Are Direct Banks The Future?

In the battle of the banks, branch-less institutions appear to be winning. According to an analysis of 2012 banking data, direct banks -- also known as online banks -- are the only type of bank that gained market share last year.

Consultancy group TNS recently issued a white paper that details how national, regional and even community banks have struggled to maintain market share against online institutions. Deposits at major direct banks have more than doubled in the past five years.

High savings account rates may be a draw

The analysis looked at deposits for these four major direct banks:

These banks forgo traditional branches and, largely as a result of their low overhead, currently offer savings account rates and CD rates that are well above the national averages. Those rates may be one reason why individuals choosing direct banks tend to have higher levels of income and assets.

The TNS report found that 36 percent of those using direct banks have incomes exceeding $100,000 per year. In addition, 39 percent have more than $100,000 in investable assets. Those figures are well above the averages for American households with incomes of more than $100,000 (23 percent) and investable assets of more than $100,000 (28 percent).

Consumers warm up to online services

While market share for direct banks has doubled, they still have a relatively small customer base. Only 5 percent of consumers currently use a direct bank as their primary institution. Instead, some consumers are using a brick-and-mortar bank for their primary account while using an online bank for their savings accounts.

However, direct banks may see their popularity increase as they offer more products and additional ways to access money. For example, Ally Bank provides customers with access to IRAs and has no ATM fees for those withdrawing money from their checking accounts. And while debit cards come standard for virtually all direct bank checking accounts, Capital One 360 will even send customers old-fashioned paper checks if they want.

Still, for those used to doing their banking in person, direct banks represent a radical change. Fittingly, younger consumers seem most likely to embrace the idea of virtual banking. TNS notes more than half of direct bank customers are younger than age 44.

Your local Chase, Bank of America or Wells Fargo branch may not disappear anytime soon, but traditional banks may want to watch the rise of the direct bank closely. The growth among online banks has yet to show any signs of slowing.