Digital banking may have the image of bleeding-edge start-up companies, but the reality is quite different. A new research report titled Digital Consumer Banks in the U.S.: Your Money or Your Wallet identifies five different segments of digital consumer banks in the United States that all are competing for consumer deposits but are generating them in surprisingly different ways. At one competitive extreme, the transaction account is the focus with added budget management and personal financial management (PFM) capabilities, sometimes to the exclusion of other deposit or lending products. At the other extreme, premium-priced savings and time deposits generate the large deposit volumes required to fund their banks’ lending. This new report takes a critical look at the evolving marketplace.
“With over one-third of U.S. consumer households with financial institution relationships already doing business with online banks, the use of digital institutions is not a fringe activity. Online banks have established an enviable initial market position, one that improves consistently. Moreover, while they may not always be known for innovative apps or user experience, the dominant larger players offer impressive product menus, and consumers are quite willing to buy those products online. Defining digital banking as just fintech-associated firms misses today’s real market movers,” comments the author of the report.
Highlights of the research report include:
- Total deposits held by digital banking organizations exceed an estimated $1 trillion as of year-end 2018. Fintechs and their partner banks represent the smallest deposit-gathering segment.
- Full service checking accounts with associated debit cards are widely offered through digital banks, and consumers are widely accepting these online relationships for their transaction accounts.
- The ongoing low-rate environment for deposits has drawn attention, and deposits, to online banks offering premium-priced savings and time deposit accounts. Institutions able to maintain competitive deposit rates are building stable deposit bases rather than hot money that will jump to competitors for higher rates.
- The strategy of establishing digital bank brands within a legacy institution (e.g. Marcus/Goldman Sachs) appears to be having broad success, especially when combined with premium deposit pricing positioning.
- While start-up fintech banks have shown innovation in their user interfaces and market positioning, they have often struggled with charter and other regulatory strategies. Those in operation typically work with a third-party bank providing a banking-as-a-service (BaaS) account platform and charter.
1. Executive Summary
3. Consumers Vote with a Touchscreen, Not with their Feet
4. Murky Data but Clearly a Large Competitive Force
5. Five Bank Segments, All Different but All Digital
- Full-Service Online Banks
- Lenders Gathering Premium Deposits Online
- Brokerage and Insurance-Owned Online Banks
- Online Divisions of Diversified Banks
- Fintechs and the Bank Partners
6. Where Have All the Fintech Gone?
- A Global Phenomenon
- Being Realistic from the U.S. Perspective
- Being a Bank is Not So Easy
7. Strategic Implications: Where Does the Story Go from Here?
- Competition for Your Wallet
- Competition for Your Money
- Where is the Digital Bank's Value? Technology vs. Book of Business vs. Brand
- Where is the Best Fit?
8. Appendix: Companies Included in the Segmentation Analysis
- Related Research