For banks that have spent decades refining their business models and building brand loyalty, it may seem like a curious decision to launch an online-only bank that targets a different audience.
But a growing number of institutions have decided it’s a step worth taking. A digital bank with its own brand can be a low-risk way to test new technology and expand nationally, bankers and industry consultants say. And in a rising-rate environment, when rate-chasers might be looking switch institutions, an online bank can help its larger parent company assist in gathering deposits.
To be certain, it’s a very crowded field, populated by established players such as Ally Bank, Capital One 360 and Synchrony Bank, as well as upstarts geared toward millennials, such as Chime Bank and Douugh.
Even Goldman Sachs, the venerable investment bank, now runs an online-only consumer bank. In the two years since it opened what was then called GS Bank and has since been renamed Marcus (after founder Marcus Goldman), the bank has accumulated roughly $8 billion of consumer deposits.
But several large regional and even community banks have recently entered the fray anyway, eager to reach new customers and accelerate their deposit growth.
They include: JPMorgan Chase, which in October launched a mobile-only bank it dubbed Finn; Flushing Financial, which established the online-only BankPurely last year; and MUFG Union Bank, which created PurePoint Financial in early 2017.
Citigroup said Monday that it also creating a digital-only bank, though not under a separate brand. In previewing which announced on Monday that it is creating a national digital bank.
In previewing Monday's announcement, Chief Financial Officer John Gerspach said at an industry conference earlier this month that Citi’s aim is to both attract new customers and move more and more of existing daily interactions onto mobile devices.
“We are coming up with new ways of serving our clients digitally,” he said.
There’s a risk that banks could alienate existing customers by offering better rates at their online versions than in brick-and-mortar locations. said Dana Vas Nunes, senior manager for deposit products at Alliant Credit Union in Chicago.
Vas Nunes said she’s noticed that both Capital One and PurePoint offer better rates online than in branches, and she thinks that’s a surefire way to lose customers. For example, PurePoint pays 1.6% for an online savings account with a $10,000 minimum balance. In comparison, Union Bank pays 0.01% for a savings account with a minimum $10,000 balance.
“I wouldn’t want to be in their shoes,” she said. The $10 billion-asset Alliant operates primarily online, only using its own name and offers the same rates online and in branches.
But other consumer-focused companies manage multiple brands and banks should be able to do the same thing, said Joe Salesky, the CEO of CRMNext, a Novato, Calif., firm that makes customer-management software for banks. A new brand can help banks develop a rapport with younger generations that see the industry as stodgy, he said.
“Some brands appeal to nostalgia. Some appeal to people who are looking for the latest trend,” Salesky said. “You create a brand that associates with the same values as a specific group of people.”
The $119 billion-asset Union Bank, a unit of Tokyo-based Mitsubishi UFJ Financial Group, decided to create PurePoint because it wanted to utilize new technology to attract more core deposits to lower its funding costs.
Pierre Habis, the head of consumer banking, said it would have been too complicated to shoehorn the new technology on top of Union Bank’s existing core platform, so the easiest solution was to launch a separately branded bank.
The move appears to be paying off; since it opened for business last year, PurePoint has raked in about $3 billion in deposits.
Philippe Dintrans, the chief digital officer of the banking and financial services group at Cognizant Technology, said it can be challenging for a bank layer new technology onto existing platforms, particularly if it wants to incorporate artificial technology.
“They have very disconnected systems and databases that don’t always talk to each other. It can be very complex to make it work,” Dintrans said. But when you’re starting anew, it makes it a lot easier.”
A digital bank with a new name can also help a bank expand outside its historic footprint, Habis said.
“We have a very good position on the West Coast, but we don’t have positions in markets like Dallas, Chicago and Miami,” Habis said. PurePoint is “an easier way for us to expand nationally.”
Citigroup also plans to use its mobile-banking app to expand its national presence. Though Citi has national brand recognition, consumers now must live in an area with Citibank branches to open an account with the bank.
Citi has just 719 branches in the U.S., and about three-quarters of them are in New York and California. By contrast, its largest rivals, Bank of America, JPMorgan and Wells Fargo, each has more than 4,500 branches.
Citi plans to roll out several improvements to its mobile banking app in the coming weeks, including a feature that lets any consumer to open a new account online, regardless of where they live.
Citi plans to keep its name on its newly expanded digital bank, a company spokesman said.
Digital-only banks have also helped community banks add deposits. Just before the financial crisis, the $1.3 billion-asset River Valley Bank in Wausau, Wis., was experiencing solid loan growth. But its branch footprint in rural northern Wisconsin and Michigan’s Upper Peninsula made gathering deposits a difficult task, said CEO Todd Nagel.
River Valley introduced Incredible Bank in 2008 and since then it has gained customers in all 50 states, Nagel said. River Valley’s regulators originally expressed concern that the bank was chasing “hot money” that would quickly leave the bank for higher rates. River Valley has persuaded them otherwise.
“They have asked us to explain to them why this isn’t hot money. And we tell them we have customers that we obtained through Incredible Bank that we’ve had since 2008,” he said. “It’s been an education process with our examiners.”