At the turn of the millennium, direct banking was viewed as being almost taboo. Internet upstart ING Direct was scoffed at by the traditional, stodgy brick-and-mortar banks. Now the bank is the envy of the booming direct-banking sector, defined as those who only use the Internet for their banking needs.
Alenka Grealish, managing director for Boston-based Celent, projects that by 2010 the direct banking sector will have $378 million in core deposits, up $168 million from 2007 projections of $210 million. ING has succeeded by effectively marketing itself as something very different than traditional banks, she says.
“They ‘poach marketed’ [customers] like a car company,” Grealish says. “They had a lot of glitzy promotions, and went at it like a Web-based company, like an Amazon. They had a whole different mindset [than typical bank] ads.”
Cathy Graeber, vp and principal analyst at Cambridge, MA-based Forrester Research, adds that the direct-banking sector is still in its infancy. In the third quarter, only 11 percent of online consumers had high-yield savings accounts through an Internet direct account. But that number is up three percent from the fourth quarter of 2006—and expected to grow steadily.
The still low penetration by the direct- banking sector means there is enormous room for growth, says Rick Greenberg, a partner at Rosetta Marketing.
The sector is driven by a very specific group of people. “Today’s customers are more self-reliant ... than traditional banking customers,” he says. “The folks who have adopted to date are what we would term a ‘personality’ segment. So the small portion of consumers who are really driving the balances and adoption in the category are all aligned pretty consistently when it comes to their beliefs about how they like to bank and how they like to deal with money.”
Graeber agrees with Greenberg that there is a specific profile for this segment: Members are educated, tend to be male, and score high in the affluence department. But, no, they are not Baby Boomers. Some 64 percent of this segment is made up of Gen-Y’ers and Gen-X’ers, in the 24- to 40-years-old range, Graeber says. “I think the dynamic we are seeing there is, yes, it would tend to be the Boomers with the more money to invest, but the Gen-Y’ers and Gen-X’ers are far more comfortable applying online and [with] the electronic movement of money.”
Grealish ads that these younger people are the same ones going online to purchase products, play videos, download music, blog, and—most importantly—shop for good bank rates. And there is where the challenge lies. Many direct banks are finding it very difficult to create loyalty. Graeber says that 15 percent of high-yield savings account customers have accounts at multiple direct banks. Thus, with the click of a mouse these consumers can move their money from bank to bank, depending on the advertised rate.
“One of the biggest challenges for these direct banks is how can you earn the loyalty of these customers so that they are not just parking big balances until they find a better rate,” Graeber says. “I call them the ‘day savers’ as opposed to ‘day traders.’ They’ve got time to check their balances and search for better rates.”
Making a site and product “sticky” is a big bonus. If a bank only has one product, such as a savings account, customer loyalty may be difficult to achieve, because rates change so often. Banks like ING and HSBC are testing electronic checking accounts to give customers more direct-banking options. Others are considering online credit products.
“If all it is is a bunch of people with the same product and the only difference is rate, then you are putting yourself in a very vulnerable position because you can’t always be the rate leader,” Greenberg says. “What we see is that when you layer on these different products, it dramatically increases customer-loyalty levels. As people adopt more of these products, it deepens their relationship and, frankly, makes it harder for them to switch.”
