Online Banks Have A Path To Grow But Market Share Gains Aren’t Guaranteed

Canada’s best digital bank follows a global model of offering superior interest rates and low costs.

Online banks are not a new concept by any measure in 2021 as many players have succeeded in the digital universe for years. For example, EQ Bank, Canada's best online bank, has been offering a completely digital banking service since January 2016.

Despite pledges of cheaper rates and superior customer experiences, the online bank sector in Canada and throughout the world fall well short of dominating the market against legacy banks, some of which have existed for more than a century.

What Is An Online Bank?

As the name implies, an online bank is a bank that exists in the digital universe with no physical presence. The logic behind online banks is that the financial institution is able to cut costs by eliminating expensive branches and passing the savings along to consumers via superior savings rates or lower loan borrowing costs.

Canada's online bank Tangerine was among the first in the world to experiment with the no branch model in the 1990s. In fact, the Canadian online bank had to rely on automated telephone services to help customers transfer money as the concept of doing anything on the internet was still very rare.

As the years evolved, Tangerine evolved its business to include mortgages, savings accounts, and mutual funds. It has grown to become a model of how a digital bank should operate and ranks as one of the best online digital banks in Canada.

Fellow global online banks that were born out of the technology revolution in the 2010s offer similar products that compete against banks. Online banks mostly focus on emphasizing their tech-first experience in the hopes of attracting young millennial workers that would eventually require complex banking products over the coming years.

According to Allied Market Research, the online banking market was valued at $11.43 billion in 2019 and is modeled to grow at a 13.6% compounded annual growth rate through 2027. Within six years, the online bank market will be worth $31.81 billion and will likely continue growing beyond 2027.

The COVID-19 pandemic may have accelerated the shift towards online banking as the world needed quick solutions to replace in-person branch visits. Many people were left with little choice but to sacrifice a familiar visit to their branch with a smartphone app.

While this may make the case for investors to buy shares of some of the few public online bank stocks, it should be noted that old-school banks aren't sitting back and letting new startups take their market share.

Wall Street behemoth JPMorgan Chase couldn't have made it any clearer that market share losses to small and fast-growing online banks are unacceptable. JPMorgan CEO Jamie Dimon acknowledged during a call with analysts that management is certainly "scared s---less" about young and agile rivals poaching customers by the millions of the coming years.

The bank even went so far as to list all the future competitors it will be following by name to ensure it stays one step ahead. The list includes PayPal, Square, Stripe, Ant Financial, and even tech behemoths like Apple and Google that can leverage their technology to create an epic banking experience.

"I expect to see very, very tough, brutal competition in the next 10 years," Dimon said. "I expect to win, so help me God."

Regardless of who ends up winning the battle between mega Wall Street giants and nimble startups, the consumer will emerge as the ultimate winner. As old banks and new startups battle it out to develop the best financial product possible, consumers will decide with their wallet who will reign supreme.

Declaring digital and online banks as the ultimate victor is premature.

List Of Public Online Banks Whose Stock You Can Buy Now

Several online banks opted to list their shares on the public market over the years. Important to note that many online banks have been acquired by public financial entities over the years, such as Canada's online bank Tangerine that was acquired by Scotiabank in 2012.

As such, buying Scotiabank stock gives investors exposure to its banking, mortgage, asset management, and other core business along with its online bank division. As such, buying a pure-play online and digital bank is hard to come by.

By no means is this list complete, rather it offers readers a great starting point should they choose to seek investment opportunities in a digital or online bank.

North America

• Ally Financial Inc (NYSE: ALLY).
• Axos Financial Inc (NYSE: AX).
• Equitable Group Inc. (TSE: EQB).
• Canadian Imperial Bank of Commerce (TSE: CM) (NYSE: CM).
• Bank of Nova Scotia (TSE: BNS) (NYSE: BNS).
• Wealthsimple majority-owned by global holding company Power Corporation of Canada (TSX: POW).

South America

• Banco do Brasil SA (BVMF: BBAS3).
• Banco Inter SA (BVMF: BIDI3).
• Mercadolibre Inc (NASDAQ: MELI) (BVMF: MELI34).

Europe

• Aegon NV (NYSE: AEG) (AMS: AGN).
• FinecoBank Banco Fineco (BIT: FBK).

Australia

• Tyro Payments Ltd (ASX: TYR)

Russia

• Tinkoff Bank (LSE: TCS)
• Qiwi (MCX: QIWI) (NASDAQ: QIWI)

What About Asia?

Notably absent from the list above are Asia-based online banks. While seemingly the rest of the world has had a multi-year head start in building out an online bank universe, this is not the case in Asia, at least according to a late 2019 Bain & Company report.

According to the management consultancy firm, the region's online bank industry is "relatively underdeveloped when we look at developed markets benchmarks." Hundreds of millions of people in the region could transform the online bank market to become a $60 billion industry by 2025 versus just $11 billion in 2019.

By contrast, Canadian online banks and their global counterparts have been battling each other for market share dominance for years. Sure, there are gains to be made over the years, but investors looking for explosive growth opportunities need to focus on regions that are years behind the curve.

Conclusion: Watch For These IPOs

IPOs offer investors an opportunity to buy shares of a company at a much earlier stage in its lifecycle. At this point, their valuations are much lower and a winning company will surge in size over the years.

Keeping with the theme of exposure to Asia, South Korea's Kbank is the country's first digital bank. It is reportedly looking to build out its businesses and services before raising new capital through an IPO in 2023. In the interim, rival digital bank Kakao Bank confirmed in late 2020 it has proceeded with the first steps towards becoming a public company, likely in the back half of 2021.

Another digital bank with exposure to Asia that investors may want to follow over the years is Grab, a Singapore-based fintech company that was given one of just four digital bank licenses to operate in the country.

Of course, online bank startups from across the world are also planning for an IPO. Among the most notable online banks in Europe that will likely become public in the coming years is Revolut, the British digital bank that is among the most valuable private companies in the world.

(Devdiscourse's journalists were not involved in the production of this article. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)