Have direct banks found a direct line to consumers’ hearts?

Conventional wisdom once would have said consumers prefer a traditional bank with branches and humans to talk to and that direct banks — as in those without branches — were only for rate chasers.

But the tide has apparently turned.

Consumers are now rating their satisfaction with direct banks like Capital One 360 and Discover Financial Services' Discover Bank unit higher than traditional banks, according to a study released Thursday by J.D. Power. Direct banks scored on average 865 out of 1,000 based on survey of 2,629 consumers. By comparison, traditional bank users scored their institutions at 824 on average.

The results illuminate what direct banks are doing right, which direct banks are most popular with customers, and what traditional banks need to do to better compete.

Scott Lippert, vice president and bank senior strategy officer at USAA, sees this as a side effect of society’s overall shift toward digital.

“We see our members’ expectations increasingly being set by companies that are really leading the way outside the banking industry, like Amazon,” he said. “Overall, you see a lot of transactional tasks shifting to these channels that are more adept at handling them.”

J.D. Power ranking of direct banks

Direct bank customers are also more likely to recommend their banks: Seventy-six percent of direct bank customers say they’d recommend it to others, while 55% of traditional retail bank customers say they’d recommend theirs.

Direct banking customers skew younger. The average age is 47, versus 53 for traditional bank customers. They are more educated: Sixty-seven percent have a college degree, compared with 54% of traditional bank customers. And they are wealthier — 65% are affluent or mass affluent, far higher than the 47% of traditional bank customers.

They are, of course, digitally savvy and crave additional functionality. Direct bank customers who were offered more than five features on their direct bank’s website or mobile app were significantly more satisfied than those whose sites and apps had fewer than five features.

“Given that there isn’t a branch connection for consumers, there’s so much focus on digital, the features and range of services on digital will take on greater importance,” said Bob Neuhaus, financial services consultant at J.D. Power. “It’s a bank in your pocket.”

That savvy is perhaps also to the detriment of those that don’t live up to expectations. At 19%, direct bank users are far more likely to switch banks than the 6% of traditional retail bank customers who said they would.

One reason for this is these users are price sensitive — they come to a direct bank because they’re attracted to the low fees and high interest rates, Neuhaus said. About 14% of direct bank customers said they chose their bank because of competitive interest rates, and 10% said because it offered free services.

When someone else offers them a better rate, they may take off. Direct bank customers also tend to have a simpler, easier-to-move relationship with their direct banks.

“You’re not anchored to a particular location,” Neuhaus said. “Many people use this as a secondary relationship.”

Note to traditional banks: Time to step up digital
One point that traditional banks ought to pay close attention to is the satisfaction of the one-third of traditional retail bank customers who never visit a branch. That group gave their bank an average score of 797, and is likely a prime target for direct banks.

“As the direct banking model matures, largely fueled by the mobile experience, this is a threat and opportunity to traditional banks,” Neuhaus pointed out. “They have to begin to do this kind of model well and get away from the dependency on the branches.”

What the leaders get right
Capital One and Discover didn’t make executives available for comment, but both emailed statements.

Capital One is seeking to “help alleviate financial anxieties and empower people to feel more confident in their relationship with money,” said John Durrant, senior vice president at the bank.

Discover’s Dan Capozzi, a banking senior vice president, attributed its success partly to not being encumbered by a branch network.

That structure “allows us to invest more into offering attractive rates, focus on delivering problem-solving customer service 24/7, and eliminate nearly all of the fees that branch-based banks charge their customers,” Capozzi said.

Though J.D. Power doesn’t rank USAA in its lists because of its mission of serving military members and their families, the bank received the highest customer satisfaction score in the study: 895.

What does it do to earn such a high score?

Lippert chalks it up partly to the focus on its members’ financial security — for example, helping them save, making sure they have an emergency fund and helping them start to invest.

The organization also has an intense focus on member experience, Lippert said. USAA recently implemented the ability to replace all lost or stolen cards at once, for instance.

“When you lose your wallet, you tend to lose your whole wallet, so we want members to go through that one experience,” Lippert said.

USAA has also added a couple of new features to its mobile app recently, including a credit card recommendation engine that helps members decide which credit card is best for them based on their behaviors and the cards’ costs and benefits.

The other is for travelers. “When you’re traveling, chances are you’re traveling with a debit card and a credit card,” Lippert noted. “We introduced a combined flow for that — tell us where you’re traveling and the cards that apply, and you go through one experience.”

USAA also encourages its member service reps to be empathetic. “Our MSRs demonstrate empathy every day,” Lippert said. “They handle calls that maybe some MSRs at other companies may not handle. For instance, the survivor relations team is uniquely tuned to demonstrating empathy in those calls.”

The study also found that problem resolution had a big impact on customer satisfaction. Customers who have a problem that’s resolved by a customer service rep have a satisfaction score of 883. Those who have a problem a rep can’t or won’t resolve have a satisfaction score of 630. If there’s a problem and the rep apologizes, the customer satisfaction score is 852; with no apology it drops to 752.

So clearly fixing problems is a huge part of at least not making people unhappy.

At USAA, “We have a track and a distinct focus on fixing the root cause and reducing member pain points,” Lippert said.

Neuhaus also spoke up for the importance of apologizing.

“I think apologies are very important in direct banking, which has a much lower touch by definition,” he said. “This is where personal touch has to be there; it’s an opportunity to provide it, and it does make a difference.”

Editor at Large Penny Crosman welcomes feedback at penny.crosman@sourcemedia.com.