Digital-only banks let community banks break free of the restrictions imposed by their local markets.
When Holyoke-based PeoplesBank launched a digital-only bank earlier this year, it wanted to find customers – not in its local market, but in Alaska and Wisconsin.
“We wanted to have a presence outside of our Massachusetts and Connecticut footprint so that we could find a lower cost to enter new markets aggressively without building branch locations,” said Aleda De Maria, PeoplesBank’s senior vice president of retail and operations.
Even before the pandemic, community banks had recognized the need to invest in technology to compete with larger banks and respond to customers’ expectations for convenience and ease of use. A recent survey by Bain & Co. found that almost all respondents planned to use digital banking channels in the future, while some also plan to reduce visits to bank branches even when the pandemic abates.
Internet-only banking is one potential option for a community bank to expand its digital offerings and reach new customers. Even though such a platform supports customers outside its markets, it still can affect local communities by increasing the bank’s growth.
Different Type of Growth
Some of the regional and national banks, including Citibank, Capital One, Citizens Bank and Ally Bank, have internet-only banks, as do financial technology companies like Chime and BankMobile.
Local banks have also had a longtime presence in digital-only banking. Salem Five and Fall River-based BankFive have internet banks. OneUnited Bank, the country’s largest Black-owned bank, and Radius Bank, which has no branch network, are two Boston-based banks with digital-only offerings.
Nymbus, a Miami-based financial technology company with an office in Connecticut, provides digital banking platforms for both traditional and online-only customers. David Mitchell, Nymbus’ former president now at Liberty Bank, wrote in a white paper that standalone digital banks provide community banks and credit unions with a possible solution to the digital movement away from branches, slowing deposit growth and the cost of investing in branch expansions. The white paper, “SmartLaunch: The Case for Digital-Only Banks,” was written for Nymbus’ SmartLaunch platform, which was introduced in 2018.
Traditional banks have had success in the digital-only market because they already have bank charters, unlike their digitally native competitors. Growth in this channel, he said, is looked at differently.
“[A] digital-only bank that is an extension of a traditional bank doesn’t suffer from the same profitability pressures as a standalone bank,” Mitchell said. “For example, the digital bank can be used to drive deposit growth, which in turn allows the traditional bank to offer more loans. As long as the digital-only bank is making the desired contribution to the organization, it doesn’t have to turn a profit.”
This quality made an online bank attractive to PeoplesBank, President and CEO Tom Senecal said. With low rates of economic growth in its footprint in Western Massachusetts and Connecticut, the bank could still grow while also offering benefits to its existing customers.
“Our strategy has to be more than just our physical footprint – it allows us to be successful within our existing community but allows us to grow outside of it at the same time,” Senecal said. “I see it as an opportunity to grow and to benefit not only the community we’re in but whatever communities that we are successful in nationally.”
Today’s Table Stakes
The initiative required a commitment to the bank’s digital strategies and building a digital brand, Senecal said. PeopleBank, which uses Nymbus’ online banking tools for its brick-and-mortar customers, is outsourced its digital bank to the Nymbus SmartLaunch platform for technology and service operations.
Known as Zynlo Bank, PeoplesBank’s digital bank launched in Anchorage, Alaska, and Madison, Wisconsin. De Maria said the bank chose these locations because they represented growing markets that did not have a community bank with technology similar to PeoplesBank’s or a national bank headquartered there. The bank is using these two communities to test Zynlo’s products, features and marketing before it becomes available nationally in early 2021.
The products and features will be key for competing nationally, De Maria said.
“There has been such an evolution in product offerings that things that seem really forward-thinking are now table stakes,” De Maria said. “We set the standard for customers that they want it all and they want it all in one place.”
Along with offering deposit accounts with rates better than those at traditional banks and early payday, Zynlo has a feature called “zyng.” When customers use their debit card, the feature rounds up the amount and deposits the excess into a savings account. The bank will then match the excess at 100 percent for the first 100 days and at 10 percent thereafter.
Diane McLauglin
One surprise, De Maria said, is that customers have reacted positively to the insurance on excess deposits available to PeoplesBank through the Depositors Insurance Fund for banks with Massachusetts charters. While no customers have made deposits exceeding the FDIC-insurance limit of $250,000, De Maria said the presence of DIF insurance has resonated with customers.
De Maria said the name “Zynlo” was chosen instead of PeoplesBank so that the digital bank would not sound like a traditional brick–and–mortar financial institution. And what does Zynlo mean?
“It really means nothing,” De Maria said. “It’s a combination of letters that we thought just sounded like speed and uniqueness were at its forefront.”
