A direct bank (sometimes called a branch-less bank or virtual bank) is a
bank
A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets.
Because ...
that offers its services only via the Internet, email, and other electronic means, often including telephone, online chat, and mobile check deposit. A direct bank has no
branch network. It may offer access to an independent
banking agent
A banking agent is a retail or postal outlet contracted by a financial institution or a mobile network operator to process clients’ transactions. Rather than a branch teller, it is the owner or an employee of the retail outlet who conducts the t ...
network and may also provide access via
ATMs (often through
interbank network alliances), and
bank by mail. Direct banks eliminate the costs of maintaining a branch network while offering convenience to customers who prefer digital technology. Direct banks provide some but not all of the services offered by physical banks.
Direct bank transactions are conducted entirely online. Direct banks are not the same as "online banking". Online banking is an Internet-based option offered by regular banks.
In the United States, direct banks are defined as online/branchless institutions with federal banking charters, with either the Federal Reserve Board, the Office of the Comptroller of the Currency (OCC) or the
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance to depositors in American depository institutions, the other being the National Credit Union Administration, which regulates and insures cr ...
(FDIC) as their primary regulator. Many direct banks are insured by the FDIC and offer the same level of protection for the customers' funds as traditional banks, although it is important to verify if this is true.
As of 2022, 27% of banking customers in the United States use a direct (i.e., online-only) bank.
Direct banks are distinctly different from
neobanks
A neobank (also known as an online bank, internet-only bank, virtual bank or digital bank) is a type of direct bank that operates exclusively online without traditional physical branch networks. The term " challenger bank" is used in the UK to r ...
. Neobanks are online-only banking providers without federal banking charters. Thus deposits are not insured by the FDIC. Their customers tend to be younger people who are more price sensitive to bank fees.
History
One of the world's first direct banks was
First Direct
First Direct (styled first direct) is a telephone and internet based retail bank division of HSBC Bank plc based in the United Kingdom. First Direct has headquarters in Leeds, England, and has 1.45 million customers. It was awarded Most T ...
, which launched telephone banking in the United Kingdom on 1 October 1989. A subsidiary of the then
Midland Bank
Midland Bank Plc was one of the Big Four banking groups in the United Kingdom for most of the 20th century. It is now part of HSBC. The bank was founded as the Birmingham and Midland Bank in Union Street, Birmingham, England in August 1836. It ...
, it pioneered the concepts of no branches and 24-hour service through a call center. The commercialization of the Internet in the early 1990s was the biggest driver in the creation of fully direct banking models.
In the 1990s, internet-only banks or "virtual banks" appeared. These banks did not have a traditional banking infrastructure, such as a branch network, a cost-saving feature that allowed many of them to offer
savings account
A savings account is a bank account at a retail bank. Common features include a limited number of withdrawals, a lack of cheque and linked debit card facilities, limited transfer options and the inability to be overdrawn. Traditionally, transa ...
s with higher interest rates and
loan
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that ...
s with lower interest rates than most traditional banks. However, there was initial consumer hesitation in conducting monetary transactions over the Internet, especially with an entity that they could not deal with face-to-face.
One of the first direct banks in the United States was the
Security First Network Bank
Security First Network Bank (SFNB) was the first pure Internet bank in the United States. It had no physical branch bank offices and could only be accessed online. It was founded in Pineville, Kentucky, in October 1995 by James (Chip) S. Maha ...
(SFNB), launched in October 1995, and was the first direct bank to be insured by the
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance to depositors in American depository institutions, the other being the National Credit Union Administration, which regulates and insures cr ...
.
SFNB did not make much profit in its initial years, it demonstrated that the concept of direct banking could work.
Some direct banks focused only on
online savings account
An online savings account (OSA) is a savings account managed and funded primarily on the Internet.
Features
OSAs are often characterized by a higher interest rate or lower fees, compared with traditional savings accounts.
Many of these high-yie ...
s, providing higher interest rates than traditional banks for customers who were happy to only have access to their account on the internet. One of the first and most successful adopters of this was
ING Direct
The ING Group ( nl, ING Groep) is a Dutch multinational banking and financial services corporation headquartered in Amsterdam. Its primary businesses are retail banking, direct banking, commercial banking, investment banking, wholesale bankin ...
that launched
Tangerine Bank
Tangerine Bank (operating as Tangerine) is a Canadian direct bank that is a subsidiary of Scotiabank. It offers no-fee chequing and savings accounts, Guaranteed Investment Certificates (GICs), mortgages and mutual funds (through a subsidiary). M ...
in Canada in 1997, expanding this to the UK, Australia, and the United States before its owner sold them around 2010.
Asia's first direct bank was finatiQ, a division of the
Oversea-Chinese Banking Corporation
Oversea-Chinese Banking Corporation, Limited (), often known as OCBC Bank (), is a Singaporean multinational banking and financial services corporation headquartered in OCBC Centre, Singapore. OCBC Bank was born out of the Great Depression t ...
(OCBC) of Singapore, launched in April 2000. It was shut down in 2011 and its operations merged into the mainstream banking structure with its parent OCBC saying that "Internet Banking has since become a core part of OCBC Bank’s multi-channel strategy – which also encompasses branches, ATMs and Mobile Banking".
The direct bank model was used by many of the
challenger bank
Challenger banks are small, recently created retail banks that compete directly with the longer-established banks in the UK, sometimes by specialising in areas underserved by the "big four" banks (Barclays, HSBC, Lloyds Banking Group, and Nat ...
s created in the UK during 2015–2018.
See also
*
Banking agent
A banking agent is a retail or postal outlet contracted by a financial institution or a mobile network operator to process clients’ transactions. Rather than a branch teller, it is the owner or an employee of the retail outlet who conducts the t ...
*
Online savings account
An online savings account (OSA) is a savings account managed and funded primarily on the Internet.
Features
OSAs are often characterized by a higher interest rate or lower fees, compared with traditional savings accounts.
Many of these high-yie ...
References
{{Authority control
Banking