Karl Dahlgren
Karl Dahlgren Nov 11, 2019

Direct banks, deposit growth and market domination

As deposit growth remains a popular and sometimes heated discussion topic among bankers, it pays to step back and take stock of how the financial services industry got to this point, where we are today and what it means going forward, especially with direct banks moving into the picture like never before.

When BAI asked bankers in 2018 to name their top business challenges, deposit growth emerged as the number one priority. But where was it just a year before? Surprisingly deposit growth didn't show up in any of the top three slots when BAI surveyed industry leaders. Fast forward to 2019 and deposit growth continues to be an important driver. Hopes are that when deposits rise, loan growth will follow. In fact, BAI Banking Outlook research shows loan growth has remained high on the list of constant challenges for banks over the past few years.

Yet these growth objectives have not come without significant challenges. In 2018, deposits were dwindling even as the Federal Reserve raised interest rates four times. The Fed looked poised to continue doing so at the start of 2019 but instead cut rates in July (for the first time since 2008), September and October. 

While all this has happened, direct banks have made significant gains in deposit growth. Since 2016, U.S. digital banks have achieved a 14.2 percent deposit growth rate, compared to 5.4 percent for traditional banks, according to the FDIC.

While direct banks have been around for decades, they're moving into a front-and-center position among consumers but not just because they are low in cost and offer returns far above the fractional percentage points typical of large financial institutions.

Clearly convenience plays a major role and although many consumers bank with both a traditional and direct financial services organization, direct banks have changed the way consumers view convenience.

Who's your primary bank?

Our latest BAI Banking Outlook research takes a close look at whether direct banks are winning the battle to become the primary bank. At the moment, traditional large banks are continuing to win the “main bank” battle with the largest share. There are areas, however; where direct banks are gaining ground or winning. For example, there are clear discrepancies on the rate front, as twice as many consumers (28 percent versus 14 percent) favor direct banks for having the best rates.

In terms of age demographics, relatively speaking, consumers in Generation Z are the most likely to use a direct bank in the future. Nearly a quarter (24 percent) of Gen Z respondents who use direct banks but not as their primary bank, anticipate making them their primary banks in 12-24 months.

Customers who use a direct bank store between 41 percent (Baby Boomers) and 50 percent (Gen Z) of total deposit balances for checking, savings, money market and CDs there. Direct bank consumers store nearly half of their total deposits with direct banks. Primacy drives even a greater share for direct banks with a 62 percent deposit wallet share for direct banks versus a 42 percent share for traditional banks. This means that if direct banks can get more of their customers to become primary then they could see a 10-20 percent growth in deposits.

Technology is the new convenience 

The question then becomes what factors could impact primary bank choice for direct banks. The answer clearly lies in convenience. When BAI surveyed consumers as to the top reason they chose to open a deposit account with a direct bank, they offered a dozen different reasons, but convenience finished on top at 19 percent.

When it comes to convenience, technology represents an obvious advantage direct banks have over their traditional competitors. Here, mobile holds the key. Across demographic groups, there’s a very high rate of satisfaction with a direct bank’s mobile apps. When asked if those apps meet their needs, between 74 and 93 percent of respondents, depending on their age group, said yes. When asked if they would change or switch to a direct bank for a better app, two-thirds of those in Gen Z and Millennials said yes, with 57 percent of Gen X and 38 percent of Boomers replying the same.

It is a mistake to think of direct and traditional banks as mutually exclusive segments. When Citizens Bank launched Citizens Access in mid-2018, the direct banking site offered 2.25 percent interest rates on deposits (versus a national U.S. average of 0.12 percent), without account fees. In just three months, Citizens Access attracted more than $1 billion in deposits. Though Citizens has a physical presence in just 11 states, Citizens access draws customers from all 50 states and very few are existing Citizens Bank customers.

Putting it all together

It is always tempting to look at and fret over external factors from interest rate cuts to the disruption of fintech, but forward-thinking bankers know that such circumstances will always exist. It’s true that the pace of change is accelerating and is faster than it’s ever been, but keep in mind that nearly everyone is sharing the same set of circumstances.

Meanwhile, some things remain constant. Consumers are time strapped and want the details of their day-to-day financial lives to be easier. They want what any of us want when we work with our money and handle our finances, and that is convenience. Growing deposits in the age of direct banks begins when bankers grow conscious of customer priorities and in the process, grow into a new way of understanding and acting on it.


Karl Dalhgren is the managing director of BAI.


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