Will Digital Only Banking Continue to Accelerate?

We are living in an era where digitalization is taking place in every industry sector. With respect to banks, some are rapidly adapting to the digital age, while a few financial institutions are progressing at a slower pace. There are even a few bank holding companies exploring the possibilities of developing a digital-only bank under their corporate umbrella as part of an existing bank or new bank altogether.

Renowned banks such as Wells, Chase, Citi, and Fargo are all reportedly in the development stages of potentially offering digital-only interfaces and strategies. Overseas, the popularity of digital-only banks is gaining traction and is expected to continue. The overseas banks have all seemed to rapidly achieve digital customer growth since their launch, while U.S. banks are trying to accomplish the same.

A recent survey by Marqeta shows that more and more customers are shifting to digital banking platforms. A striking piece of data in the survey shows that 62% of Americans prefer an online or digital banking experience. The survey results indicate that digital banking is here to stay and a large component of the financial future.

How Can Traditional Banks Approach Digital Only Banks?

Financial institutions are still learning the ins and outs of starting and running a parallel digital platform, and what these ventures should aim to achieve. There are two approaches that banks can take when creating a parallel brand. The first approach relies on banks’ existing IT infrastructure, while the second entails building a new digital organization from scratch. Given the difficulties banks have had with digital transformation in recent years based in part on legacy systems, many feel they should start from the ground up.

A parallel brand can be viewed by banks as nothing more than a new brand that is linked to the parent institution. The parallel bank in this case is simply an extension of the original organization, using the same legacy technology infrastructure. As a result, the parallel bank is reduced to a branding exercise, with the same institution wrapped in a new marketing strategy aimed at younger customers who don’t frequent branches.

While this branding approach can provide some of the benefits mentioned above, the alternative approach can provide far more. The second approach is to treat the parallel bank as a completely new type of organization, free of the constraints that have hampered legacy banks’ digital transformation efforts. The parallel bank is more than just a marketing strategy in this case. It’s a sandbox where the parent organization can learn how to create and run a truly digital organization.

Taking this approach necessitates the creation of a new technology infrastructure that allows the parallel bank to integrate new technologies and partners while rapidly iterating on new products and services. As the parallel banks experiment and grow, the parent organization will gain a better understanding of emerging technologies, potential startup partners, new business models, different organizational structures, and forward-thinking recruiting tactics.

The Rise of Neobanks

The term neobank often arises when discussing digital banking. Neobank is a term that has blurred, as not too long ago neobanks were considered online-only financial institutions that were similar too, but not banks. Now the term seems to be applied to both banks and nonbanks that possess state of the art financial technology offering limited banking type services.

However, one thing is for sure today, neobanks with or without a banking license are making a splash rapidly growing their user base and attracting massive amounts of equity funding as financial services pivot toward digital delivery channels.

Digital-only banks have become a trendy buzz all over the world as the financial industry continues to innovate and customers continue the march to online services.