Will Online Banking Eclipse Brick and Mortar Financial Institutions?

by tom 6. March 2014 16:48

We can learn something new from the Chinese. A story that ran earlier this month in the New York Timesreported that last June Chinese e-commerce company Alibaba offered Chinese depositors a better rate than Chinese banks – 7 percent as opposed to 3.3 percent from brick-and-mortar banks. By February more than 81 million Chinese customers had signed up for Alibaba money market accounts. Alipay, which is Alibaba’s fund, now has $40 million US under management making it the largest money fund in China. Not bad for six months work.

So why can’t the same thing happen here?

Asia has been outpacing North America in a number of financial trends, including digital banking. The digitalization of money has made transactions easier than ever without going to a branch or ATM. In China, more than 65 percent of mobile phone users use their phones to access the web, and in India 55 percent of all Internet access is expected to be via smartphone by 2015. This means online banking is easy and portable. A 2012 McKinsey study found that 70 percent of Indian customers acquired a credit card online and 53 took out personal loans, all without setting foot in a bank.

The new generation of bank customers is more Web-savvy than ever. They use their smartphones to buy movie tickets or coffee, and some banks are tying credit cards to smartphones so you can pay by SIM card, or you can bypass the banks altogether and accept payments via smartphone. Today’s bank customers are used to living in the virtual world, and using the web to manage their money is no big deal.

As technology and consumer attitudes continue to evolve, there is a real possibility that customers may leave brick-and-mortar banking for the Web in search of convenience and rates. There are arguments to be made for both types of banking, but if you can get better rates, apply for loans, and get your credit cards online, the only reason to go see your banker is to get cash or for more personal customer service. If you are looking for a better deal on interest rates, then online banks continue to offer a better deal.  Online banks continue to offer very attractive rates for savings and CDs.

So as depositors get more comfortable with cloud-based banking, will traditional banks become obsolete? The online banks have much lower overhead and can compete on a global scale, which may give them a real advantage over brick –and-mortar institutions. But will depositors ever be ready to abandon their current banks in search of better rates?

What are you doing to compete with online institutions? Do you see online banking as a threat or a flash in the pan? We’d love to hear your opinion.

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