• Sanjeev Kumar

Back To The Future: The Evolution of Branchless Banking

Digital-first banks have gained significant prominence in the last decade with several startups, banks, and non-banks launching and scaling virtual and branchless banking propositions, and doing so by leveraging new technologies to deliver mobile-first experiences.


However, if we look at the historical evolution of branchless banking, we see that several incumbent banks have experimented with the model right from the 1980s and 1990s, through a branchless banking proposition called Direct Banking.





Direct Banking: Focus on Efficiency and Ease

The 1st generation of Direct Banks used telephone banking to enable customers to perform a range of financial transactions over the telephone without the need to visit a bank branch or ATM. This initiative, which saw growth during the 1980s and 1990s, was first introduced by Girobank in the United Kingdom, who further established a dedicated telephone banking service in 1984. One of the world's first fully functional direct banks was First Direct, which launched telephone banking in the United Kingdom in 1989. A subsidiary of the then Midland Bank, it pioneered the concept of no branches and 24-hour service through a call center.

ING introduced the same concept in other countries in 1997 as ING Direct, a bank without branches that offered attractive savings accounts and other retail banking products.


In early days, direct banks offered their services through telephone banking or through an independent banking agent network. Some also provided access to financial transactions via ATMs (often through interbank network alliances) and mail. Direct banks' business model allowed them to operate at extremely efficient levels by reducing significant costs of maintaining a branch network, and hence, they were able to offer higher-interest rate savings accounts and lower-interest rate loans than most traditional banks. These banks offered significant ease to customers in accessing banking services 24/7.


- Bumps Along The Way: The Highs and Lows of Direct Banks

The development of online banking in the early 2000s started a long term decline in the use of telephone banking in favor of internet banking. Several direct banks started to offer internet banking through online channels. This manifested in the form of dozens of online-only internet banks in the late 1990s and early 2000s, such as Egg, Fineco, mBank and Skandiabanken. Launched in developed markets, these online banks often offered customers high interest rates. Despite providing such progressive services, many were short-lived, and some of the survivors later struggled during the crisis as the traditional banks sharply increased their deposit rates.


One such intriguing case is of Soon, a mobile-banking product of Axa Banque, that was born in 2014 with the aim of being a bank for young people. Along with delivering basic services, including the bank card, checkbook and a passbook, it was also home to several relatively interesting banking aspects. The 100% mobile banking brand introduced the concept of “remainder to spend” - a feature that made creation of budgets a possibility. With a first payment of 40 euros and most of the services offered free, Soon by Axa Banque built a customer base of 30,000 three years from its inception. Alas, all good things must come to an end, and in the wake of 2017, Soon customers witnessed its D-day, and were to switch to the Axa Bank application while keeping the same identifiers.

In the same year, digital lender Zuno Bank, a unit of the Raiffeisen Bank International AG in the Czech Republic and Slovakia regions, saw an end to its operations as a result of the falling through of its selling to ABH Holdings SA. The 2010 founded defunct direct bank was the first in the CEE region to target its services around a complete 24/7 online banking model. After it’s termination, its clients were moved to Tatra Banka in Slovakia and Raiffeisen Bank in Czech Republic.


Another remarkable instance worth mentioning is of BankMobile, America’s first no-fee mobile, tablet and online bank, that saw a tremendous reach of 100,000 customers in less than a year of its launch in 2015. A brainchild of Customers Bank, the online banking service set new standards amongst a sea of other online-only subsidiaries by providing financial aid reimbursements via debit card accounts to college students. However, despite supplying a banking experience with a B2B2C go-to-Market strategy, the brand entered a merger agreement with Megalith Financial Acquisition Corp in 2020, to give rise to publicly-traded BM Technologies Inc.


In 2013, BNP Paribas took the revolutionary step of introducing Europe’s first 100% digital mobile bank through Hello bank!. Initially launched in Belgium and Germany in May 2013, the digital subsidiary soon saw its expansion in neighboring countries of France and Italy. By 2015, its market was flourishing across Austria, with a booming market reach of 2.5 million customers. This was soon followed by the brand replacing Cetelem trademark in the Czech Republic in May 2017. Not only does the digital brand offer services of banking, brokerage, insurance, loans and savings, but the Belgian branch was also one of the first three banks to launch Google Pay in the country. At the end of 2017, Hello bank! reached 2.9 million customers across all 5 of its original markets.



Digital Banking: Focus on Experience and Expansion

The digital banking phenomenon, which started with internet banking and quickly matured to mobile-first offerings, was centralized on delivering seamless and intuitive banking experiences to customers. Incumbents who are today launching digital banking propositions, are also taking a cue from the challenger banks and neobanks to expand their offerings to traditionally underserved segments, such as GenZ, Millennials, Freelancers and Micro-SMBs.


Digital banks are direct banks that acquire and serve customers primarily or entirely through digital touchpoints. They aim to distinguish with erstwhile direct bank offerings by spotlighting digital technologies–such as cloud computing, APIs and microservices, big data and artificial intelligence–in order to transform banking. They make banking services available on any device, in context and at any time, with paperless, automated processes.


The initial period saw launches from developed market banks in Europe. From the onset of 2015, digital banking has grown across the world with incumbents from emerging markets such as India, Southeast Asia, Africa, Middle East putting forward their own digital-banking arms.


- A Little Leap, A Little Hitch: The Highs and Lows of Digital Banks

One such success is that of the high-yield consumer bank, Marcus, an initiative founded by Wall Street-acclaimed Goldman Sachs in 2016. With several unique goodies in its bag like no-minimum deposit savings accounts, no-penalty Certificate of Deposits (CDs), and no-fee personal loans, it was only a matter of time before it made its mark as one the best online savings account, having some of the best CD rates and also being #1 in personal loan customer satisfaction in 2019, as recognized by J.D. Power. This only adds to the many triumphs the consumer lending business has encountered as of recently: a booming 8 million customers, $100bn in deposits, and partnerships with major brands including Apple, Amazon, and Walmart.


In a similar lane of consumer-centric, app-only banking, imagin. by CaixaBank was launched in 2016, with an aim to drive the idea of a lifestyle-oriented financial services forward. In its first year since its inauguration as a new digital community concept in 2020, the youth-targeted bank has attained new heights with a growth rate of 20%. As of June 2021, the app has successfully gained a score of 83 out of 100 for mobile banking in the neobanking sphere in Spain, making it a leader amongst contending neobanks and fintech companies in the region.


However, the journey of success cannot be accomplished without throwing light on the hurdles along the way. As much as the second generation of digital banks introduced their customers to financial convenience across the globe, a few stumbled in their race to make it big. Finn, JPMorgan’s hybrid of digital services with some in-branch access, was shut down only nine months after its initial launch in 2018. Having managed to sign up 47,000 customers since its inception, the bank’s failure can be attributed to a lack of demand for such a bank-with-digital-bank model, and perhaps, also the targeting of a wrong audience to deliver this theory to. Royal Bank of Scotland’s handiwork, Bo, saw a similar downfall just six months from its introduction. Despite its new “piggy-bank” feature, no transaction fee for abroad transactions and real-time transaction alerts, the UK-based digital bank witnessed an end through a merger with the bank’s challenger brand, Mettle.


Another mobile-first banking app that was aimed at younger generations saw its demise when Wells Fargo stopped accepting new users for its creation, Greenhouse, recently in 2020. The millennial-friendly platform also supplied a “Set Aside Account”, which was a similar concept to other apps offering budget plans by keeping savings aside for payments of bills, personal use, etc.

Even so, some undeterred players made a comeback with new models that constituted the best of both worlds of commercial and consumer banking. JPMorgan’s Chase is a prime example of this innovation in recent years. While other heavyweights significantly are relied upon for their key banking services, JPMorgan is an all-rounder, providing an array of services across investments, mortgage, banking, equity, sports, and even entertainment. As of date, the retail banking brand is set to sally its services outside of North America, with having expanded overseas in the UK, in order to set the ground for building a business around the tradition of free current accounts.


The incumbents have paved the way towards varying opportunities of digital-first banking, and are also taking the fight back to the startups. Without a doubt, there would be speed-bumps along this developing journey, but the revival sure sounds promising with several technological capabilities as well as business learnings available as the backup. Challenger/neobanks are also no pushovers, having scaled their business manifolds and having raised 100s of millions over the years. Consumers would be the eventual winner as incumbents roll-up their sleeves to defend their territories with fair, transparent and personalized banking products delivered through digital channels.


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