Why You Should Bank Without a Branch


Customers are becoming comfortable with online banking and mobile applications. (Getty Images)

The first online banks hit the U.S. market more than 20 years ago, attracting customers with higher interest rates and lower fees. While some early innovators are no longer operating, others have evolved. Take ING Direct, for example, which was acquired by Capital One and transformed into Capital One 360 in 2012, or Ally Bank, which is one of the most dominant names in the online banking market.

Today, however, these banking institutions face competition from new direct banks as well as traditional banks that are looking to expand using the online-only model. For instance, Finn by Chase and Marcus by Goldman Sachs bring digital banking to areas in which the companies have no physical presence.

“What we’re fundamentally seeing is a massive shift in consumer behavior,” says Rajesh John, principal in the financial services practice at management consulting firm A.T. Kearney. Customers are more comfortable and confident with online banking and mobile applications, and often prefer them for their convenience and ease of use.

Customer satisfaction surveys illustrate this change with top ranking positions from consumer insight firms like J.D. Power going to branchless banks. However, customer satisfaction isn’t the only benefit of online banks. Customers may also find they get better rates and the same services they would from a traditional institution. Read on to discover the advantages of digital banking.

Online banks outpace traditional banks in customer satisfaction. According to the 2018 J.D. Power U.S. Direct Banking Satisfaction Survey, branchless banks surpass conventional retail banks in customer satisfaction.

“The [direct banking] group is setting a very high standard for satisfaction,” says Bob Neuhaus, financial services consultant at J.D. Power. All but one of the direct banks ranked by the firm outperformed national banks operating under the traditional model.

On a 1,000-point scale, direct banks had an overall satisfaction score of 863, compared to the overall satisfaction score of 806, calculated as part of the J.D. Power 2018 U.S. Retail Banking Satisfaction Survey. The top-scoring direct bank in 2018 is Capital One 360, followed by Ally Bank and Charles Schwab Bank.

Those results don’t surprise Diane Morais, president of consumer and commercial banking products for Ally Bank. “Our customers are incredibly loyal and satisfied,” she says. It’s something she attributes to the bank’s commitment to offering a convenient mobile experience, 24-hour customer service and competitive banking rates.

Direct banks are still a secondary option for some. While online banks have become mainstream, most people who use them still have accounts at traditional institutions. J.D. Power found only 43 percent of those with accounts at a direct bank consider it to be their primary bank. “To some degree, the relationships are not as complex as you see with traditional banks,” Neuhaus says.

Those who primarily use a direct bank report even greater satisfaction than those who use one for secondary purposes, such as to hold an emergency fund. J.D. Power found overall satisfaction among primary users was 873. These account holders also made 41 contacts with their bank, as opposed to 21 for those who use a direct bank for a secondary account. What’s more, direct banks may offer phone, email and chat options to contact customer service.

Better rates are often an added benefit. Without a branch system to support, direct banks often require lower costs and entice consumers with competitive interest rates. That’s one feature that attracts many people to online institutions. “[People] want their money to work hard for them,” Morais says.

The online banks Salem Five Direct and VirtualBank offer the highest interest rates on savings accounts. They have an annual percentage yield of 2.05 percent and 2.01 percent, respectively, and require only a $100 minimum deposit. Meanwhile, the national average for traditional banks is 0.09 percent.

While competitive rates help drive people to bring their savings to online banks, Morais says it isn’t unusual to see customers open additional accounts after a positive initial experience. Once they try online banking, customers “very rarely go back,” she says.

Mobile technology provides a full range of services. Despite operating without branches, direct banks can provide almost all the services of traditional banks. “The only thing we don’t support is if people want to give us cash,” Morais says. However, some people work around that by purchasing money orders with their cash and sending those to the bank for deposit, she adds.

Otherwise, customers can use mobile deposits, which involve snapping a photo of a check with a smartphone, and direct deposit or transfers from other institutions to fund their account. Withdrawals can be made through electronic transfers, ATMs or a debit card.

John says the mobile interface used by many direct banks is part of what wins over customers. “It’s very clean,” he says, adding, “It’s very simple. It’s very elegant.” Today’s mobile apps and websites have been developed in such a way as to make them easy to navigate, even for those who have limited technology skills, he adds.

Financial technology services differ from direct banks. Direct banks are subject to the same regulations as traditional banks, and their deposits are insured by the Federal Deposit Insurance Corporation, known as the FDIC. Should a bank fail, the FDIC will pay up to $250,000 per owner for certain accounts, such as savings and checking accounts, and some retirement and trust funds.

In recent years, financial technology – or fintech – firms have launched a number of apps and websites that provide services similar to those found at banks, though they are not licensed as banks. Peer-to-peer payment services like Venmo and PayPal are two examples. These services allow people to hold money in an account, make payments and even use a linked debit card. However, they do not offer FDIC protection, nor are they subject to the same regulations as banks.

John notes that fintech apps can be innovative and useful for consumers. He expects them to continue to crossover into banking activities in the coming years. However, consumers need to understand that they are not the same as a bank.

Switching to a direct bank that doesn’t offer any branches may feel like a risky proposition, but the reality is many people already do most of their banking outside of a branch, and a direct bank can offer the same services at a better rate.

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