Are Online Banks Here to Stay?

Online Banking

Internet Banks

These are two phrases that have become parts of ordinary, daily speech, and while they are frequently used interchangeably, their meanings are quite different.

Online Banking is an internet-based tool offered by regular "brick-and-mortar" banks to enhance the traditional banking experience through account management and bill payment services. It’s the latest in a long line of conveniences offered over the years by banks; think of online banking as the successor to Saturday banking hours, the drive-through, and the ATM.

Internet Banks (also known as Virtual Banks, Direct Banks, Digital Banks, Online Banks, Internet Only Banks, and even Point-and-Click Banks) are simply banks that require customers to conduct business exclusively online. All transactions are conducted via the internet, email, mobile check deposit, and the occasional ATM, as there are no physical branch locations.

While the Internet Bank may seem to be a creation of the 21st Century, the first fully-functional, FDIC insured Internet Bank was Security First Network Bank, founded in 1995 by James S. Mahan III. According to the FDIC Banking Review, Vol. 8 No. 3 - Article III - Published: February, 1996

The OTS gave approval for Cardinal Bancshares, Lexington, KY, to change a subsidiary, Security First Network Bank, Pineville, into an on-line bank serving customers on the Internet. The bank will offer services similar to those available from some banks by telephone. While a number of banks now offer information about their services on the Internet, Security First is unique in that it plans to do most of its business on-line, and will use the Internet for actual checking account transactions, not just information.

Although not a profitable success in its three-year existence prior to being bought out, Security First Network Bank proved that a virtual bank was feasible and opened the door to further development.

Twenty years later, Internet Banks offer virtually (no pun intended) the same product line (checking, savings, CDs, money market accounts, IRAs, etc.) as their brick-and-mortar branch older brothers, but Internet Banks can offer better rates and lower fees simply because there is no network of branches.

Internet Banks have significantly lower payroll, infrastructure expenses, and overhead costs than the average brick-and-mortar bank with several branches, and therefore can operate on a smaller profit margin and can afford to offer higher interest rates.

In addition to higher rates, Internet Banks are conveniently always open to do business, no matter where you are as long as there’s an internet connection. No internet connection? No problem, customer service is usually provided 24/7 via your phone.

The one important feature lacking, due to the very nature of Internet Banks, is that continuing personal relationship with "Your Bank." If you’re known and well-regarded at "Your Bank," resolving a problem can be a lot easier than trying to establish an instant rapport on the phone with a Customer Service Representative. Complex and complicated issues can also benefit from a face-to-face interaction, rather than a frustrating phone call that only serves to muddy the waters further and raise your blood pressure.

For good or for bad, Internet Banks are here to stay, contrary to some "gloom and doom" articles written in the early part of the new century. An article entitled, "Stand-alone Internet banks lose their sheen," in the Irish Times from November 2000, basically derides the idea of a successful, long-lasting Internet Bank model.

There is market evidence from the US that consumers are not opening Internet-only accounts; at the beginning of the year JP Morgan calculated that of customers using Internet banking in the US, 96 percent were with banks that also had branches. The Internet will become increasing important in banking. But the winning bank business model is likely to be the one that offers customers a range of ways to access product and services while ensuring keen pricing and a good service.

What a difference 15 years can make. From March 2009 to March 2015, the top ten US Internet Banks increased their new deposits by $175 billion.

Let me say that again: $175 billion in new deposits in six years.

In other words, in six years, those ten Internet Banks (Ally Bank, USAA, Capital One, American Express Bank, Discover, EverBank, CIT, Nationwide, Bancorp, and Green Dot Bank) have grown to become the dollar equivalent of the 18th largest bank in the United States.

While the $175 billion in six years seems quite an impressive feat, it does need to be put in perspective: the banking industry’s deposits, in that same time-frame, grew by $2.85 trillion. The $175 billion represents approximately 6% of all deposit growth in the past six years. It may not be a giant-killer statistic, but it’s a start.

Internet banks are here to stay and they’re ready to play.

1 Beef up your savings with higher cd, checking, and savings account rates.
2 Simplify your banking experience with industry-leading tools & features.
3 Reduce or eliminate those pesky account fees that sap your savings.
4 Enjoy the convenience of 24/7 availability and top-notch customer service.