Photo: iStock
Photo: iStock

Why Internet-only banks may make sense

Based on cost advantages, these banks are expected to come up with differentiated services, spurring competition, say analysts

When Kakao Corp., operator of South Korea’s messaging app KakaoTalk, and KT Corp., the former state phone monopoly, got preliminary approvals to set up the nation’s first Internet-only banks on 29 November, it created history in Asian banking.

Similar to Internet-only banks in the US and the UK, these two banks that are expected to be functional in the first half of next year, will have no bricks-and-mortar offices and provide financial services without any face-to-face contact with customers.

A big advantage is the lower personnel expenses and operating costs, which enable them to offer higher interest rates on savings and levy lower rates on loans.

Based on cost advantages, these banks are expected to come up with differentiated services, spurring competition in the banking industry and prompting existing banks to improve their services, say analysts. This is the reason why Web-only banks can spur innovation in the financial industry, they add.

Convenience is a major draw for Internet banking. Customers can transfer money, pay bills online and monitor account activity. “With online banking, you are not beholden to bank hours to make deposits or conduct your business...and you limit the amount of paper and clutter in your life because you can eliminate paper statements," Paul Golden, a spokesman for the National Endowment for Financial Education, said in an interview on 14 May with NerdWallet, a tool that searches for the best credit card offers, corporate deposit rates, savings and checking accounts, insurance, and other financial products.

Internet banks could charge their customers lower fees since their costs are lower. They may also deliver better rewards and customer service than traditional banks, as the lack of physical branches means they can invest more in services.

However, Internet banks may not be right for everyone, caution banking experts. One obvious reason is that it has less face contact with people, something that not all customers are comfortable with.

Another downside is that customers may have to pay higher ATM transaction fees. “Consumers won’t find a bank-owned ATM and will have to trust the owner of a particular ATM to conduct your transactions," said banking analyst and consultant Praveen Puri.

Consumers would also have to watch out for various details associated with money transfers between accounts, bill-payment services and minimum balance requirements, said Puri.

Security issues have to be addressed as well. “Identity theft and fraud is a concern with online-only banking," according to Marc DeCastro, research director of consumer banking at IDC Financial Insights. “As with any financial services provider’s website, avoid logging in through insecure public networks like those at coffee shops or airports."

DeCastro believes banks and customers should continue to stay educated, and work together to help identify and prevent fraudulent activity on their accounts.

In the case of South Korea, there are still more challenges ahead. The Internet-only banks may find it difficult to raise an adequate deposit base for years because of initial difficulties in expanding deposits. If not properly administered, they might trigger a fresh economic debacle, stated an editorial posted in Korea Herald on 30 November.

Moreover, expectations are high for the differentiated services to be offered by the new online banks, Kakao Bank and KT’s K-Bank, it added.

In India, experts say the Internet has the power to increase a bank’s profitability and cater better to customer requirements. With the competition in the banking industry growing rapidly, it is necessary for banks to use Web, mobile and social media space to garner more and more business.

“Digital channels of banking will cater to today’s youth who are highly technology savvy, and prefer to carry out banking transactions online or on the mobile rather than visiting a branch," according to author and banking evangelist Brett King. This can spur greater innovation in products and services, he said.

The Reserve Bank of India, too, has been urging banks to increase their presence online, on mobile and over social media platforms.

The number of mobile bank customers will be more than 1 billion by the end 2015, according to a 13 October report by the UK-based Juniper Research Ltd. The report expects this figure to double in the next five years.

Additionally, around 19% of global household bills will be paid via personal computers, tablets and mobile devices this year. Global online banking users as a proportion of banked individuals is forecast to cross 50% in 2016, the study said.

Nitin Bhas, head of Juniper Research, did point out that while “...most consumers, especially in developed markets, prefer digital banking and virtual channels, a significant proportion still favour an in-branch, face-to-face meeting compared with an audio or video call with a customer contact center".

This article is in association with CXOtoday.com.

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