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Digital-Only Banks: Are They a Threat to Brick and Mortar?

An examination of digital-only banks’ growing influence in the financial world.

August 20, 2018


Are digital-only banks a threat to traditional banking?

The short answer: Probably.

At least, that’s the case for financial institutions that are unwilling to adapt and modernize. As technological advancements continue to boom and accelerate, consumers’ expectations for simple, fast, and immediately rewarding digital interactions with companies continue to rise in tandem. In fact, according to a recent PWC report, 46% of consumers now prefer digital interactions with banks, almost double what reports claimed in 2012. The truth is that digital experiences and platforms are no longer optional, they are both expected and preferred by consumers.

Digital experiences and options are no longer optional, they are both expected and preferred by consumers.

Some organizations, such as DBS Bank, have launched digital-only platforms that are exempt from the costs of operating brick and mortar locations. Not only that, but the cost of each individual transaction for digital-only banks is significantly lower. This allows them to better allocate their resources to offer greater deals and focus on providing the most advanced and differentiated user experiences. DBS Bank’s digital-only “DBS Digibank,” for example, offers bank accounts with zero balance requirements, unlimited access to ATMs, and 7% interest rates on savings accounts. These types of benefits are something that legacy organizations will struggle to combat.

The debate:

There’s no denying that the rise of FinTech startups and digital-only banking options have put pressure on traditional organizations to modernize and reevaluate the needs of their customers. There is, however, a debate over the extent to which these new challengers pose a threat.

The rise of FinTech startups and digital-only banking options have put pressure on traditional organizations to modernize and reevaluate the needs of their customers.

Some individuals, such as Jeffry Pilcher, CEO/President and Founder of The Financial Brand, believe the digital revolution has evolved from a simple “existential crisis” into a “mandatory survival strategy” for financial institutions around the world. In a 2017 article, Pilcher wrote, “Not long ago, the industry debated whether or not new FinTech startups could generate any real traction. Now discussions center on just how quickly and how far transactional banking be unbundled and margins slashed.”

Conversely, some of the world’s other financial leaders have entirely disparate perspectives. Raman Bhatia, the digital chief of HSBC in the U.K. and Europe, has stated that he thinks the David versus Goliath debate over FinTech challenging big banks is “overblown.” While it is true that FinTechs and digital-only banks have given traditional organizations reason to modernize, since now they have a true competitor, there are many factors that work in their favor.

The battle:

When boiled down to the debates most basic form, the two combative forces here are fairly simple: Digital-only banks offer customers superior customer experiences. Traditional banks have earned the trust of their customers. This, at its core, gives legacy organizations a competitive edge.

Traditional banks already have customers who trust them. That means that the user experience offered by digital-only banks must be a significant improvement in order to pry these customers away. While entirely possible, this leaves traditional banks in a position where, through modernization, they will have the ability to maintain their current customers and attract new customers. They simply have to elevate their digital offerings.

In a 2017 interview with CNBC, Raman Bhatia stated, “We have customers. We have the trust of customers for more than 100 years, and we are investing heavily in, and learning from, FinTech; partnering with FinTechs; and developing our digital propositions for our customers. And the customers appreciate that.”

Today, traditional institutions have only a few options. They can create their own technological solutions if they have the resources for it, challenging digital-only banks on their own turf; they can partner with these other organizations or open their platforms to grant third-party access; or, they can buy up smaller companies outright.

The good news:

None of this spells the end for traditional retail banks. It simply means that legacy organizations must quickly adapt to the changing expectations of their customers.

We must remember that this type of apprehension and uncertainty has happened before. When the ATM was first introduced in 1967, bank employees feared that it could make the human teller completely obsolete, putting numerous individuals out of work. But, as we can clearly see today, tellers have not gone anywhere. This is simply another opportunity for banks to grow and change the way they behave internally.

For banks that are prepared to modernize and evolve, the odds seem to be in their favor. However, the time for change is now, and institutions that continue to drag their feet on technological investment and advancement will find themselves at a serious, and potentially irreversible, competitive disadvantage.

None of this spells the end for traditional retail banks.

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