The right approach to digital-only banks

By November 26, 2018Articles

As banks work to compete in an increasingly digital world, many are exploring new launching digital-only brands. Banks of all sizes, including industry heavyweights ChaseCiti and Wells Fargo, are in various stages of developing such “parallel” banks. As digital-only banks have achieved rapid customer growth overseas, these institutions are trying to get ahead of the trend here in the U.S.

These digital-only brands also afford banks an opportunity to find new ways to appeal to digital-first customers, while serving them at a lower cost without the overhead of maintaining branches for them. Of course, these digital-first customers also tend to be from younger demographics that represent the next generation of core banking customers, making them vital to banks’ future. While so-called neobanks — startups that similarly offer digital-only banking services — provide an alternative to traditional financial institutions for these younger customers, launching a parallel brand gives traditional banks a means to ward off that threat.

However, financial institutions are still learning the ins and outs of launching and operating a parallel bank as well as what exactly these ventures should aim to accomplish. There are two different approaches banks can take to developing a parallel brand. One approach relies on banks’ existing IT infrastructure, while the second involves creating a new digital organization from the ground up. Given the struggles that banks have had with digital transformation in recent years, they should not pass up the opportunity to take the ground-up approach.

Banks can view a parallel brand as nothing more than a new brand attached to the parent institution. In this case, the parallel bank is simply an extension of the original organization, relying on the same legacy technology infrastructure. This relegates the parallel bank to a branding exercise — it’s essentially the same institution wrapped in a new marketing strategy aimed at younger customers who don’t frequent branches.

While this branding can deliver some of the aforementioned benefits, the other approach can deliver far more. This second approach is to treat the parallel bank as a new kind of organization altogether — one that is free from the constraints that have hampered legacy banks’ efforts at digital transformation. In this case, the parallel bank is more than just a marketing initiative. It is a sandbox that allows the parent institution to learn how to build and operate a truly digital organization.

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