With COVID-19 making in-person interactions hazardous, digitization trends kicked into high gear recently. But one sector appears to have bucked the trend – banking. Since online banks offer the same functionality as traditional banks, analysts assumed they would make serious moves in 2020.
Instead, these newcomers haven’t made the quantum leap that businesses in other sectors have. So, why hasn’t the online bank made a breakthrough? In this article, we’ll profile the roadblocks standing in the way of mobile banks.
2020 Kicked Online Migration Trends Into Overdrive
For years, business thought leaders have talked a big game about going remote. But over the past 12 months, COVID-19 put them on the spot. For the most part, this massive work-from-home experiment has worked out better than anticipated.
PTC, a software company that specializes in IoT solutions, recently wrote about the dramatic shift experienced by the front office of Huntington Ingalls. In 2019, the military shipbuilder had a vision of shifting 10% of its staff remote.
When COVID-19 hit, the company had done the “impossible”. Within a month, every front office function had migrated from their HQ to home offices, going from location dependent to fully remote in less than 30 days.
Across the global economy, this trend played out in similar ways. From restaurants launching online delivery services to doctors consulting patients over telehealth apps, the pace of change has stunned many.
Online Banks Haven’t Exploded – But They Are Growing
And yet, it appears that mobile banks, the ultimate form of fintech disruption, failed to launch in the past year. As of July 2020, only 6% of Americans had a checking account through an online bank.
But these small numbers can be misleading. It’s true – mobile banks haven’t experienced the sea change that working-from-home has seen. But there have been significant shifts in online bank enrollments. According to the above-cited study, the number of Americans with online checking accounts was up 67% from January 2020.
With rock-bottom interest rates and COVID risks at legacy institutions, more people are moving to mobile banks. With plenty of time to think over the past year, many of us realized something – you couldn’t make money on bank deposits anymore.
As of March 2021, the average savings interest rate nationwide stood at a laughable 0.07% APY. Bear in mind that this is an average – many leading financial institutions offer less than that. Compare that to what mobile banks are offering. For instance, Comenity Bank is offering customers a rate of 0.6% APY.
But that isn’t all – many online institutions also offer interest rates on checking accounts. Ally Bank is among the leaders in March 2021, charging a rate of 0.25% APY. Try finding a checking account offline that offers interest – you’ll be looking for a long time.
Are the Big Banks Too Entrenched To Overcome?
However, despite their recent gains, mobile banks are still a David compared to the big bank Goliaths. Major banking brands occupy much of our mental real estate. Because of this, it’s next-to-impossible for smaller brands to breakthrough.
Long ago, the likes of Bank of America and Citibank seared themselves into the consciousness of everyday Americans. Customers came to know them as relatively stable, bedrock institutions. Storing your life savings in your mattress isn’t safe – but storing it with these banks is (or so their brand suggests).
This perception is what every online bank is working against. Most everyday people are too busy/lack the patience to do in-depth research. So, even if an online bank like Ally has rock-solid fundamentals, most will choose to stick with their current institution.
So, mobile banks that use the angle, “just like your current bank, but it’s online”, are doomed to fail. For every Starling Bank (who more than tripled their business accounts YoY), there are scores of online institutions struggling to gain a foothold.
The stark reality is this – in addition to having a hammerlock on the minds of the masses, the big banks have near-limitless resources. If any of the mobile banks start to make progress, these multi-billion dollar institutions can spend tens of millions on advertising. By drowning out the mobile bank’s voices and installing FUD (fear, uncertainty, and doubt) in the public’s minds, they can hold the line.
For all their progress, Starling has just a 4.4% market share in the United Kingdom. Barring some unforeseen black swan event, mobile banks won’t overthrow Lloyd’s or Barclays anytime soon.
The Online Bank Isn’t Going Anywhere
Don’t misread us – we’re not Luddites that fear progress. Mobile banks are not a fad – they have a core group of pioneers that believe in their mission. But it’s also important to realize that progress doesn’t soar upward in a parabolic line – at least, not at first.
There are fits and starts on the road to success. For years, Internet Explorer had the browser market on lock. Competing browsers couldn’t dislodge the mighty IE. Then, Google Chrome debuted. By cornering the market on load speed, they dethroned Microsoft’s default browser in a brisk four years.
If the online bank is to succeed in the long run, these institutions must take a similar path. By exploiting the weaknesses of bigger incumbents, they can become a force in the financial world.
