If you were to describe the 21st century so far in just one word, many of us would probably say ‘digital.’ Is it any great surprise when modern technology underpins so many aspects of our daily lives, from the way we communicate, to how we shop, travel and work? The ease that digital has brought us has set increasing expectations for customer experience, and that includes the way we bank.
Whether you prefer an in-branch experience to a virtual banking service or perhaps a combination of both, is irrelevant. At Capco, we believe that traditional banks with a large physical footprint are not disappearing any time soon. However, the industry cannot ignore that direct banking is growing - and fast.
Direct banks are adding customers at an 8 percent annual compounded growth rate, and between 2015 and 2020, nearly 50 million new customers will begin using a direct bank. By contrast, the number of customers using physical branches has declined by 9 percent in just the last three years, and that decline is expected to continue. Why? Because direct banks save money for customers and are more convenient to use. While trust, security, and legal issues still worry some customers, the barriers are falling rapidly.
Direct banks are capturing a large proportion of new customers, and the top direct banks are growing rapidly. Ally Bank, one of the top four direct banks, grew total deposits from 2014 to 2016 by more than $20 billion (more than 35 percent). By comparison, the top five U.S. traditional banks have grown deposits on average by only 6.6 percent.
The cost advantages of digital banking are more impressive than the growth story. The cost per transaction with a teller at a branch bank is $4.25. Online and mobile banking transactions cost only 19 and 10 cents each, respectively.
So, what would you need to do if you wanted to build a direct bank? Here are our top three lessons from the front lines of the 21st century banking revolution:
1) Invest early and heavily in the architecture and design of your new bank.
For direct banks, success is typically determined on the customer experience. Your new digital bank must be distinct and differentiated from other banks already in the marketplace. This requires that the user platform must be custom designed.
2) Pick your technology solution for tomorrow, not today.
Be forward thinking. New services and products are almost certain to be required before you build a new technology solution; therefore, you will need a system that can support diverse products and integrate well with other systems.
Why choose technology for tomorrow’s vision rather than today’s imperatives? First, it costs more to go back and redo your technology base than to invest in better systems up front. Second, with forward-looking technology, your bank will be better able to compete by offering superior products, services and customer experiences.
3) Utilize your new direct bank to set the new standard for operational and IT efficiency.
We helped launch a hybrid direct bank that combined a deposit growth strategy with expansion into new regions. This bank was built with new technology, new operational processes, and a unique customer experience. Our account origination process cut the time required for a new account from days to literally minutes.
All these new direct bank elements were more efficient and therefore more cost effective than the legacy systems. The launch of this hybrid direct bank was so successful that new systems are now being tested and adopted to improve the legacy bank’s operations.
Building a new digital core for your direct bank exposes redundancies and inefficiencies that build up over time in legacy systems, and these new efficiencies can then be applied to streamline operations of the traditional bank.
To read more about our approach to modernizing banking, read our whitepaper, Digital Delivered: Launching Direct Banks.