Are Virtual Banks Just a Flash in the Pan?

In late 2001, the world was waiting with baited breath for an invention rumored to have revolutionary potential. It was code-named Ginger, and Steve Jobs said its importance would rival his Mac computer. It could be bigger than the Internet, said legendary Silicon investor John Doerr.

Such was the hype that accompanied Dean Kamen's Segway, the electric, self-balancing, two-wheel human transporter that's now used mostly by urban police and tour guides. Kamen predicted the Segway would "be to the car what the car was to the horse and buggy." Segway fans envisioned that the vehicles would be used everywhere from Disneyland to battlefields, factories and specially constructed pedestrian malls.

Despite the hoopla, the Segway didn't take over the world. It has instead quietly settled into a comfortable niche between golf carts and pogo sticks.

Similar hype has surrounded virtual banks like Moven and Simple, which promote themselves as the future of banking. Brett King, the chief executive of Moven, is one of the main voices preaching the banks-are-dead sermon.

But while you'll find many disruptors in banking, Moven and Simple aren't among them. They simply staked out an online banking niche and found a way to offer debit transactions and money-tracking software, contracting with banks insured by the Federal Deposit Insurance Corp. to do the heavy lifting. Simple chief executive Josh Reich once said that he didn't want his company to be a pretty app sitting on top of someone else's bank, according to journalist Felix Salmon. Simple appeared to solve the dilemma by selling itself to BBVA Compass last year.

In essence, startups like Moven dress up web storefronts to look like banks but offer one-tenth the services. Want a credit card? Can't get it. Car loan? Can't get it. Business account? Nope.

An online-only concept does not automatically make a company revolutionary. Real disruptors, such as marketplace lender LendingClub, personal financial management service Mint, crowd-funding site Kickstarter and online investment advisor Wealthfront, brought new ideas to banking.

To be fair, Moven has successfully identified a way to deliver financial services to young, tech-savvy audiences. But there's more to banking than technology.

This point is confirmed by a recent ethnographic study by research firm Simon Associates aimed at determining the bank features most important to people in Gen Y and Gen X. "One theme that kept emerging from the conversations was that banking is still a people-to-people business, and that what these younger people wanted most was someone to guide them through their life transitions," the study concludes. Customers wanted a bank where they "belonged": one that could give them the advice they were looking for and help them design a sound budget and financial plan.

It's hard for bank customers to feel secure when their sense of belonging depends on the juice in their smartphone battery. And it's tough not to lose trust if their financial guide disappears along with Wi-Fi.

A larger 2014 survey by Bain & Company of 83,000 consumers in 22 countries also concluded that "most customers in most markets — 60% of respondents overall — used a combination of digital and physical channels to do their banking." Multi-channel banking is critical for effective service, marketing and selling, according to Bain, because customers expect to be able to switch from one channel to another.

Virtual banks' obsession with efficiency overlooks the human factor: customers want a full-service bank and bankers they can talk to in person. Most surveys show that customers prefer to visit branches when they have a problem or need advice. The only unsettled question is how many assets banks should tie up in brick and mortar. It's unlikely that consumers want the answer to be zero.

Those who proclaim that virtual banking is the sole path to the future forget the importance of providing consumers with options. Lots of people don't want to engage in exclusively cashless, branchless, smartphone-dependent banking. We want both the option of visiting local, quality restaurants and the convenience of ordering takeout on Seamless. We prefer a personal visit with a doctor for more serious inquiries and an algorithm-fueled diagnosis from Web MD for small ones.

Ironically, many fintech startups lead a schizophrenic existence. They spend much of their time acting like banks while also distancing themselves from them. Yet they can't exist without banks. They need to partner with them for checking accounts and insured deposits. A bank charter guarantees regulatory oversight, cybersecurity and a stable banking system — features you can't buy in an app store.

It's true that banking is ripe for disruption, and bank CEOs need to adapt to a digital world. Fintech startups can chip away at bank services, picking and choosing low-hanging fruit. And tech giants like Amazon and PayPal may well start their own online banks.

But there will always be a place for full-service institutions. So as the new banking landscape unfolds, let's see if virtual banks take over the banking world, follow the lead of Simple and actually get absorbed by a bank, or end up in a nice little niche, next to the next big thing that never was.

Kevin Tynan is senior vice president of marketing at Liberty Bank in Chicago. He can be reached at tynanmarketing.com and on Twitter at @kevintyn.