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Direct banking: should banks play offence, defence or stay on the sidelines? Jim McCormick and Gordon Goetzmann, president and managing vice-president, respectively, of First Manhattan Consulting Group, give their views on one of the definitive trends to hit the retail banking market over the past decade
Could this 'disruptive' direct banking model put 30 percent of banks' stock price at risk? What should your strategy be as more competitors offer high rates via this approach? The answer will be different depending on your bank's situation.
First Manhattan Consulting Group (FMCG) estimates that deposits in direct banking accounts have reached 2.5 percent of the $6 trillion consumer and small business deposit market in the US. Growth in these balances has been 40 to 60 percent in the past four years.
Competitors include consumer loan generators (such as Countrywide, GMAC), investment and insurance companies (E*Trade, MetLife) and banks with traditional branch networks (Citi, HSBC, Emigrant). While the lion's share of direct banking balances are in savings products, some competitors, notably ING and E*Trade, have recently introduced high-yielding transaction products as well.
Direct banking may present the most serious threat to traditional retail banking incumbents in decades. There are several reasons why the direct phenomenon requires incumbent banks to formulate their own strategy:
1. In many banks, the retail franchise line of business represents a material portion of the market cap of the entire institution. The financial performance of this line of business is typically dominated by deposits. If the growth rate in direct banking deposits continued at 40 percent annually, in five years...