REDEFINING DIRECT BANKING (Aug 2015)

Product and Pricing Incentives

Benefits and Concerns

Provider Competition

Key Finding from the Report:

SYNERGISTICS survey results reveal that more than one-third of Internet households are customers of an Internet-based or direct bank, and more than one-quarter express interest in these cyber competitors.

A83 Prop Graphic

Highlights of the Study

This study examines direct banking and assesses the scope of these relationships. It also determines the competitive strength of Internet-only or direct banks.

National Internet Survey – 1,012 consumers age 18 or older.

Key Dates

August 2015 — Project Report available.

Strategic Questions

  • To what extent have households established relationships with online or Internet-based financial institutions?  With what types of providers do consumers have these relationships?  What is the customer perception of these providers – are they subsidiaries of traditional institutions or “pure” direct online institutions?
  • How frequently do customers access their accounts with online or Internet-based providers and what types of activities do they conduct?  Has this activity negatively impacted traditional channels?
  • Which access channels – other than the web – are customers using to interact with their online providers – including ATMs, mail, and mobile devices?  Do or would customers value a physical presence for their online providers via the “cafés” concept?
  • What motivations – particularly rewards or incentives – have been important in acquiring relationships in this market and can they be effective for further market expansion?  What barriers must be overcome to appeal to nonusers?
  • What is the potential among nonusers to establish online or Internet-based account relationships? Which perceived benefits or advantages should be promoted to drive future expansion?
  • Is attrition a factor providers should be concerned with in this market?  For what reason have customers ended relationships with online or Internet-based providers?  Would competitive rate competition by traditional providers impact this market?
  • Which types of customer segments – in terms of demographics or financial profile and behavior – are the primary user bases of direct banking?  Is there potential for expanding the market to other groups?

Research Issues

  • Internet-only or direct banks are key competitors in today’s financial marketplace. These branchless institutions have gained a competitive advantage by providing better rates on savings and loan products. Many of these web-based institutions are able to offer better rates and reduced fees because there is no need to maintain costly physical branches or staff.
  • This coupled with the offering of incentives and bonus programs make direct banking attractive to consumers. Free checks, no ATM fees, and remote deposit capture are promoted as features of Internet-only banks. Consumers who become direct banking users may go beyond being attracted by bonus rates to purchasing other financial products and even establishing primary relationships.
  • While consumers may be attracted to the higher rates and low-cost banking options, they may struggle with the lack of physical locations for regular banking activities and customer service. Having a clear understanding of the consumer perspective on direct banking and Internet-based institutions is essential in order to compete effectively in the highly competitive financial marketplace. [A83]