Virtual banks, real results

Illustrations: Michael Austin

Online-only banks have taken flight. Industry experts share why and how some of these brands are bolstering community banks’ brick-and-mortar presence across generations and state lines.

By Ed Avis

When leaders at All America Bank in Mustang, Okla., noticed that deposits were shrinking in the mid-2000s, they identified the culprit: national bigger banks’ online capabilities.

“We surmised that the big banks were opening accounts online and taking our depositors right out from under our nose,” says Wade Huckabay, president of All America Bank, a $400 million-asset institution chartered in 1969.

In 2008, All America took the logical step and opened its own online-only division, Redneck Bank ( It didn’t take long for deposits to shift into overdrive.

Is the future of banking virtual?

Virtual banks’ net gain
of customers in the year
to March 2016

of consumers are willing
to bank using robo-advice
in the future

of consumers will use
their branches in the
future—and want human
interaction when they do

“It solved the problem, and it’s still a huge contributor today,” Huckabay says.
All America’s venture into online-only banking proved that community banks can hold their own against the big guys, even in the digital arena.
“Community banks play a distinct role in the financial system, and I think clearly there is an opportunity for them to solidify that role with an online presence,” says Scott Sargent, an attorney in the financial services transactions group at Baker Donelson, a law firm based in Memphis, Tenn.

How online-only banks work
Nearly every community bank has some kind of online presence today. What makes online-only banks different is that they don’t just serve the parent bank’s existing customers. Rather, they attract new customers, generally from a much wider geographic area.

Online-only banks have different names than the parent brick-and-mortar bank, and they usually offer fewer services and products. But they are still tethered to the parent bank via the bank’s charter, with the parent bank handling much of the back-office work.

Consider BankMobile, an online-only bank launched in 2015 by $10 billion-asset Customers Bank, which is based in Wyomissing, Pa. It is run by Luvleen Sidhu, daughter of Customers Bank’s CEO, Jay Sidhu.

“Customers Bank is primarily a business bank that serves small and medium businesses, with very little personal banking,” Luvleen Sidhu says. “BankMobile is completely different. We wanted to go directly to consumers and be completely branchless, which we think is a better model.”

The Sidhus set some high goals when they began contemplating BankMobile in 2014. They wanted customers to be able to open an account in less than five minutes, and they wanted the bank to succeed without charging fees, so that frugal consumers would be attracted to it.

In lieu of fee revenue, the Sidhus count on interchange revenue. Every time an account holder swipes a debit card, the bank profits. Interchange fees bring in 70 percent of BankMobile’s revenue today, Sidhu says.

“A big advantage of an online-only bank is that you can go virtually anywhere in the country. Your footprint immediately becomes so much larger.”
—Andrew Varga,

Lending is another, albeit smaller, revenue stream for BankMobile and some other online-only brands. BankMobile offers an unsecured line of credit up to $5,000, and Sidhu says the bank’s “robust customer onboarding process” reduces the risk of issuing credit to customers known only online.

Deposits first
MemoryBank, a separately branded online-only banking platform of $4.9 billion-asset Republic Bank & Trust that opened in fall 2016, expects to begin lending money next year.

“We led with deposits because of Republic’s ongoing success in growing loans. Deposits are always an area of focus for the bank,” explains Andrew Varga, chief innovation and strategy officer of Republic Bank & Trust. “Offering deposits on a national basis is not as complex as making loans on a national basis due to the various state laws that come into play.”

Republic Bank & Trust, with MemoryBank as a division, is based in Louisville, Ky., but already offers mortgages online in 13 states and Washington D.C., says Kevin Sipes, the bank’s chief financial officer.

“Management is evaluating originating mortgages through the MemoryBank platform, plus home equity lines of credit and other unsecured lines of credit products such as credit cards,” Sipes says. “Those are all possibilities in the future.”

Huckabay, on the other hand, says Redneck Bank is not planning on becoming a lender.

“We don’t have the resources to make car loans outside the state of Oklahoma and figure out how to service that loan adequately, especially if they stop making payments,” he says. “So the only way to do it would be with unsecured loans, and that puts you in the payday loan arena, which is something we don’t want to do.”

Whether the revenue comes from fees, interchange revenue or lending, online banks can generally get by with less money. There are no branch locations to build, no landscaping to water and fertilize, and no vaults and safety deposit boxes to manage.

“BankMobile is completely different. We wanted to go directly to consumers and be completely branchless, which we think is a better model.”
—Luvleen Sidhu,

“I know it’s cheaper by quite a bit, but I can’t ascertain how much cheaper it is,” Huckabay says, explaining that since much of the online bank’s business is still handled by the brick-and-mortar personnel, it’s hard to separate the expenses.

That’s not to say the online-only banks have no special costs. Technology is one, of course, and the call center is another. Redneck Bank had 16 people in its call center at the height of new customer acquisition and still has seven, Huckabay says.

Who are their customers?
People who open accounts at online-only banks differ from brick-and-mortar accountholders in a couple of ways. First, they are not confined to the geographic area of the bank, since they don’t need to walk into a branch to open an account.

“A big advantage of an online-only bank is that you can go virtually anywhere in the country,” Varga says. “Your footprint immediately becomes so much larger.”

Huckabay says Redneck Bank had accountholders in all 50 states within 50 days of launch.

Second, they are people who are comfortable in the online world.

“The younger generation has grown up with technology, so there’s an expectation with them that they can do their business [on their] phone,” Sargent says.

The third difference emerges from those first two points: Since online-only bank customers are not restricted to choosing local banks, and they’re comfortable on the internet, the banks can use the internet’s power to more effectively target their products to particular market segments.

For example, the management of MemoryBank decided to focus on people born from the mid-1960s to the mid-1980s. “The natural inclination is to look at millennials, but the beauty of digital is that it goes above one generation,” Varga says. “Instead, we focused on Generation X. We felt they are soundly entrenched in the digital approach, and they are in their prime earning years.”

Marketing and regulatory challenges

One advantage that brick-and-mortar banks have over online-only brands is that each physical branch is a giant, permanent advertisement. A new family moves into Happyville, Mom drives by Happyville Bank, and next thing you know, Happyville Bank has a new customer. That doesn’t happen with an online bank.

“We realized early on that even though you’re on the internet, no one knows you’re there,” Huckabay says. His bank tackled the marketing challenge with an unforgettable name.

“We surmised that the big banks were opening accounts online and taking our depositors right out from under our nose. [Redneck Bank] solved the problem, and it’s still a huge contributor today.”
—Wade Huckabay,
All America Bank

MemoryBank took a disciplined approach to its marketing.
“We looked at four different markets and employed four different models,” Varga says. “One market was the US as a whole, which we reached through search engine optimization. Another was Richmond, Va., where we employed display ads and social media. In Kansas City, we did some TV and outdoor advertising. And in Madison, Wis., we did heavy PR.”

Varga says he’s not revealing which marketing worked best, but he admits that the digital marketing techniques were the most efficient and effective.

Online-only banks face the same regulatory challenges as physical banks. However, since they never actually see their customers, those regulations can be more difficult to meet. “All banks are required to know who you’re doing business with, and when you’re not face-to-face with the customer, it’s harder,” Sargent explains.

Sargent says he’s seen banks employ various strategies to satisfy regulators, including analysis based on “out-of-wallet” questions that would stump an imposter, such as “What house did you live in seven years ago?”

Community banks have proven that they can succeed with online-only bank brands. The future is about keeping all those distant customers happy. “We have a lot on our plate with 1.7 million customers now,” Sidhu says about BankMobile. “It’s not just about getting them into the funnel, but about how to enhance their experience and keep them as customers for life.”

Your bank is called what?

The name Redneck Bank came to Wade Huckabay, president of parent bank All America Bank, one day in 2007. Huckabay had hired consultants to find a name for his bank’s new online-only venture but felt the four names they offered were too generic.

“So I sat down with a thesaurus and dictionary and spent 14 hours plugging names into the internet to see if they were taken,” he says. “About hour 12, Redneck Bank came out as a possibility.

“The next day I had about 130 possible names that I took to our officer meeting, and I buried Redneck Bank in the middle. The two oldest people in the meeting liked it best, but the younger folks thought no way, it was just too far out there.” They decided to try out three names: Evantage Bank, AmericaNet Bank and Redneck Bank, which had the most success.
Redneck Bank’s website plays up the concept with the slogan, “Redneck Bank: Where Bankin’s Funner” and images including an outhouse and a braying horse. The bank put up some billboards in October 2008, and in December 5,000 people visited the site. A month later that number was 250,000, and by March 2009 it was 1.2 million.

“We were opening 350 accounts a day,” Huckabay remembers. “But we didn’t have the software piece to take the information from the internet into our core system. So people were driving in from other locations and working all night. Finally, we put ‘Sold Out’ across the opening page of the website. We were just unprepared for the power of the internet.”
Redneck Bank added the software needed to automatically add the new accounts to the core system and started accepting new accounts about a year later.
—Ed Avis

The academic perspective

Subhajit Das and Aroop Gupta are visiting research fellows at the Clayton Christensen Institute, a nonprofit, nonpartisan think tank in Redwood City, Calif. They recently studied the application of the Theory of Disruptive Innovation to elements of retail banking. About online-only brands, they say, “For incumbent community banks to compete with new [fintech] entrants in the space, they will need to create a completely separate entity that is distinctly different from the parent. The new organization should be focused on building a business model that reimagines the customer value proposition. For a bank, this would mean offering unique products and services that take advantage of the advantages and capabilities offered by digital technologies. To be truly successful, however, the new organizations must strive to create a completely different DNA, and its resources, processes and priorities must be designed to literally compete with their parent companies as well as any fintech entrants in the space.” —Ed Avis

Ed Avis is a writer in Illinois.