Karl Dahlgren
Karl Dahlgren Oct 1, 2019

There’s no doubt: Direct banks are here to stay, winning consumers along the way

Direct banks, or online-only banks, continue to be a hot topic in the industry. As direct banks become more established and gain market share, new research indicates that direct banks are changing the way consumers want to bank and setting a new standard for the industry.

BAI surveyed more than 600 consumers to identify and understand consumer perceptions related to direct banking and what, from the end-user’s perspective, makes a financial services organization stand out. From changing perceptions to the right kind of technology, consumer attitudes indicate that the appeal of direct banks continues to grow and threaten traditional financial services organizations in ways that can’t be ignored.

Convenience redefined

Although many consumers bank with both a traditional and direct financial services organization, direct banks have changed the way consumers view convenience.

The general assumption has been that rate is driving the growth of direct banks, and when rates are lower, consumers will move back to traditional financial services organizations. Contrary to this popular belief, BAI’s research found that convenience is the number one reason why consumers open accounts with direct banks, but the definition of convenience has changed. This evolution might cause some consternation with leaders at traditional organizations as consumers have historically cited having a branch or ATM nearby as extremely important when defining convenience.

Will the industry’s future customers, comprised of digital natives, care about physical locations much longer or have consumers changed what they consider convenient? Our research indicates “convenience” is quickly changing into something new.

For example, while 72 percent of consumers would consider opening a checking account with a direct bank, it came with a caveat. Consumers are looking to direct banks for significant benefits such as fee reimbursements, free use of other banks’ branches, cash/incentives, higher rates, payday advances, cash back on debit cards, non-sufficient funds fee waivers, and better savings or investment options.

What does this mean for the industry? In short, the more products and incentives direct banks offer, the more “convenience” means something very different than ATM or branch locations and hours. Ultimately, this change represents greater potential for primary bank status to shift from traditional financial services organizations to direct banks.

Faster payments are top of mind, voice banking is not

When asked how financial services organizations can improve apps and digital capabilities, consumers overwhelmingly said they wanted a clear, easy-to-use app for check deposit and bill pay (44 percent), quicker money transfers (33 percent), faster payments (33 percent) and 24/7 customer service (27 percent). Interestingly, Generation Z’s responses differed from the rest, placing quick transfers (57 percent) and faster payments (45 percent) atop of the priority list.  

Generation Z has grown up with digital technology and is more adapted to digital-only products and services than any other generation. This generation focuses more on speed than simplicity of apps. As Gen Z continues to enter the workforce, their wants and needs must be addressed by both direct and traditional financial services organizations.  

Notably, despite the industry’s heightened discussion around voice banking, it ranked as the lowest request among consumers with only 3 percent citing it as a priority.

Direct banks’ tech reigns supreme

When consumers were asked “who does it better?” with options ranging from digital experience to the account opening process, direct banks had a lead on the competition.

Direct banks win in the areas of mobile app experience, cutting edge technology, fair fees, bill pay, account opening and rates, while traditional financial services organizations won only with ATMs and trust. While regaining trust has been a focus of the industry, especially since the financial crisis in 2008, it’s important to note that consumers generally trust brands that are most familiar. As direct banks gain valuable market share, traditional financial services organizations may be at risk and should continue to view these growing institutions as fierce competitors. As direct banks become more prominent and their reputations build, it is possible consumers will shift their trust to direct banks from their more traditional counterparts.

Direct banks are steadily moving ahead in the race to meet the expectations of today’s consumer. Many areas of activity that leaders from traditional organizations may have thought were temporary trends are now more deeply rooted within the financial services space and leading the charge on driving the industry forward. As a result of these advancements, a new definition of convenience is emerging with technology at the heart and the consumer in the center.

While most consumers (79 percent) still rely on traditional financial services organizations for their primary bank, it is of the utmost importance for these organizations to stay ahead of the curve and continue to acknowledge the competitive threat direct banks present. Leaders who recognize that a consumer-driven revolution is underway will position their organizations to successfully compete today and tomorrow.

Karl Dahlgren is managing director of BAI.

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