Do You Still Need a Brick and Mortar Bank?

My first job after I graduated from college was as a mortgage banker, working for a local retail bank. After a couple of years, I moved into branch banking, where I ran a branch, developed business, lent money, and oversaw operations. At that time, there were more than 22,000 individual banks in the United States.

That was definitely the heyday of banking. Because banks were prohibited at that time from expanding beyond state lines, and sometimes, even within the state, new banks were springing up all the time. In fact, it was always a joke among us managers—how long are you going to work here before you start a new bank? Back then, it was a pretty good road to riches.

And people had much cozier relationships with their local bankers. Bankers knew their customers by name; local banks sponsored high school and Little League sports teams; and your children could still open their first passbook savings account with the $5 that Grandma sent for their birthdays.

Loans were local too. When I took over my first branch, I was astonished to discover the number of ‘signature’ loans that were made to long-time bank customers, with no collateral! And I could make loans up to $100,000, without Board approval.

My, how times have changed.

Don’t get me wrong; there are still local banks with that hometown feel. But they are rapidly becoming institutions of the past.

As you can see from the following graph, the number of banks have been on a downhill trend since the 1960s.

Financial Crises Toppled Thousands of Banks
Much of the decline is a result of several bank crises:

• 1980s and 1990s: 32% of the 3,234 savings and loan companies in the U.S. failed, due to rising rates that killed their fixed-rate long-term loan portfolios.
• 1997: The Asian financial crisis began when the Thai currency was devalued and then spread throughout Asia. It almost led to a worldwide economic shutdown.
• 1998: Failure of Long-Term Capital Management (LTCM), a Connecticut hedge fund, led to a $3.6 billion bailout by 14 of the country’s largest banks in order to prevent a systematic bank failure.
• 2007-2010: The subprime mortgage crisis led to a $626 billion bailout, after housing prices fell 30%; more than 1 million homes went into foreclosure; 102 banks became insolvent in just 2008 and 2009; and 136 public companies filed for bankruptcy in 2008. Indiscriminate lending had made housing a hot market and pushed home prices up by more than 35%. When they came crashing down, so did the economy. More than 9 million jobs were lost and the five largest U.S. investment banks, with combined liabilities or debts of $4 trillion, either went bankrupt (Lehman Brothers), were taken over by other companies (Bear Stearns and Merrill Lynch), or were bailed out by the U.S. government (Goldman Sachs and Morgan Stanley).

And from 2007 through 2013, the number of independent commercial banks shrank by 14%—more than 800 institutions.

Regulatory Changes Incited an M&A Frenzy
But in addition to the banking crises, the number of community banks have also shrunk—either due to individual failure or being merged into a larger competitor. At the same time, practically no one is opening new banks (traditional brick-and-mortar banks, that is). The rate of new-bank formation has fallen from an average of about 100 per year since 1990 to an average of about three per year since 2010.

The reason for that is simple. You see, in the 1970s states began relaxing their branching restrictions. This continued throughout the 1980s and early 1990s. As depicted in the following graph, there were numerous legislative changes that spurred consolidation of the industry through the years. Then the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 was passed, and that removed most of the remaining restrictions on interstate branching.

So, instead of opening new banks, the bigger institutions just bought out the smaller ones. The last bank I worked for was bought out twice in just a handful of years.

There have been more than 16,000 bank mergers in the past 40 years. Every year, there are still an average of 400.

So, between failures and mergers and acquisitions, the number of banks has dramatically declined. At the end of last year, there were 5,177 commercial banks and savings institutions in the U.S. That’s less than 25% of the total banks in existence in the 1980s.

And while not declining as quickly as individual banks, the number of branches have also decreased—after peaking during the financial crisis of 2007-2010.

Banking Reimagined
Now, the number of banks and their branches are facing an even bigger threat—fintech. That’s just shorthand for financial technology and innovation that delivers financial services in a non-traditional way. And neobanks—banks that are totally digital (online and mobile)—are one of the fastest-growing fintech niches.

Today, you don’t need to go into your nearest bank branch to open an account, get a car or mortgage loan, or even to deposit cash or your paycheck. It’s the digital age!

You can pay your bills, shop online, deposit and transfer money on your computer and your cell phone. Once security on the internet was ‘relatively’ secure, online banking exploded. And that set up the path for mobile banking, which is faster, more secure, and very convenient.

At the beginning of this year, I moved from a rural town in Tennessee to a suburb of Knoxville. I loved my local family-owned bank, but they didn’t have an office in my new town. However, just as I was in the process of moving, they entered the digital age with a new mobile banking app. Now, I’m not one for gadgets, and I’m never the first on the block to try out new technology, but I love that app! And with the coronavirus pandemic keeping me mostly at home, I can do just about all my banking with my phone. I can’t even remember the last time I went into a bank’s lobby.

As you can see from the following graph, digital banking has risen significantly—through all age groups since COVID-19 arrived.

Online banking has actually been around since the 1980s. Microsoft Money was one of the first applications. It integrated online banking and signed up 100,000 households. NetBank, created in 1996, was one of the first successful internet-only banks. Over the next decade, most major U.S. banks had some form of online banking. In 1999, Yodlee developed the first account aggregation software, assisting consumers to get the best loan rates, lower fees, and higher returns, by scouring thousands of institutions. Today, now named Envestnet Yodlee has 27 million users.

But we should distinguish here, the difference between online banking and digital banking. They are often used interchangeably, but they are really not the same. Online banking doesn’t have all the bells and whistles of digital banking. It’s actually included as one facet of digital banking.

Most of us use some form of online banking. Through a gateway accessed by our user IDs and passwords, we check our account balances, make sure our debit card transactions are listed correctly, and many of us pay our bills online. But with digital banking, all the bank’s services are gathered into a combination of online portals and banking apps, so that you can not only do all of the above-mentioned tasks, but you also have access to debt and money management, accounting and payroll applications, international money transfers, instant credit, and much more—all right on your cell phone.

The digital revolution really took off with the 2007 launch of the iPhone. With that little device, you are, effectively, carrying around your personal computer. A recent study showed that 80% of banking customers own smartphones and 60% now use mobile banking to manage their money. That number has tripled since 2012.

According to the FinTech Times, 24% of people in the U.S. now rely on digital-only banking. And just 34% of those 35 and under even carry cash! By 2022, forecasts say that more than 75% of millennials will be digital banking users. And don’t forget about the Gen-Z’ers (born between 1995 and 2015). They control $45 billion in annual spending, and account for some 60 million people in the U.S., and they grew up using their phones for everything from texting, social media, playing games, and, oh, yes, even as a telephone! Most of them will never set foot in a bricks-and-mortar bank branch.

The spread of digital banking is global. According to Oracle, 67% of bank customers around the world are now on digital banking platforms, and the World Bank says that in the last three years, 515 million global customers opened a banking account through a mobile money provider.

Digital banking is significantly changing the banking industry. In order to compete with neobanks and third party mobile money wallets like PayPal, Apple Card, and Facebook Pay, traditional banks are now investing heavily in technology and digital infrastructure upgrades. For example, to appeal to the younger, tech-savvy generation, Bank of America offers an artificial-intelligence-driven virtual financial assistant dubbed “Erica” in its mobile app. BoA has 66 million customers that interact with it 10 billion times a year, and 97% of those interactions are digital—mobile, online or through interactive voice response.

The following survey by Oracle shows the rapid proliferation of digital banking around the world.

But it’s the neobanks that are becoming the bank growth vehicles of the future. Sure, brick-and-mortar banks will still have a place in the economy—at least in our lifetimes. After all, if you need a safe deposit box or easy currency exchange, you go to your local bank (at least for now!). But over the next few decades, it’s the younger folks who will drive the banking industry. A survey by Finder.com reported that 21.4% of U.S. internet users ages 18 to 91 already used neobanks, and 8.8% of the respondents said they plan to open a digital-only bank account in the coming months.

There are plenty of advantages in using digital banking instead of physical bank branches:

• It’s a lot less expensive for the banks; they don’t have to pay for buildings that house their branch networks; they have fewer regulations than traditional banks; and little, if no credit risk.
• Most banking transactions, including balance inquiries, bill payments, and money transfers are almost 100% digital. And if you need a personal consultation, that, too, is going digital, via chats, as well as artificial intelligence (AI) and machine learning.
• Quick processing time (for setting up accounts). For example, with SoFi, you can pre-qualify for a loan and set your interest rate in a matter of minutes.
• Because the bank’s expenses are less, their transaction fees (if they have any), are less than those in traditional banking. Many neobanks have fee-free accounts, although they may charge you if you don’t keep a minimum balance.
• Digital banking can reach a wider prospect base less expensively, so people who are ‘unbanked’ or ‘underbanked’ (think of those who pay their bills through money orders or use check cashing services with huge fees) can also sign up. Right now, the FDIC estimates that 25.2% of Americans do not have a bank account.
• Almost all neobanks have a smartphone app, so you can bank anywhere, anytime.

How Neobanks Work
In the United States, Simple and Moven were among the first neobanks, founded in 2009 and 2011, respectively. Today, there are around 60 neobanks, It’s pretty easy to sign up for a neobank. Most are just apps that you download—with no reams of paperwork to complete. Some even allow you to link your traditional bank accounts to the neobank—a great way to ease into totally digital banking.

Services that a neobank may provide include:

• Checking and savings accounts
• Payment and money transfer services
• Financial education tools, including budgeting help

Most neobanks don’t offer much in the way of credit, so it’s good to maintain your back-up traditional bank or credit union for those needs. However, some neobanks do offer personal and business loans through partner banks and credit unions. Then, there are some like SoFi, who were lenders before they offered neobank features, so it offers both loans and deposit accounts. You can see the future, can’t you? The neobanks are edging their way into almost all banking functions.

Since it takes a lot of work, money, and time to become a chartered bank, there are just a few neobanks that have gone down that road. Most just create alliances with existing banks so that they can offer FDIC insurance. Banks such as Evolve Bank and Trust, The Bancorp Bank, BBVA, Choice, MetaBank, Metropolitan Commercial Bank, Wells Fargo, CBW Bank, nbkc bank, and UMB Bank have all been expanding their services by partnering with neobanks.

Still other financial institutions, like Goldman Sachs, launched Marcus, its own neobank, in 2016. GreenDot Bank, partnering with Walmart, created GoBank in 2013.

And lest you think the services are one-size-fits-all, you’d be wrong. There are neobanks targeted at a variety of different demographic groups, and offering differentiated services.

For students and millennials, and offering tools to help manage debt, increase savings, or begin investing, as well as person-to-person (P2P) payments, spending notification, rewards, early access to pay, and gamification of financial literacy (a game-based approach to make managing your money fun) are BankMobile, Dave, Digit, Chime, Current, GoBank, MoneyLion, SoFi Money, and Varo. Chime has the largest amount of consumer users, about 8 million people between the ages of 25 and 35.

For small businesses, offering invoicing; bill payment and ACH credit push and debit pull payments; integration with merchant platforms such as Kabbage, Stripe, Square, and soon PayPal; accounting and budgeting, instant credit, and early access to pay; no-fee international transfers; creation of LLCs; cash flow projections; and tools that enable the building of application programming interfaces (APIs) on top of the bank account; you can choose between Azlo, BankNovo, Current, Joust, Lili, MoneyLion, NorthOne, and Oxygen. Joust is the leader, with 4 million accounts.

Affinity groups, such as the “prebanked” (those age 21 or younger who rely on cash), business travelers, HENRYs (“high earners not rich yet”), and those who are environmentally or socially conscious can opt for the services of Aspiration, Be Money, Marcus, Revolut, Step, and Unifimoney. They offer high-yield savings and checking accounts, artificial intelligence (AI) built into investment apps, and cash-back credit cards.

Here’s a link to the list of current neobanks and their services.

Neobanks aren’t perfect. There are some cons to consider:

• Their deposit accounts are not all backed by federal insurance. You are taking a big risk if that is the case with your neobank, so I would highly recommend you make sure your deposits are insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Share Insurance Fund (NCUSIF), like they would be at your corner bank or credit union.
• Neobanks are not as regulated as traditional banks. Consequently, you might not have any legal recourse if you run into difficulties with an app, services, or non-regulated third-party service providers. Or, if you have to prove potential fraud or resolve errors.
• You won’t have a local bank branch to visit. You’ll probably still be able to use a local bank that’s within your neobank’s ATM network, but you won’t have a personal banker.
• If you’re a technophobe, neobanking may not be for you. You need to have some comfort level with using mobile apps, and you can’t be afraid of exploring the app. If you only use it to deposit your paycheck, you may be missing out on all the product and service offerings that are included.

Artificial Intelligence and Machine Learning are Propelling Digital Banking
I mentioned AI and machine learning earlier. One definition of AI is, “a wide-ranging branch of computer science concerned with building smart machines capable of performing tasks that typically require human intelligence.” Wikipedia says, “it’s the study of “intelligent agents”: any device that perceives its environment and takes actions that maximize its chance of successfully achieving its goals.”

In a survey from Varo Money, 79% of adults in the U.S. believe that AI could help them manage their money better, and also said if their bank offered AI tools, they would use them. It is estimated that artificial intelligence will transform the digital banking industry and save it $1 trillion dollars in the process. Erica, the Bank of America personal assistant I mentioned earlier, uses AI and advanced analytics to track spending patterns and makes suggestions on altering them to improve the customer’s financial health.

Pre-COVID-19, digital banking was on the rise. But the pandemic has accelerated the pace. With most bank branches closed (except by appointment), many of us have become more dependent on digital banking. But the largest beneficiary of digital banking has been e-commerce, where digital payments are King. According to the Department of Commerce, $200.72 billion was spent online with U.S. retailers in the second quarter, up 44.4% year over year. And e-commerce now accounts for 20.8% of total retail sales, a rise of 14.7% from last year and 16.2% from the first quarter of this year.

I don’t expect that to decline after the pandemic ends. Those of us who weren’t big online shoppers have now caught the bug, and discovered just how convenient it is and how much time it saves us from getting in the car and checking three or four stores for what we need.

Digital banking is here to stay. The biggest challenge today—and one that deters some of the older banking customers is security. Digital banks have added layers of security to make sure the person using your device is you, and they utilize encrypted data, two-factor authentication, intrusion detection systems and firewalls to keep on top of constantly changing customer and regulatory requirements. Nothing is 100% safe, but it’s important that you feel comfortable that security is a priority at your digital bank.

Reasons for also Maintaining a Local Bank Relationship
Now, even if you are all-in on your neobank, don’t completely discount the benefits of also keeping a local bank relationship. These include:

If you need to get a lot of cash or make a large deposit. You know that ATM’s have daily cash withdrawal limits. Your local bricks-and-mortar bank branch is limited only by the amount in your account and/or the cash stored in its vault. As well, your mobile banking app can’t take a cash deposit and it may also have a daily limit as to the size of the checks you can deposit into your account. My mobile app allows me only to deposit up to $2,500 per day.

As I mentioned earlier, neobanks don’t offer safe deposit boxes. So, if you want to secure your birth, marriage, or divorce certificates or other items that would be hard to replace in case of a fire or robbery, your local bank has a safe deposit box for you.

Cashing in loose change. Sure, even my grocery store has a coin counter, but it charges for that service. At my local bank, I can just bring in my ziplock bag with the contents of my piggy bank, and they are happy to throw it into their coin counter and deposit it right into my bank account.

You need a cashier’s check for your home closing. The title companies no longer will accept your personal check, so, yes, you’ll have to get that guaranteed check at your bank branch. You can possibly get one mailed to you from your neobank, but that will take some time—not the immediate service you will receive at your bank branch.

Do you have need of a notary public? No, you can’t get that at your neobank. But if you require a notarized, witnessed signature on documents like vehicle titles, loan documents, and power of attorney forms, your local bank can probably accommodate you.

Personalized customer service. Sometimes, you just need to explain your problem or issue to a real person. My best example is the Sunday night before a long trip when I attempted to pay my bills online. To my surprise, my bank’s internet site was down for maintenance. (I’m sure they alerted me, but I didn’t, obviously, pay any attention!) I needed to transfer money from one account to the other. I called and left a message on the bank manager’s voicemail. He called me back between flights the next day. I told him what I needed, and he said, “I’ll take care of it.” And he did. With a digital bank, you’re probably going to be routed through a series of voicemail prompts, which may or may not be able to help you, and you’ll most likely spend a lot of time on hold and swearing at your phone as you try to make it through the voicemail prompts..

Even machines (and you) make mistakes. You can punch in the wrong amount for your deposit, or the camera’s picture of your check is fuzzy, and the computer at your bank can also pick up the wrong amount. A couple of months ago, when my dog kennel deposited my check for Oreo’s visit, her bank encoded the check for $50 less than the amount I wrote. The kennel called me; I called my bank; and they corrected the error. Probably not that easy at a neobank.

If your banking needs are simple—just depositing and withdrawing, by all means, try a neobank. But if you need more from your bank, why not use both—a traditional bank and a neobank (or your bank’s online, mobile, and digital app platforms). I’m telling you; that app is hard to beat!

The Top 7 Digital Banks in the U.S.
According to onlinebanking.top10.com, these are the top 7 digital banks in the U.S., and their primary advantages:

1. BBVA: High yield, award-winning mobile banking app, access to 64,000 fee-free ATMs, zero monthly fees, and a Visa Debit Card with cash back rewards, bbvausa.com/special/online-checking.html?source=affiliate&CID=ref:afl:oth:-Online+Checking_TextLink+4--:Natural+Intelligence+Ltd._2828146-apply-:13647542_9109189:::::CJ::XJVmwJag4Z::&cjevent=ee596017eca211ea822e01400a240612
2. Varo: zero monthly fees for checking & savings, live customer service available all week, automatic savings options available, earn up to 1.21% APY on savings, varomoney.com/apply-verticalp/?utm_source=Natural_Intelligence&utm_campaign=5VKApW2ost
3. Chase: premium full-service online bank, flexible, user-friendly and secure app, no fees on any financial operations, get $200 for opening a checking account, accounts.chase.com/consumer/banking/online?px=YA99297&jp_cmp=rb/663227/aff/3_94/na&CODE=pV2zaWFdRBY-DCGXQRjx8xtdqsHKDzAg8w&MSC=pV2zaWFdRBY-DCGXQRjx8xtdqsHKDzAg8w
4. Radius Bank: user-friendly app with robust features, free ATMs available worldwide, transparent information on fees, earn up to 0.15% APY on savings accounts, radiusbank.com/personal/rewards-checking/?utm_source=aragon&utm_medium=affiliate&utm_campaign=00344&pid=76&utm_term=Natural+Intelligence_
5. SoFi: checking & savings services in 1 account, 5% cash back up to $100 for new members, no fees on any financial operations, member rate discounts on SoFi loans, sofi.com/money/?adDepartment=BD&adId=864375&adName=Natural%20Intelligence%20-%20Money&adTarget=money&clickId=xl62E6XerxyOUqCwUx0Mo3YgUkiVjBxowQfFWo0&irgwc=1&partnerId=34020&partnerName=Natural%20Intelligence%20LTD%2C&partnerType=Affiliate
6. Discover: the best for frequent business travelers, 24/7 U.S.-based customer service, no hidden fees, earn 0.80% APY on savings accounts, discover.com/online-banking/savings-lng-01/?cmpgnid=affl-bk-CJ&src=S00000LIK&van=Dbank
7. CIT Bank: all types of high-yield savings accounts, special home loans services, no monthly service or maintenance fees, earn up to 0.75% APY, cit.com/cit-bank/tiered-savings-account-savings-builder-direct/?utm_source=Natural+Intelligence+Ltd.&utm_medium=affiliate&utm_campaign=9109189&utm_term=E8Ej5lk4Ma&cjevent=35e6f3e9eca311ea808301340a24060e&utm_content=savingsbuilder_000_text_brand