks has been our bizarre industry rate environment. As the chart below dramatically illustrates, the past six years have been a ride along the trough of near-zero fed funds rates. It has been difficult for digital banks to take advantage of their lower cost models when differences in interest rates are less dramatic to gain consumers’ attention.
When rates finally rise, it could be a whole different ball game. Smart phones will be in more than 75% of all U.S. adult hands, and downloading another digital banking app to grab a better rate on a money market account will be as easy as ordering with Amazon OneClick or playing a new version of Candy Crush. When that time comes, all traditional players may be surprised that their bountiful deposit liquidity is seeping out in an alarming way. Whatever anyone says at industry conferences, this will not be primarily a battle of customer experience; it will be a hard-nosed rate war. To date, nice personal financial management tools, spending reminders and cool navigation have not disrupted bank market share. In the future, when 100,000 financial institution branches become more and more empty space, digital banks will proliferate and help usher in a new period of deposit rate wars. These competitors will use a more streamlined cost structure versus fancy spending pie charts to make a meaningful dent in market share.So, GonzoBankers, we can feel good that we have not been “Amazoned” or “Netflixed” by digital banks, but it’s healthy to remember that digital innovation will someday rear its head in a different rate environment, and these disrupters will make us seriously question the cost structure we utilize to operate a simple business that gathers deposits, facilitates payments and lends out funds. It’s time for us to seriously rethink delivery cost structures before the market share numbers look different.
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