Direct-only banking market saturated? | General financial discussion | Discussion forum

Norman1 said

Norman1 said
I think I found the McVay and Associates report the Globe & Mail article refers to:

Focus on Direct Banks (May 22, 2018) by David McVay

…

Interestingly, McVay writes in the report that "it appears that the market for direct only banking may be substantially saturated."

Loonie said
My recollection of the 3% figure a few years back was that it referred to deposits.
If indeed the market is nearly saturated (which I very much doubt as I know tons of individuals who do not yet use these alternatives for their savings or everyday banking), then their advertising and promotion would be directed towards stealing customers from each other rather than growing their base. I can't imagine that Meridian, for example, would be putting the huge amount of money and effort that they are into creating a new bank if there were no new market to be had. I think they run their business pretty well, and that just wouldn't make sense.
…

Meridian could be in for a rude awakening.

Creating a new bank allows Meridian to do business outside of Ontario. Just because Meridian is not in the other provinces doesn't mean that no-one else is already there.

Could be that the likes of Simplii Financial, Tangerine Bank, and the Manitoba credit unions have already captured whatever direct-only banking market there is.

Sort of like the market for green hair colouring. Lots of people haven't coloured their hair green. But, all those who want their hair green may have already been taken care of.   

Time will tell, but I think Meridian has a good chance. So far, I have not heard any credible explanation as to why they can't continue to expand their market.
The MB CUs are always going to be limited in their reach because they are not allowed to advertise outside MB.
Tangerine and Simplii will not offer best rates on an ongoing predictable basis.
BC residents on this forum often ask for better-run FIs to serve them for various reasons.
QC residents have often had limited options due to language issues.

I wouldn't underestimate the power of marketing. Marketing exists to tap a need or want that we didin't know we had. As far as I know, the market for online banking has about doubled in the last few years - no small feat. Millions of people are still not involved in it. I'm sure Meridian didn't go into this without doing their research. The potential is huge.

Our comments are all speculative, but I still feel there is lots of room for Meridian and even Coast Capital, Norman. Whether they will access it will depend on how good they are at marketing.

Tangerine , in the form of ING, was first off the mark by a long shot. ING put an enormous effort into advertising over a long period of time, had a very good set-up, and delivered on its promises; had many happy customers,including me. ING had the advantage of launching in happier times in terms of interest rates. Thus , they have lots of residual customers. I know some of them, and they haven't yet seriously considered other alternative banks. Tang's challenge is to hang on to them, and, at the moment, that is costing them 2.5%

Simplii, in the form of PC Financial, had excellent access to potential customers through the kiosks at Loblaws-owned stores. Those are all gone now, as are any PCpoints you might have gotten; and they're getting a lot of negative publicity and are sleazy with their fine print. They also had the huge advantage of offering a very popular credit card which targeted ordinary shoppers, not necessarily people with a lot of money, and rewarded them in-store; this is also now gone from CIBC. Simplii also has crappy rates. I may be wrong, but I can't foresee a rosy future for them at this point unless something changes in management. I wouldn't even be surprised if CIBC shuts it down.

I don't think there is much comparison between AlternaBank and future Meridian Bank. Meridian CU is the largest in Ontario, by far. Alterna, by comparison, is a small player. Meridian has the resources to push forward. And, as a CU, they are establishing themselves in bricks-and-mortar. They have small but visible branches, and, from what I see, they are busy and efficient.

I may be more cynical than you, but I believe the desire for such products are driven to a large extent by clever marketing. That's what's required to overcome typically-Canadian inertia and suspicion.

You are right that people deal with alternative banks for reasons other than convenience at this point, but that is not really surprising.
The main reason is that they get better rates there - including no-fee accounts. Isn't that the main reason most of us deal with them? This is something the BigBanks are never going to give way on unless it really hurts them not to, which will take a long time.

I looked at several of McKay's posts. While interesting, there is a significant lack of detail, as with his CV, so that I don't have much reason to assume he's correct. The posts are teasers more than anything.

Bottom line, we would need to know more about the market and how it is accessed. How many people have how much money in savings accounts at BigBanks, and what benefit would accrue to them by moving it to another FI that paid a significantly better return? If rates continue to rise, the spread may also increase, and the difference may be more meaningful. It's not that they can't get a better deal elsewhere; this is obvious; it's what will motivate them to do it. That's for the marketers to figure out.
It's marketing, marketing, marketing; budget, budget, budget.

Speaking of Zag Bank,2 GIC's just came due,cashed out & cut ties. None of their rates are competitive any more.I don't know why anyone would still be with them.

Thinking more about what keeps people in the FIs that offer them less, I'm going to expand on my assertion tht marketing is key.

It is key.
However, I think that what will likely make the difference in uptake of direct banking for the majority who don't have 100K+ to deposit and for whom the +/-$29 doesn't much matter, will be when these new banks are able to offer comprehensive efficient services, such that branch banking isn't necessary and is less convenient. In order to displace the major banks, it needn't be the best rate, only a consistently superior rate. If they offer comprehensive banking services, do it well and with friendly staff, I think people will move. I think Meridian is well positioned to do this, although I don't know what their plan is exactly. They already offer pretty well everything at the branch level, including people who will leave the branch and come and meet with you to discuss mortgages, so it ought not to be too onerous to transfer their expertise to the new bank.
Right now, with online banks, it's piecemeal and, thus , only worth it for people with larger sums or who are highly motivated to save every penny, and often unattractive with rates being low as they are now. Currently, you have to go to one bank for one thing and another for something else, so that, for many, it probably isn't worth the trouble. Hubert is great but it doesn't offer chequing. EQ is great but it doesn't offer joint accounts or chequing. Oaken is great but it doesn't offer registered savings accounts. And so on. The person with five figures or less isn't going to find it worthwhile to park it somewhere that doens't offer chequing or a worthwhile credit card or joint accounts or a line of credit or a mortgage or whatever it is that he/she needs. Improvements in financial literacy may also help, as people learn about the longterm impact of saving, compound interest, etc.
I find it hard to imagine that Meridian hasn't thought abut these things.

An online article from 2011 claimed that RBC alone had $160 billion in individual deposits. I imagine it's higher now; plus there are all the other banks to consider as well. Much of this may be in smaller accounts, but they do add up to a heck of a lot of money.

I will be closing my last BigBank Savings account in the next week or two, as soon as I get to it. There isn't a lot left in it, and the interest for May was $0.13, but it shows how things are changing. I can get $3.92/mo. at Tang for the same amount, and I'll happily take it. Why not?

Online only banks use to attract deposit base with high interest savings account which provide a decent return (relative to bond yield) and liquidity. Even at 2.5% funding, they are making money lending it out as mortgage at 3% or more. As rates start moving up and online banks now shifting towards GIC to smooth out deposit base fluctuation, their treasury department are all learning how to manage the flow. Big 5 will continue to offer much lower savings and GIC rates, as there is a "loyal base" of customers who dont use online only banks for various reasons. I have not come across a single 65+ senior that "trust"online banks for their savings. Gen X and younger are primary online bank custies. Also those who visit forums like these are tech savvy enough to earn a better savings rate than big5 rates.
A growth area for online only banks will be business accounts in my humble opinion. With the ability of edeposit etc and as society reduce use of cash, I dont see why businesses cant use online only banks as their main account.

Loonie said
..........I will be closing my last BigBank Savings account in the next week or two, as soon as I get to it. ....... Why not?  

While most of my deposits are in alternative online etc FI's, I continue to maintain an account at two BigFives, because they serve useful purposes, in my case.

As a snowbird, the TD account allows seamless cross border money transfers to and from Canadian based $CDN and $USD accounts and a U.S. based $USD account.

The BMO account serves a different purpose, and both act as "hub accounts" for moving funds in and out (push /pull) of some of the online FI's where the alternative FI's electronic funds transfer protocols limit what I need to do, for a variety of reasons.

Virtually any alternative account can be linked to one or both of TD and/ or BMO, each of which, BTW, is a grandfathered long standing account with no fees and several built in benefits.

Conclusion, there is no disadvantage, cost or inconvenience for keeping them, and several tangible benefits, for my situation.

Stephen

Stephen, as I said, it's my BigBank Savings account that i am closing. I still have chequing accounts at 2 BigBanks, and they too are grandfathered as seniors accounts. For the time being, like you and Top It Up, I find them useful.

My point though, about full service banking, was that if the online banks become sufficiently sophisticated that they can offer everything that ordinary people might ever need in banking, then they will beome meaningful competition for the accounts held by many more indivudals at the Big Banks, regardless of size of account.
Younger people, who are more accustomed to using their smartphones for everything, may lead the way on this.