Direct banking, deposit growth and market dominance
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As deposit growth remains a popular and sometimes heated topic of discussion among bankers, it is worth taking a step back and taking stock of how the financial services industry has come to this point, where we are at. are today and what that means for the future, especially with the arrival of direct banking in the picture like never before.
When BAI asked bankers in 2018 to name their top business challenges, growing deposits became the number one priority. But where was it just a year before? Surprisingly, deposit growth did not show up in any of the top three niches when BAI surveyed industry leaders. Fast forward to 2019 and deposit growth continues to be a big driver. It is hoped that when deposits increase, loan growth will follow. In fact, BAI Banking Outlook research shows that loan growth has remained at the top of the list of constant challenges for banks in recent years.
Yet these growth targets have not come without significant challenges. In 2018, deposits were falling even as the Federal Reserve raised interest rates four times. The Fed seemed poised to continue doing so in early 2019, but instead cut rates in July (for the first time since 2008), September and October.
While all of this has happened, direct banks have made significant gains in deposit growth. Since 2016, U.S. digital banks have achieved a deposit growth rate of 14.2%, compared to 5.4% for traditional banks, according to the FDIC.
While direct banks have been around for decades, they occupy a prominent place among consumers, but not just because they are inexpensive and offer returns well above the fractions of a percentage typical of large financial institutions.
It is clear that convenience plays a major role and although many consumers do their banking with a traditional and direct financial services organization, direct banking has changed the way consumers perceive convenience.
What is your main bank?
Our latest BAI Banking Outlook study takes a close look at whether direct banks are winning the battle to become the main bank. At present, the big traditional banks continue to win the battle for the “main bank” with the biggest share. There are areas, however; where direct banks are gaining ground or gaining. For example, there are obvious differences on the rate front, because twice as many consumers (28% against 14%) favor direct banks for the best rates.
In terms of age demographics, relatively speaking, Gen Z consumers are the most likely to use direct banking in the future. Almost a quarter (24%) of Gen Z respondents who use direct banks but not as their primary bank, plan to make them their primary bank in 12-24 months.
Customers who use a direct banking store have between 41 percent (Baby Boomers) and 50 percent (Gen Z) of the total deposit balances for checks, savings, money market, and CDs there. Consumers in direct banks store almost half of their total deposits with direct banks. The primacy further increases the share of direct banks with a share of deposit portfolio of 62% for direct banks against a share of 42% for traditional banks. This means that if direct banks can get more of their customers to become primary customers, they could see 10-20% growth in deposits.
Technology is the new convenience
The question then becomes what factors might influence the choice of primary bank for direct banks. The answer clearly lies in convenience. When BAI asked consumers about the main reason they chose to open a deposit account with a direct bank, they came up with a dozen different reasons, but convenience finished first at 19%.
When it comes to convenience, technology is a clear advantage that direct banks have over their traditional competitors. Here, the mobile holds the key. Across all demographics, there is a very high level of satisfaction with direct banking mobile apps. When asked if these apps meet their needs, between 74% and 93% of those surveyed, depending on their age group, said yes. When asked if they would change or move to a direct bank for a better app, two-thirds of Gen Z and Gen Y said yes, 57% of Gen X and 38% of babies. -boomers responded the same.
It is a mistake to view direct and traditional banks as mutually exclusive segments. When Citizens Bank was launched Citizen access in mid-2018, the direct banking site was offering a 2.25% interest rate on deposits (compared to a US national average of 0.12%), with no account fees. In just three months, Citizens Access has attracted over $ 1 billion in deposits. Although Citizens has a physical presence in only 11 states, Citizens Access attracts customers from all 50 states and very few are existing Citizens Bank customers.
Put it all together
It’s always tempting to look at and worry about external factors, from interest rate cuts to fintech disruption, but forward-thinking bankers know such circumstances will always exist. It is true that the pace of change is accelerating and is faster than ever before, but keep in mind that almost everyone shares the same set of circumstances.
Meanwhile, some things remain constant. Consumers are short on time and want the details of their day-to-day financial life to be easier. They want what each of us wants when we work with our money and manage our finances, and that is convenience. The growth of deposits in the era of direct banking begins when bankers realize customer priorities and in doing so embrace a new way of understanding and acting on them.
Karl Dalhgren is the CEO of BAI.
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