Online banks are one of the most visible branches of FinTech, and as such can define the general public’s impression of Startups within the field. This text will explain the main differences between these new organizations – online banks – and the traditional high street bank, as well as summarize my own experiences with them so far. Unavoidably, we conclude with our views on how the changes in the sector will continue, and how this affects your choices right now. This is the first of two parts of the text.
Who’s afraid of the big bank?
Most countries I lived in have a few large banks to which most people send their regular incoming payments such as salaries. On one hand, it is clear that banking is among the most traditional services you want to rely on. The trust implied in this commercial relationship involves being able to allow an organization to receive and care for your money. On the other hand, since the last financial crisis – in which public money bailed out banks in a number of countries – important transparency questions were raised and the trust in these big organizations has eroded.
How is the large size of a bank making clients safer? Is it really because the bank might be “too big to fail”, and public money will save them, if needed? Even if this happened in the past, that’s certainly not a good reason to trust big banks, nothing guarantees this would happen again. Moreover, in places like Europe, regulators since adopted official insurance-like mechanisms to protect all clients deposits with registered financial service provider. In this sense, there are now guarantees covering your accounts with big and small banks equally, up to a certain amount.
Another meaningful matter when looking at online banks versus traditional banks is the branch networks they offer. Many clients are used to going in person to solve one or another banking issue at a bank branch, and that’s alright. The question, however, is how much bank clients collectively have to pay for bank branches to be maintained.
Branch network and fees
Here in Germany, there seems to be consensus both that 1- someone needs to cover the costs, but 2- the bank branch networks need to be smaller than once thought. On the first point, people happy to pay bank fees always surprise me. If you do accept paying them, however, fair play. As long as you see your fees go to support branches that help you, rather than composing part of large bank’s huge profits, I have no issue with it. Regardless of your current attitude towards fees, I would urge anyone willing to listen to consider if this really makes sense for them personally. For me, it does not make sense to pay fees, I believe the financial services network can reinvent itself if pushed with all the resources they currently manage.
Moving on to the necessary bank network reduction, it is public knowledge in Germany that banks are downsizing. Many are closing branches and letting employees go. Less worse that it’s all relatively gradual over time, without short term visibility of any failing (or even unprofitable) banks. The downsizing impacts nonetheless an enormous number of employees and clients, and during this process many probably wonder if their local branch will still be around for long. There is for me some ambiguity about the adequacy of this movement, because it surely is a bad development for traditional banks in their relationships with clients and employees, while at the same time the move does seem to be in the right direction. At least banks are trying to make themselves leaner and continue to be competitive, even if this is little more than a requirement to survive.
To be continued…