This is the seventh and last in a series of blog posts about how established industries responded to new threats and competing technologies. In this blog post I analyse the impact of online banking enterprises like ING and Ally Bank in their ability to steal market share. As this is a series, it’s worth reading this introductory blog post first.
Companies use financing in order to support their inventory purchase of raw materials and parts, as well as to cover their day-to-day operating expenses. The lower the interest rates on financing, the lower the company’s costs and the better its cash flow position, or so the theory goes. Unfortunately, in what many have referred to as the “Great Recession”, these costs have skyrocketed despite historically low interest rates.
While interest rates may be low, they are more than offset by the time it takes customers to pay their bills. These costs rose simply because companies were extending credit and taking longer to pay. The longer the delay, the higher the costs and the more likely conventional banks would withdraw credit. However, new competition arrived that all but put an end to the dominance of banks and credit unions with branches, ATMs and large-scale banking locations. In yet another example of Chris Andersons “atoms vs. bits”, conventional banks with their brick and mortar business models were being challenged by online entities such as ING and to a lesser extent, Ally Bank out of the United States. So, what do online banks bring to the table that consumers and businesses find so attractive?
First, online banks reduce headcount by focusing solely on providing services online. This allows them to offer extremely competitive interest rates for both the everyday consumer and the established business. Second, all of these online banks are insured within the countries they operate in. This makes them just as safe, if not safer, than the conventional banks. Third, they almost always stick to offering standard banking services and whilst some have expanded their service offering, their main focus is on providing small businesses and general consumers with simple, low-cost solutions. Whether it’s Ally Bank in the United States, Egg and First Direct in the UK, or ING worldwide, all operate on the basic premise of providing high interest savings accounts and bank loans, with reduced transaction fees and more competitive interest rates.
One of the more intriguing online entities is that of Ally Bank. The company’s headquarters are located in Midvale, Utah and the company has only two offices throughout the entire United States and fewer than 1000 employees. Unlike conventional banks, Ally has absolutely no branches whatsoever. All services are offered online and include a myriad of products from savings and checking accounts to automobile financing. ING reach is much larger. The company offers standard savings products with competitive interest rates such as cash ISAs (individual savings accounts) and has further expanded its product offering to include home and auto insurance, mortgages and mutual fund investments and securities. So, how have conventional banks responded?
Faced with mounting pressure, conventional banks have had no choice but to respond by improving interest rates and offering more competitive services. However, some banks in Canada, such as TD Canada Trust (Toronto Dominion), CIBC (Canadian Imperial Bank of Commerce), and METRO Bank in the UK have turned to opening on Saturdays and Sundays in an effort to distinguish their service offering from online entities. However, for the most part, most banks have nobody else to blame but themselves for pushing customers towards online competitors. By aggressively reducing the number of branches, and services within those branches, banks had hoped to force their customers to use their online and phone banking services. Now, online companies like ING and Ally Bank have turned the tables and stolen market share, whilst a large number of customers have left conventional banks altogether.
What does the future hold for the banking industry? Who knows? I for one believe, that with time, it will become solely an online model serving digital native customers who probably never set foot in a brick and mortar branch.