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In 2014 the market favors those that go digital – and discards those that do not. The Amazons (AMZN) have thrived while the Sears (SHLD) of the world have sunk. The sea change encompasses several industries, with Consumer Goods and Services both favoring the technologically savvy, to say nothing of how the Digital Age has influenced the internet-dominated Technology sector. But while several fields have been revolutionized by the shift online, the Financial sector – specifically banking – still largely favors brick-and-mortar based throwbacks.
There are scant few banks that operate strictly online. A few are beginning to make waves, but the industry still greatly favors those with a wide physical branch presence. But the tide may be turning.
The Disadvantages of Online Banks
Of course, even the major lenders have online banking options. Bank of America (BAC) , Wells Fargo (WFC) , and JPMorgan & Chase Co. (JPM) haven’t keep their head in the sand when it comes to allowing customers to do their banking through the internet.
But the key difference is the possibility of physical transaction is there. A customer wants to pull their money out in cash from any of Bank of America’s 5,600 branches or 16,200 ATMs? Donezo. Want to walk into a branch and talk to an actual person and not someone on the phone about a problem? No problem (well, at least theoretically). Want to utilize one of those old standbys of banking, the safety deposit box, to hide your valuables? Go to a neighborhood location and rent one out.
People take comfort in the tangible, and that’s a big key difference. Physical reassurance. It’s why the country stayed on the gold standard so long after it made sense to do so. It’s one of the myriad reasons traditional investors are wary of bitcoin. People like to feel that if absolutely necessary, they can go to a real bank and talk to a real person and get real money they can ultimately exchange with another real person.
And though digital is big, cash is still king. While only 0.2 percent of all financial transactions by value occur with cash, a whopping 49.4 percent of the volume of it does.
This is not to say, as a flipside, that online-only banks are incapable of providing cash. But they usually rely on the infrastructure of other banks to supply it. Internet bank BofI Holding (BOFI) , for example, pays debit fees associated with using rival bank’s ATMs, which they are able to do since they don’t have much overhead. But it’s still essentially leeching on the physical structures of others.
Speaking of physical structures, if you bank with an online bank, good luck getting face-to-face time, unless you live where the bank’s one or two actual physical locations are.
So traditional banks provide the infrastructure to provide reassurance in the form of physical cash, customer service, and protection of wealth. But all of those things have costs. And by trimming those out, inter banks can provide exceptionally cheap banking. And a much higher interest rate than competitors.
The Advantages of Online-Only Banks
By existing almost solely on the internet, banks like the aforementioned, awkwardly named BofI (for “Bank of the Internet”), and First Internet Bank of Indiana (INBK) trim an incredible chunk of overhead out of their budget. As a result, like an even more efficient regional bank they are able to offer favorable interest rates to customers, usually paying a higher rate for savings and money-market accounts, and almost always offer free checking.
Additionally, the lack of physical locations means a customer doesn’t have to change banks if they move. The ability to freely move for a job is usually a net financial benefit for a person, and getting to avoid the hassle of moving money and switching online bill pay can be a welcome benefit.
Traditional banks have the physical branches to provide physical reassurance of wealth. But this is not to say that online banks aren’t backed by the FDIC. Well, there are probably some dicey ones out there somewhere that don’t, but the major online banks are all FDIC insured, thus protecting customers deposits exactly the same as they do with physical banks.
This of course differentiates online banks from bitcoin “banks” like the failed Mt. Gox. While they both handle digital money, one of them can provide reassurance that if things ever did somehow go south, there would be nothing to worry about.
It is true that online-only banks lack many physical branches to provide customer service. But they tend to make up for it in innovative ways. 1st Century Bancshares (FCTY) , for example, does have two physical branches, but it will also send an employee to wherever a customer is to set up their account. If they didn’t invent it, 1st Century is certainly spearheading one pretty innovative concept: home delivery banking.
A “bull” for online-only banks, then could argue that the only reason online banks haven’t caught on is a lack of exposure to the populace. But that might be changing, both with customers and investors, notably BofI. The “oldest bank on the internet” currently has $3.56 billion in assets, is valued at over $1 billion, and its stock has gained 100.93 percent from its price a year ago, including a 10.03 pop on April 8.
Internet banks have their pros and cons, but if banking is moving like other industries are, internet banking is going to a part of conversation for some time to come.