As a strained economy spurs consumers to chase the best rates and banks to cut costs, Internet-only banks stand to prosper while traditional branch traffic will stagnate, according to TowerGroup. Recent research from the Needham, Mass.-based advisory firm predicts that the amount of money deposited with direct banks will double by 2012.
Estimating that the costs to start and operate a direct bank are "less than 10 percent" of the costs of a traditional bank, George Tubin, senior research director with TowerGroup and author of the report, "The Hunt for New Funding Sources: Can Direct Banking Save the Day?," points out that direct banks have a double edge over brick-and-mortar institutions because of the recent financial crisis and long-term trends that have made Internet banking easier and safer in the eyes of the consumer. As a result, the share of consumer deposits held by direct banks will grow to 8.5 percent in 2012, from 5 percent in 2008, Tubin contends. As the overall deposit pie grows, he adds, that will mean $350 billion in deposits held by direct banks by 2012, up from $160 billion last year.
The No. 1 driver behind the rise of direct banks, Tubin notes, is consumers' emphasis on maximizing their increasingly scant financial resources. "People want to be able to get some reasonable return on what money they have left, rather than 1 percent or 2 percent," he says. "A lot are not going to put it in the market right now, and the direct banks can provide the highest rate of return." Tubin adds that consumer confidence in financial institutions has not been so shaken that they will avoid banks that lack a physical presence, suggesting that deposit insurance from the Federal Deposit Insurance Corp. will be enough reassurance for consumers.
Contenders in the direct banking space include community banks on one end of the spectrum and, on the other end, the former New York investment banks Morgan Stanley ($658.8 billion in assets) and Goldman Sachs ($884.6 billion in assets), which, Tubin asserts, are more likely to build their own direct banking capacity to bring in deposits than they are to buy existing retail banks. But Tubin's list of the top three direct banks all have traditional banking parents.
While his list includes banking Goliaths ING Group (Amsterdam, US$1.9 trillion in assets) and HSBC Group (London, US$4.35 trillion in assets), it also includes a relative David: Emigrant Savings Bank, whose $12.5 billion in assets pales against its larger rivals' coffers. Before launching Emigrant Direct in 2005, Tubin notes, Emigrant Savings was just "a small New York bank."
The End of the Branch?
While he acknowledges that "There's a still massive amount of money being held in traditional branches, so banks can't abandon them," Tubin claims that the majority of banking transactions already are conducted online and that a "dramatic increase" in the opening of bank accounts online is coming. "In 2008 83 percent of checking accounts were still opened in the branch," he says. But, "By 2012, that will drop to 67 percent." Meanwhile, Tubin notes, the proportion of accounts opened online will jump from 6 percent to 17 percent, while those opened through call centers will grow modestly, from 11 percent to 16 percent.
Further, according to Tubin, the 19.7 billion banking transactions conducted online in 2008 will grow to 33.3 billion transactions by 2012 as branch transactions stagnate at 14.8 billion, barely changed from the 14.4 billion transactions conducted in a branch in 2008. He notes that these figures call into question the future of some physical branches opened during the recent building binge in areas such as New York City.