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How digital banks are outperforming traditional retail banks, in 4 charts

  • Direct banks still don't represent a major threat to large incumbent banks.
  • And while they outperform in many metrics, direct banks still have a lot of room to improve.
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How digital banks are outperforming traditional retail banks, in 4 charts

Even before COVID-19, branchless — or direct — banks were already taking deposit market share from traditional retail banks, particularly among younger customers. But while challenger banks like to tout their aggressive growth numbers, they’re still small competitors to large incumbent banks. There is one place, though, where challenger banks are outperforming: customer satisfaction.

Overall satisfaction for direct banks is 864 (on a 1,000-point scale), substantially higher than the overall satisfaction for customers who use branches at traditional branch-based retail banks, according to the J.D. Power 2020 U.S. Direct Banking Satisfaction Study. Direct banks’ overall satisfaction is also substantially higher than the average score at the Big Six retail banks among customers who are not conducting branch transactions.

Gen Z appreciates digital banks

Gen Z is becoming an increasingly important banking segment. The generation is coming of age and maturing financially. As a demographic, Gen Z has a higher percentage of their deposit accounts banked at direct banks versus other groups. On average, Gen Z clients keep over half (54 percent) of their deposit accounts with direct banks (compared to 47 percent for non-Gen Z). This translates to 52 percent of their borrowing dollars at the direct bank. Non-Gen Z keep 43 percent of their borrowing dollars at their direct bank.

Gen Z also tend to have a more diverse product portfolio with their direct banking relationships. 25 percent of Gen Z have credit and loan products with their direct banks compared to 14 percent of all others.

Gen Z demands more from direct banks

“Despite deeper involvement with their direct bank, Gen Z customers significantly trail older customers in key metrics, such as trust, advocacy, and retention,” according to the survey.

The satisfaction gap is quite pronounced and greater than similar gaps within retail banking itself. Gen Z is overall dissatisfied with its banks, channel activities and new account opening in both direct and retail banks. But direct banks fare much worse. These large negative satisfaction gaps can span over 100 points (-57 to +44) in the case of problem resolution. Direct banks are severely underperforming in that metric.

But when it comes to products and fees, communication, and problem resolution, direct banks come up really wanting. Two of the larger drivers of these differences are Gen Z’s level of satisfaction with competitiveness of interest rates, as well as relevancy and frequency of communication.

Omnichannel?

Half of direct bank customers complete activities using a single channel. Digital containment is becoming increasingly important for service providers. It not only helps with servicing costs but eases customer frustration while driving consistency of interactions.

Customers who always use multiple channels also use the highest number of digital features. These customers are highly satisfied, suggesting their multi-channel interaction is by choice and not necessity.

Compared to customers who never have to use more than one channel, those who sometimes or usually have multi-channel interactions are less satisfied overall with the digital experience. Ratings of the clarity of information, range of services, and navigability of the online and mobile experience point to opportunities for improving the experience for these customers.

Trust

Trust in direct banks is one of the highest in financial services. J.D. Powers’ Direct Banking Trust Index is derived from customer ratings (on a 10- point scale) of 11 trust-related attributes.

  • Protects my personal identity is the most heavily weighted attribute, and the smallest advantage of the Direct Banks compared to Retail Banks.
  • Puts the interest of customers first and Doesn’t have hidden charges or fees are also highly weighted attributes in the Trust model.

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