Let’s start from scratch and build a fully digital bank using the latest fintech deliveries. It can be done. A bank can now be ‘built’ that is not dependent upon a physical location to deliver prompt service, to allow customer transactions, and to acquire new accounts.
Of course, we will need a core processing solution, and ATM/debit card processing. The digital bank will serve customers just like any other bank including yours. In many ways, core processing systems become utilities providing transaction posting. We will plug into these systems a highly-capable internet banking solution, that will include bill pay, and P2P payment capabilities. Then we will add a robust mobile banking app – because who leaves home without their phone these days? With a smartphone banking app, it’s like having a branch of your bank in your pocket. Our banking app should include the ability to capture checks for deposit. It has to have that capability if we aren’t going to have a physical location for this new bank. In addition, we will need an internet-based new accounts acquisition service, and hopefully, this service will be extended into a smartphone banking app.
We can take that app one step further by adding a voice-enabled chatbot. Chatbots are computer programs that are able to respond intelligently to text or spoken commands.
Let’s make our new digital bank so convenient for self-service that customers discover that contacting the bank for most service needs is no longer required. This bank will be fully digital and fully automated. Our primary form of communication will depend upon e-mail statements and notices. Customers will have the ability to email and to text message customer service as well.
Most of what I describe is available to your bank today. You could configure a fully digital branch. Of course, your competition could, too, and this competition could be from anywhere.
In 1999, Wingspan Bank (a subsidiary of Bank One) opened as fully digital bank. It was designed for the Internet only, because smartphones weren’t available then. Ultimately, this digital bank was not able to open enough accounts to sustain it. It closed a year later. One huge issue confronting Wingspan Bank was that it did not have any ATMs, however, its customers could use Bank One ATMs limiting its service area. And, all checks had to deposited by mail. That had to be cumbersome as there were far more checks written in 1999.
Our fintech bank won’t have that issue and the ATM issue could be avoided by joining a free network that does not have service charges. However, a free network could prove costly to our digital bank.
Simple (formerly BankSimple) has chosen to follow that route by joining a nationwide network to avoid withdrawal fees. BBVA acquired Simple in 2014, two years after it opened for $117 million, the equivalent of $1,200 per customer! That is almost unbelievable! BBVA has promoted fintech development and this acquisition played right into that strategy. Obviously, the acquisition cost was more than the value of the accounts being acquired.
I’m surprised that there aren’t more fully digital banks offering their services in the U.S. There certainly are several fully digital banks popping up worldwide and these banks are enjoying substantial investment. Number26, a German digital only bank, has raised over $40 million from investors including Peter Thiel, co-founder of Paypal.
Then there is Monzo (formerly Mondo) a London-based digital only bank that set a record for crowdfunding with over one million pounds (approximately $1.3 million dollars) raised in just 96 seconds. In August, Monzo received a restricted banking license and has a waiting list of 200,000 prospective account holders!
Tandem is another London-based app only bank. Tandem has received its banking license, but has yet to open its virtual doors. Interestingly, nearly all of Tandem’s investors are Americans including eBay’s Founder Pierre Omidyar. Tandem was co-founded by Matt Cooper, who is also the co-founder of Capital One.
England seems to be a hotbed for digital only banks including Atom Bank, which operates there. Atom has been in service for over a year and has BBVA as an investor. Last year, BBVA took a 29.5% stake in Atom for $68 million. BBVA, as I mentioned earlier, also purchased BankSimple. Clearly, BBVA has a digital strategy and it is investing heavily in it.
Another UK-based digital bank is Starling Bank founded by Anne Boden, who served as the former Irish Allied Banks Chief Operating Officer in 2014. Starling Bank has received $70 million in funding as of earlier this year.
On our side of the pond, there is Mexico’s digital only Bankaool. Since October 2015, Bankaool opened 65,000 accounts in its first 10 months and it hopes to open 100,000 more accounts by year-end.
There are several other digital only banks in operation with more in formation worldwide. Digital banks have interesting stories about their start ups, and they appear to be successful now, but how they fare over the long term is unknown. The question is “When will the U.S. market see similar competition?”
In my opinion, I doubt that this competition will come from a startup; if so, certainly there would already be news of that. More likely, a regional or national bank will extend its offerings and services through a smartphone app. Which financial institution is actively developing that kind of bank today? And, how will you respond when facing this type of competition? Below are links to digital banks discussed in this article.