Outperforming market growth via direct banking

May 28, 2013

Direct banking is banking without branches. This business model is used to raise liquidity rapidly or enter new markets. New entrants and large groups alike have followed this strategy. But how successful were they?

Results have surpassed most expectations. Looking at the results of the direct banks of two European groups reveals an astonishing increase of savings deposits over the last 4 years (Figure 1). With a 2008-2012 CAGR1 of 67% and 39%, respectively, these banks have secured liquidities in a very short period of time – much faster than what could be achieved through other means and far exceeding market growth.

These successes are also remarkable in absolute terms. In our first example, direct banking operations accounted for about 28% of total funding in 2012. Similarly, in our second example, the 2012 direct savings deposits accounted for about 16% of the savings deposits at group level. And, icing on the cake, a large fraction (45% for the first bank) of these volumes is placed in term deposits with maturities of up to 10 years.

 Graph: Savings deposits

Figure 1: Savings deposits from the direct bank operations of two European groups.

Consumer clients are drawn in by a combination of simple products, transparent communication and competitive interest rates. Direct banking is, however, evolving because of its success. From a purely online retail savings focus, it is evolving towards online focused full retail banks by expanding the product portfolio in areas such as mortgage loans, brokerage services, or even personal finance management.

A direct bank can be deployed quickly and at a low cost. This efficiency, combined with the rapid growth seen in recent years, makes it a very attractive business model. It is thus not surprising that BNP Paribas recently launched a new direct bank, Hello Bank, which hopes to attract 1.4 million customers in 5 years. Regardless of whether branches will transform, continue or even cease to exist, direct banking is a sound strategic option to grow a bank in these challenging times.


 1.The compounded annual growth rate (CAGR) is the smoothed annualized growth over a period of time of some business element. It is calculated as CAGR = 100 x [(Final value/Initial value)1/n-1], where n is the period of time.

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