Digital Only Banks: A threat to traditional Banks

Traditional banks are haunted by financial technology or fintech. Depending upon which bank executive you ask, they’re liable to give you different answers to the question “What is the major upcoming challenge for the banking industry?” Regulation, industry consolidation, shareholder pressure, blockchain, and cryptocurrency, the overall economy, all of those are perfectly valid concerns. One response that you might not hear as often? Digital-only banks and that’s a dangerous oversight. Whether those stakeholders at traditional financial institutions are willing to readily admit it or not, there’s a legitimate threat to be acknowledged and strategized for.

According to a PWC report presented in 2018, presently 46% of consumers prefer digital interactions with banks, almost double what reports claimed in the year 2012. There’s no denying that the rise of FinTech startups and digital-only banking options have put pressure on traditional financial organizations to modernize and rethink the needs of their customers. Here we have mentioned some of the key reasons why digital only banks pose an immediate threat to their traditional banks.

• They’re nimble and apply resources in the right places

Digital only banks are technology-first and mobile-first, so their R&D mindset and rate of producing new features and functionality for their customers are innately different. Updates don’t need to be developed for and rolled out across legions of legacy infrastructure, so they can be more continuous, frequent, seamless, and innovative. Being mobile-first additionally provides the distinct advantage of built-in security mechanisms like two-factor authentication, encryption, biometric sensors, and even fraud detection through behavioral analysis. Numerous mobile features and security upgrades are the last thing that traditional banks get around to, which clashes with a recent PwC survey that found nearly half of consumers now rely on mobile and/or online as their primary banking channel.

On a business level, there’s also less of a struggle in the allocation of resources, as armies of employees, real estate, in-branch hardware, and other overhead aren’t massive line items on the bank’s balance sheet. That means more financial resources can be invested directly in improving technology and customer experience.

• Better customer service

Whereas pretty much every major bank has been dinged at some point or another for poor customer service, again, not naming, digital only banks were born in an age of immediacy, customer choice and an expectation for exceptional customer service. They tend to not have as many one-off fees tacked on, like those for utilizing other bank’s ATM infrastructure on the rare occasions when cash is necessary and typically maintain multiple channels for customer service, be those in-app chats, bots or good call lines.

Part of that customer-first approach is manifested in the fact that digital enrollment and onboarding are a foregone conclusion for banks that don’t have physical outposts. As more banks make digital enrollment a possibility, it will become tablestakes to customers across the market, rather than a perceived barrier to entry or drawback. By that point, digital-only banks will already be pros at it.

• Branches only serve a purpose if properly capitalized upon

In a similar way that digital onboarding is becoming more popular or even preferred, consumers want to take control of their banking experience through self-service. Millennial users especially don’t think they need the same high-touch treatment that their predecessors do. And what better venue for self-service than online and mobile, which we’ve already established is second nature to digital only banks.

This isn’t to imply that branches and the services that come along with them – particularly for regional banks and credit unions – don’t serve a purpose. They absolutely do, but only if they’re leveraged in the right way. In order to keep pace with their digital-only competitors, traditional banks must consider modernizing their in-branch technology with the likes of self-serve kiosks, biometric authentication, and instant card issuance to make branches an appealing, effective, seamless and secure experience.

• Partnerships with their digitally-native peers are more enticing

At the point when you look at rewards programs that traditional banks offer for credit card points and cashback, they’ve generally aligned themselves with big-box retailers, restaurants, and similar brands. It’s an age-old industry truism, Legacy businesses tend to partner with other legacy businesses. Digital only banks may not have those same relationships, but they’re much more well-positioned and comfortable with partnering with their peers in other digital segments. They’re primed to take advantage of the thriving gig and service economy by offering rewards with rideshare providers, subscription services and digital media platforms, among others.

Final take:

Standing alone, none of these factors represent obstacles that can’t be overcome by traditional banks. It simply means that legacy organizations should rapidly adapt to the changing expectations of their customers. For banks that are prepared to modernize and evolve, the odds seem to be in their favor. However, the ideal time for change is now, and organizations that keep on dragging their feet on technological investment and advancement will end up at a serious, and potentially irreversible, competitive disadvantage.