The history of the digital-only bank business model is mixed in the US. Several well-funded ventures including WingSpan Bank (Offered by Bank One 1999-2001), Finn (Offered by Chase 2018-2019), and NetBank (’96-’07) never reached scale and shuttered. In contrast, Ally Bank and Goldman Sachs Marcus have been successful in growing digital banks to ~$100Bn in deposits. However, this doesn’t crack the top 10 in the US measured by deposit share.
Now, a new generation of digital-only neobanks have raised considerable amounts of VC and investor funding. Although aggressively focused on growth few appear to be profitably scaling. Some even appear to be struggling like Monzo, which, as reported in the Financial Times recently, has withdrawn its application for a US licence.
This begs the question: are branches a required part of the channel mix to successfully scale a bank? Anecdotally, three data points may support the proposition that branches are still relevant:
- Traditional banks continue their branch-based models (number of branches per capita today is the same as it was 20 years ago per American Banker) – this is arguably indicative of a number of factors not least of which is access to finance for certain demographic groups such as the elderly who still prefer to bank in person.
- Industry leaders like Jamie Dimon view branches as key customer engagement channels – for the reasons above but also perhaps because there is an underlying trust component to this. Physical manifestations of a bank can be more reassuring than something that really only exists digitally. In an industry still looking to rebuild its reputation more than a decade after the Global Financial Crisis, maybe being seen is tantamount to being trusted.
- Digitally savvy millennials visit branches occasionally early in their financial life and more frequently as their financial needs become more complex. Having a checking account when one’s financial situation is relatively straightforward is fine – it is a simple funds in/funds out proposition. But as mortgages, retirement savings, investing or business loans become features of people’s lives, even those who are ‘born-digital’ look for face-to-face advice in the reassuring environment of a physical branch.
Perhaps the role of the branch has evolved to be an essential advice center for more complex consumer and business products and symbol of trustworthiness. After all, why should retail banking be any different to other forms of retail? If omnichannel is increasingly the way forward for the majority of retailers then banking should take note. And, for the ‘born-traditional’ banks it’s a refreshing reminder that the time, effort and cost they have invested in building their brands and ensuring greater levels of regulatory compliance were not for nothing. New market entrants will always be a disruptor, regardless of sector, but the barriers to entry in Financial Services will also be high and ‘born-digital’ businesses may struggle to balance their growth aspirations with the stringent demands associated with handling other people’s money.