Direct bank

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A direct bank (sometimes called a branchless bank, virtual bank, online bank or an internet-only bank) is a bank without any branch network that offers its services remotely via online banking and telephone banking and may also provide access via ATMs (often through interbank network alliances), mail and mobile. [1] Direct banks reduce the significant costs of maintaining a branch network.

Bank financial institution

A bank is a financial institution that accepts deposits from the public and creates credit. Lending activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial stability of a country, banks are highly regulated in most countries. Most nations have institutionalized a system known as fractional reserve banking under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, known as the Basel Accords.

Branch (banking) subsidiary office of bank

A branch, banking center or financial center is a retail location where a bank, credit union, or other financial institution offers a wide array of face-to-face and automated services to its customers.

Online banking, also known as internet banking, is an electronic payment system that enables customers of a bank or other financial institution to conduct a range of financial transactions through the financial institution's website. The online banking system will typically connect to or be part of the core banking system operated by a bank and is in contrast to branch banking which was the traditional way customers accessed banking services.

Contents

The concept of a direct bank gained prominence with the advent of online banking technology in the early 1990s which led to a number of direct banks being created, although many were owned by traditional banks. A number of direct banks offer only online savings account and these banks typically offer higher interest rates than their traditional competitors as these banks can be very cost efficient to operate. Since mid-2000s online and telephone banking has become a mainstay of retail banking and most banks have incorporated these into their core services and transforming or reducing their branch network to mirror the advantages that direct banks have.

An online savings account (OSA) is a savings account managed and funded primarily on the Internet.

Retail banking, also known as consumer banking, is the provision of services by a bank to the general public, rather than to companies, corporations or other banks, which are often described as wholesale banking. Banking services which are regarded as retail include provision of savings and transactional accounts, mortgages, personal loans, debit cards, and credit cards. Retail banking is also distinguished from investment banking or commercial banking. It may also refer to a division or department of a bank which deals with individual customers.

In the United States, many online banks are insured by the Federal Deposit Insurance Corporation (FDIC) and can offer the same level of protection for the customers' funds as traditional banks. [2]

Federal Deposit Insurance Corporation US company providing deposit insurance

The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation providing deposit insurance to depositors in U.S. commercial banks and savings institutions. The FDIC was created by the 1933 Banking Act, enacted during the Great Depression to restore trust in the American banking system. More than one-third of banks failed in the years before the FDIC's creation, and bank runs were common. The insurance limit was initially US$2,500 per ownership category, and this was increased several times over the years. Since the passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2011, the FDIC insures deposits in member banks up to US$250,000 per ownership category.

History

One of the world's first fully functional direct banks was First Direct, which launched telephone banking in the United Kingdom on 1 October 1989. A subsidiary of the then Midland Bank, 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 full direct banking models. As the Internet became more widely accessible, traditional banks sought to reduce operational costs by offering internet banking services.

First Direct is a telephone and internet based retail bank in the United Kingdom, a division of HSBC Bank plc. First Direct has headquarters in Leeds, West Yorkshire, England, and has 1.35 million customers. It used to maintain a reputation for superior customer service, awarded Most Trusted Financial Provider by Moneywise, first place in the customer service survey for Which? of August 2015. It is as of 2019 rated as bad by Trustpilot coinciding with HSBC increased influence via restructuring to a wing of HSBC UK Bank Ltd https://uk.trustpilot.com/review/www.firstdirect.com

United Kingdom Country in Europe

The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a sovereign country located off the north-western coast of the European mainland. The United Kingdom includes the island of Great Britain, the north-eastern part of the island of Ireland, and many smaller islands. Northern Ireland is the only part of the United Kingdom that shares a land border with another sovereign state, the Republic of Ireland. Apart from this land border, the United Kingdom is surrounded by the Atlantic Ocean, with the North Sea to the east, the English Channel to the south and the Celtic Sea to the south-west, giving it the 12th-longest coastline in the world. The Irish Sea lies between Great Britain and Ireland. The United Kingdom's 242,500 square kilometres (93,600 sq mi) were home to an estimated 66.0 million inhabitants in 2017.

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 expanded in the Midlands, absorbing many local banks, and merged with the Central Bank of London Ltd. in 1891, becoming the London City and Midland Bank.

At the same time, 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 accounts with higher interest rates and loans with lower interest rates than most traditional banks. Virtual banks could operate virtually from a single PC and server administration without a substantial infrastructure. However, there was an initial consumer hesitation in conducting monetary transactions over the Internet, especially with an entity that they could not deal with face-to-face.

Savings account type of account maintained by retail financial institutions

A savings account is a deposit account held at a retail bank that pays interest but cannot be used directly as money in the narrow sense of a medium of exchange. These accounts let customers set aside a portion of their liquid assets while earning a monetary return.

Loan transfer of money that must be repaid

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 incurs a debt, and is usually liable to pay interest on that debt until it is repaid, and also to repay the principal amount borrowed.

One of the first fully functional direct banks in the United States was the Security First Network Bank (SFNB), which was launched in October 1995, [3] and was the first direct bank to be insured by the Federal Deposit Insurance Corporation. Though SFNB did not make much profit in its initial years, it demonstrated that the concept of direct banking could work.

United States Federal republic in North America

The United States of America (USA), commonly known as the United States or America, is a country comprising 50 states, a federal district, five major self-governing territories, and various possessions. At 3.8 million square miles, the United States is the world's third or fourth largest country by total area and is slightly smaller than the entire continent of Europe's 3.9 million square miles. With a population of more than 327 million people, the U.S. is the third most populous country. The capital is Washington, D.C., and the most populous city is New York City. Forty-eight states and the capital's federal district are contiguous in North America between Canada and Mexico. The State of Alaska is in the northwest corner of North America, bordered by Canada to the east and across the Bering Strait from Russia to the west. The State of Hawaii is an archipelago in the mid-Pacific Ocean. The U.S. territories are scattered about the Pacific Ocean and the Caribbean Sea, stretching across nine official time zones. The extremely diverse geography, climate, and wildlife of the United States make it one of the world's 17 megadiverse countries.

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. Mahan III. Several months later, the bank relocated to Atlanta, Georgia.

Some direct banks focused only on online savings accounts, 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 that launched its first such bank in Canada in 1997, expanding this to the UK, Australia and the United States before its owner sold them around 2010.

One of Europe's first full-service direct banks was First-e, launched by ENBA, a Dublin-based internet incubator company under the banking license of French bank, Banque d'Escompte. First launched in the United Kingdom in September 1999, it garnered appreciable attention, resulting in more such ventures all over Europe. After about two years of operations, it shut down its operations during the dot-com bubble bust. [4] Rival Egg Bank was launched in October 1998 by Prudential plc as a direct bank, however it took several years before it became a full-service direct bank.

Asia's first direct bank was finatiQ, a division of the Oversea-Chinese Banking Corporation (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". [5]

The direct bank model was used by many of the challenger banks created in the UK during the period 2015-2018.

See also

Related Research Articles

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Manulife Bank of Canada is a wholly owned subsidiary of Manulife. It offers high-interest chequing & savings accounts, credit cards, lines of credit and mortgages, including Manulife One. Since it was established in 1993, Manulife Bank has grown to more than $22 billion in assets and serves customers across Canada. Manulife Bank headquarters are in Waterloo, Ontario.

HSBC Bank Australia Limited was granted a banking licence in 1986 by APRA having been established as HSBC Finance Company Limited in 1965. It is part of the worldwide HSBC Group. HSBC Bank Australia is a foreign bank in Australia, offering a wide range of banking products and services to the retail, commercial, corporate and institutional sectors.

China Banking Corporation, commonly known as China Bank, is a Filipino bank established in 1920. It was the first privately owned local commercial bank in the Philippines initially catering to the banking needs of Chinese Filipino businesspeople. It offers various banking services and products related to deposit, investment, trust, cash management, remittance, and financing products and services. It also offers insurance brokerage and bancassurance services through its subsidiary and affiliates.

NetBank, formerly named Atlanta Internet Bank (1996) and Net.B@nk (1998), was a direct bank.

First Internet Bancorp

First Internet Bancorp is a bank holding company that operates First Internet Bank of Indiana, sometimes called First Internet Bank or First IB, one of the first state-chartered, Federal Deposit Insurance Corporation-insured institutions to operate without physical branches.

EverBank American diversified financial services company

EverBank, now TIAA Bank, is an American diversified financial services company providing banking, mortgages, and investing services. It is based in Jacksonville, Florida, U.S. It operates through standard banking offices and through its Direct Banking division. EverBank Direct operates by telephone, mail, and over the Internet. As of September 30, 2015, EverBank had approximately $25.2 billion in total assets.

Citibank (Malaysia)

Citibank Berhad is a licensed commercial bank operating in Malaysia with its headquarters in Jalan Ampang, Kuala Lumpur. Citibank Berhad operates as a subsidiary of Citigroup Holding (Singapore) Private Limited. Commencing its banking operations in Malaysia in 1959, Citibank Berhad was locally incorporated in 1994.

Nevada State Bank, a division of Zions Bancorporation, N.A., is a full-service bank with branches statewide. Founded in 1959, Nevada State Bank serves 20 communities across the state of Nevada. Zions Bancorporation, N.A. operates in nearly 500 local financial centers across 11 Western states: Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah, Washington and Wyoming. Zions Bancorporation, N.A. is included in the S&P 500 and NASDAQ Financial 100 indices.

CompuBank

CompuBank, N.A. was a financial company engaged primarily in retail banking, mortgage banking, business finance and providing ATM and merchant processing services. CompuBank was founded in 1998 by banking veteran Frank Goldberg and launched on the internet in early October the same year. It was one of the pioneers of the Internet banking industry, and recognized as one of the first internet-only banks.

Sterling Bank (Texas) Texas bank

Sterling Bank was a wholly owned subsidiary of Sterling Bancshares, Inc., of Houston, Texas. Sterling has total assets of $5 billion and operates 56 banking centers in the greater metropolitan areas of Houston, San Antonio, Dallas, Fort Worth, as well as in the Texas Hill Country. The Bank was founded in 1974 as Jersey Village Bank. Of the bank's 56 banking centers, 13 are in Dallas and Fort Worth, 29 are in Houston, 8 are in San Antonio, and 5 are in the Texas Hill Country.

DUCA Financial Services Credit Union Limited, commonly shortened to DUCA Credit Union, is a Canadian credit union. Financial products include chequing and savings accounts, loans, mortgages, insurance and small business products. It is a member-owned institution and its deposits are insured through the Deposit Insurance Corporation of Ontario.

Insured Cash Sweep

The Insured Cash Sweep® or ICS® service is used by banks and savings associations that are insured by the Federal Deposit Insurance Corporation (FDIC). Financial institutions that are in the ICS Network can place the deposits received from their customers into interest-bearing savings accounts at other FDIC-insured banks in the Network.1 Banks can also place their customer funds into demand deposit accounts using the ICS demand option.2 Because the funds are placed at multiple banks across the Network in amounts that stay within the FDIC deposit insurance limit at each bank ($250,000), the customer is eligible for total amounts of deposit insurance that are greater than the standard insurance limit for any one bank.3

Radius Bank is an online focused community bank based in Boston, Massachusetts. Radius Bank is a member of the FDIC and an Equal Housing Lender as well as a member of the NYCE SUM ATM network. Radius is one of the fastest growing banks in Massachusetts. and is currently the 39th largest bank headquartered there.

References

  1. Frankenfield, Jake. "Online Banking". Investopedia. Retrieved 2019-03-17.
  2. "Safe Internet Banking". GOBankingRates. FDIC. 2016-01-11. Retrieved 2016-07-20.
  3. FDIC Banking Review, Vol. 8 No. 3 - Article III February, 1996
  4. "Irish Internet Bank Shuts Its Doors". Tax News. September 7, 2001.
  5. "FinatiQ to cease operations". Asia Banking and Finance. May 8, 2011.