New money habits
Online and mobile banking are changing the way banks serve customers
- October 27, 2011
Capital One Financial Corp. plans to spend $9 billion to acquire a bank that, in the staid world of finance, looks downright revolutionary. The target is ING Direct USA, an 11-year-old company that emphasizes online banking and offers only a handful of far-flung, nontraditional branch offices.
Forget bank tellers, think baristas. ING Direct’s branch offices, called cafés, look like places where customers are more likely to order a latte than make a bank deposit. (In fact, they serve lattes.)
ING Direct’s strategy has proved successful, particularly among younger customers, the so-called “digital natives” for whom computers and smart phones are second nature. The Wilmington, Del.-based bank has accumulated 7 million customers and $80 billion of deposits, making it the 15th largest bank in the U.S.
That’s attractive to Capital One. Since 2005, it has expanded beyond its credit card business with three large regional bank acquisitions. If approved, the ING Direct deal would make McLean-based Capital One the largest online bank in the U.S., as well as the fifth largest U.S. bank overall, as measured by deposits. Currently, it’s the ninth largest bank and ranks third in online banking.
The deal, subject to regulatory consent, is drawing close scrutiny. For one thing, it’s the first large bank merger since last year’s passage of the federal Dodd-Frank financial reform law. Some consumer groups want regulators to block the merger, claiming that, after a near financial meltdown in 2008 and 2009, another giant bank is the last thing the country needs. Some ING Direct customers also are unhappy, fearing Capital One will ruin their trendy bank.
A Capital One spokesman declined to discuss the deal until it is finalized, which is expected to happen early next year.
“Capital One probably views ING Direct as allowing it to bank differently in the future and de-emphasize large regional bank deals,” says David West, senior vice president for Davenport & Co. LLC, a Richmond-based investment firm.
Capital One’s deal might be the most prominent move in online banking, but it’s not the only institution looking to expand in the field. Online banking is experiencing robust growth, and mobile banking — which relies on devices such as smart phones and iPads — is set to outpace it soon, banking-industry experts say.
Technology already has dramatically changed the way banks serve and interact with customers. And it will continue to do so. “The big trend over the next 10 years will be online and mobile banking,” West says.
Online banking took one of its first baby steps 16 years ago, when San Francisco-based Wells Fargo became the first U.S. bank to allow customers to check account balances via the Internet for free. Initially, only the largest banks joined Wells Fargo because of the then-relatively high costs of launching an online banking service, or “channel.”
Today, though, most regional and community banks offer a variety of online banking options, including the ability to check account balances, pay bills and transfer funds electronically. Like some big banks, many regional banks also offer online tools designed to help customers manage their personal finances.
Banks of all sizes are motivated in part by the potential cost savings online banking offers them long-term. “It is much more economical to transact electronically and deliver a secure electronic statement than it is to print, stuff and mail a statement to customers,” says Jeffrey W. Farrar, executive vice president and chief financial officer of Charlottesville-based StellarOne Corp.
Compare a bank’s costs for processing a deposit, for example. Handling a branch deposit is twice as expensive as processing a deposit made at an ATM, and that ATM deposit is three times as expensive as one made by cell phone, says Tom McDermott, senior vice president of cross channel strategy for Atlanta-based SunTrust Banks Inc., who did not provide any dollar figures.
But McDermott, like many banking officials, points out that customer demand is the primary driver behind the growth of online banking. “Banks want the relatively low costs of online banking, and consumers want the convenience” it offers, West says. It’s a win-win for both parties.
“If we can take a customer’s satisfaction from an eight to a nine, we know that customer is less likely to leave our institution in the future,” says Charles Driest, online banking channel manager for Richmond-based Union First Market Bank.
Mobile banking — which includes text messaging and streamlined websites designed for mobile-device usage as well as downloadable applications written for smart phones and tablets like the iPad — is taking convenience to a new level. “If a customer is in the checkout line at the grocery store, she can quickly use our text banking to inquire upon her balance simply by sending us a text message and receiving the results in a matter of seconds,” Farrar says.
Unlike the early days of online banking, many regional and community banks are keeping pace with bigger banks when it comes to mobile banking because it’s cheaper and easier to set up than online banking.
In addition to displaying account balances and transaction histories, for example, StellarOne’s mobile banking channel can help customers find ATMs and nearby branch offices. Plus, the bank is testing dedicated applications for the iPhone and iPad as well as the Android operating system. Farrar expects the apps to be available for customers later this year.
So far, customer response has exceeded StellarOne’s expectations. “Our year-over-year growth in the mobile banking channel has been almost 200 percent,” Farrar says. In addition, mobile devices account for 8 percent of the traffic coming to the bank’s website.
Likewise, Union First Market has seen a strong response to its foray into mobile banking, which began in August with text messaging and an app for smart phones. Within a month, 6 percent of the bank’s customers were using its mobile banking channel, Driest says. “That was way ahead of schedule.”
Union First Market expects to have an Android app ready by the end of the year.
Among big banks, Capital One saw the number of its active mobile users more than double between January and August, and app usage among its customers grew by more than 450 percent in the same period. “The personal computer still reigns supreme, but the growth is definitely in mobile,” says Mark Elliot, Capital One’s executive vice president of national direct banking. “Customers are starting to demand mobile banking. It’s really about meeting our customers in their channel of choice.”
The future of bank branches?
The sheer number of customers using online and mobile banking is impressive. Here are a few examples:
Wells Fargo — the pioneer of online banking — today has 19.3 million customers using its online banking services. The bank, which entered the Virginia market with its acquisition of Charlotte, N.C.-based Wachovia Bank in 2008, also has 6 million mobile banking users. (Currently, it has 292 branch offices in the commonwealth, whose names changed from Wachovia to Wells Fargo in August.)
Union First Market has approximately 50,000 online banking customers, representing 35 percent of its retail customers. (In August, it racked up roughly 400,000 logins, processed approximately 50,000 online bills and conducted about 34,000 transfers, Driest says.)
More than half of SunTrust’s customers regularly use its online banking channel. “It’s their primary account servicing vehicle,” McDermott says. And mobile banking is now SunTrust’s “highest percentage growth channel,” with double-digit growth, he adds.
Youthful digital natives aren’t alone in adopting online banking. “We initially saw a younger generation use it, but we are seeing a shift of adoptions among all generations,” StellarOne’s Farrar says.
Union First Market also has seen a switch to online banking among customers who are 47 or older, with 48 percent of them using online banking channels, compared with 52 percent of customers 46 or younger.
The numbers hold up nationally, too. A survey released in September by the American Bankers Association found that this year, for the first time, Americans 55 and older prefer online banking to any other method. The shift has been dramatic. Fifty-seven percent of those surveyed prefer online banking, compared with 20 percent last year. The surge toward online banking held up across all age groups, too. Sixty-two percent now prefer online banking, overall, up from 36 percent last year. The percentage of participants who prefer branches fell to 20 percent, down from 25 percent.
“Online banking has gone from its infancy 15 years ago to being the No. 1 delivery vehicle today,” says Bruce Whitehurst, president and CEO of the Virginia Bankers Association.
Of course, online banking and traditional branch offices are a little like the opposite sides of a seesaw: As one goes up, the other goes down. “According to Capital One, only about 70 percent of customers use a branch just once a year — compared with nearly 100 percent in 1980,” says West of Davenport & Co.
After 25 years of steady growth, the number of commercial bank branches in the U.S. declined slightly in 2009, and the number dropped further last year. (The U.S. had 82,287 commercial branches in 2008, according to the FDIC. Last year, it fell to 82,089.) Many of those closures were driven by bank failures and consolidation, says SunTrust’s McDermott.
Some banks, such as Union First Market, have bucked the trend and increased their branch footprint in the last year by opening in-store branches that avoid the costs of a large, stand-alone building. But experts predict the industry-wide decline will continue.
Rumors of the branch’s demise might be exaggerated, though. “The role of branch will continue to evolve and change, but it will be a long time — if ever — before the last teller closes his window,” Whitehurst says.
Their roles may change, however. Experts expect the branch office concept to shift increasingly away from transactional activity, which is fairly easily automated and fulfilled through online and mobile banking channels. Instead, branch offices will likely provide services for which customers feel more comfortable speaking face-to-face with a bank representative.
“We have the capability to open accounts online, but 80 percent of our clients tell us they prefer to open an account in a branch, and I don’t expect that to change in the next few years,” says SunTrust’s McDermott.
Branches might find they’re still the preferred destination for loan advice and planning for college savings, too, experts suggest.
“We believe online banking channels and branches complement one another,” says Patrick D. Smith, senior vice president of Wells Fargo’s online financial management. In the future, “people will simply use more channels.”