April 15, 2019
Fiaz Sindhu, FIS SVP and General Manager, Core on Demand
Squeezed by megabanks on one end of the spectrum and nonbanks on the other end, community banks look for ways to compete for new revenue streams and new customers. To capture new deposits and new, digital-oriented customers, large banks are launching direct banks, often under endorsed brands. Simultaneously, nonbanks are chipping away at community banks’ market share by leveraging new technology, big data and Silicon Valley skills.
Community banks must decide how to react to the emerging direct banking market – maintaining a business-as-usual posture or exploring opportunities associated with direct banks.
Rationales Similar to Those of Large Banks
Community bank executives share similar rationales with large banks for launching a direct bank. Liquidity is the big driver, especially when current market forces place increasing pressure on banks to open new DDA accounts.
Community banks also understand that digital is table stakes in exploiting the massive opportunities represented by Gen Xers, millennials and up-and-coming Gen Z consumers. Already, 24 percent of Gen X members and 29 percent of millennials have an account with a direct bank, according to FIS’ PACE study. Direct banking can deliver digital and ancillary services that specifically meet the needs of young customers at a reasonable cost.
Multiple Paths to Direct Banking
Multiple paths are available for community banks to participate in direct banking. Some banks launch direct banks under their current platforms as extensions of their traditional banks. Less expensive to launch on the front end, this option, however, has downsides, including: less agility due to its core platform legacy, ongoing technical challenges presented by coordinating changes for two banks on one platform, and increased pressure on employees to manage both businesses. It also can hinder the bank’s ability to optimize brand positioning to attract new segments.
Community banks also can engage in partnerships with fintechs to participate in direct banking. In this scenario, the bank loans out its charter to the fintech in order to capture new income streams. This approach avoids disruption to banking operations but can stymie a bank’s ability to extend its own market presence.
A third option is to deploy direct banking capability on a different platform – on demand core solutions that offer turnkey software options enabling the rapid deployment and launch of direct banking on a lightweight platform. When evaluating potential providers of turnkey options, look for these attributes:
What Are the Critical Questions to Answer?
Community banks evaluating direct banking options need answers to questions, including:
It’s not too early to start a conversation about direct banking opportunities. We would be pleased to have that discussion with you.
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