Taking on direct banks – what must legacy players do?

Find out what steps legacy banks should be taking if they are to successfully compete with emerging digital-only players.

It’s been frequently said over the last few years that one of the biggest challenges to established players in the banking sector is the emergence of new, digital-only competitors who are using technology to shake up the market.

These banks, without the overhead of physical branches and sometimes even without a traditional contact center where customers can speak directly to a human advisor, take advantage of ubiquitous digital technology and the fact people are now more comfortable managing most, if not all, aspects of their life online.

One traditional viewpoint has been the idea that without a recognizable human element or the ability for customers to discuss their accounts in detail in-person, these banks would have limited appeal, and would be aimed mostly at younger consumers with simpler financial needs.

But has this been the case in practice? One new survey suggests that many of these digital-only offerings are winning out over traditional players when it comes to satisfaction levels, so banks need to be thinking carefully about the experience they offer.

Direct banks show high satisfaction

A recent study by JD Power into customer satisfaction among banking users revealed that so-called direct banks – those which lack physical branches – score strongly in areas such as loyalty, advocacy and overall satisfaction.

The company’s 2017 US Direct Banking Satisfaction Study found the overall score for direct banks stands at 865 out of 1,000. This is 49 points higher than the average score for traditional banks identified in the firm’s equivalent 2017 US Retail Banking Satisfaction Study.

When it comes to loyalty and advocacy, direct banks again come out ahead. More than three-quarters of direct bank customers (76 percent) questioned said they “definitely will” recommend their bank to others, while 72 percent stated they “definitely will” reuse their bank. By comparison, the figures for traditional bank customers stand at just 57 percent and 56 percent respectively.

Bob Neuhaus, financial services consultant at JD Power, observed: “Customers who take the leap of faith with branchless banking are having very favorable experiences. Look for continued rapid growth from branchless banks and expansion of branchless strategies from traditional banks, especially outside of their branch footprints.”

The implications for legacy banks

Focusing more closely on digital services will therefore be a necessity for traditional branches if they are to counter this rise and win back customers who may be some of the most lucrative targets for financial institutions.

JD Power’s survey noted that those consumers most likely to favor direct banking tend to be well-educated and have high levels of disposable income. It noted that two-thirds (67 percent) have a bachelor’s degree or higher, while 65 percent are either affluent (with an average income of $150,000 or more and investable assets of $250,000 or more) or mass affluent (either income of $150,000 or more and investable assets less than $250,000, or an income less than $150,000 but with investable assets of at least $100,000).

While many legacy banks may assume that it will be younger customers who turn to digital solutions, the average age of a direct banking customer is 47 – slightly lower than 53 for traditional banks. They are also more likely than average to be employed full-time, while direct banks also have a greater number of minority customers than traditional banks.

Mr Neuhaus was quoted by American Banker as saying that as direct banking matures, traditional banks must step up to digital, and ensure they offer a comprehensive, feature-rich experience to those customers who favor branchless interactions.

For instance, direct bank customers who were offered more than five features on their bank’s website or mobile app were significantly more satisfied than those whose sites and apps had fewer than five features. This therefore may be a good place to start if banks are to re-engage with the growing number of customers who prefer to manage all their finances through digital channels alone.

Written by Glenn Tom

Glenn Tom

Glenn Tom is NCR’s Senior Director of Global Solutions Marketing. In this position, he is responsible for leading global marketing efforts for all of the division’s consumer- and FI-facing solutions, including digital banking, branch, ATM hardware and software, channel management, payments & transaction processing and enterprise fraud & security. Prior to joining NCR and Digital Insight in 2008, Glenn previously held marketing and general management positions at Intuit, Morgan Stanley, Citibank and American Express. Glenn has a BA in Liberal Arts from Claremont McKenna College, a BS in Industrial Engineering from USC and an MBA from The Wharton School, University of Pennsylvania.

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