The last couple of weeks have been pretty eventful in the world of online banking. In case you aren’t familiar with the semi-niche market that ING and Ally dominated in Canada, these two banks were market leaders in their unique style of internet-only banking. Banks that operate exclusively online are obviously able to cut down substantially on costs (relative to traditional brick-and-mortar banks) and pass some of those savings on to clients in the form of more advantageous rates on savings accounts and GICs among other things. The Canadian arm of ING was scooped up last week by Scotia Bank and today RBC announced it was purchasing Ally.
With two of Canada’s Big Six (or five, depending on who you ask) banks acquiring these online assets one has to wonder what the future holds for the two companies specifically and for the future of the online banking model in general. It will be interesting to see if Scotia and RBC continue to operate these low-cost banking providers in their traditional manner. It would seem that they would directly compete with what the big banks are already offering (that is what they were designed for after all). I’m not sure if RBC and Scotia Bank are seeing this as an opportunity to bring new customers into their fold, or if they see it as a long-term play to crush an eventual competitor. It doesn’t take a genius to foresee a possible scenario where the new buyers would subtly raise fees bit by bit, and bring payment rates closer to the company average in order to kill any large advantages that used to exist. Even though the price tags on the acquisitions look massive to us little guys, it would likely be an easy investment to make for huge corporations that depend on their retail superiority for the long term.
Competition Is a Good Thing
There is some precedent for a Big Six bank to run an online entity from the sidelines. CIBC has controlled part of PC Financial for years, and that company continues to offer no-fee checking accounts, high interest savings vehicles, and other unique options. If the banks (which are often accused of working in concert as an oligarchy) do start to move to mitigate the advantages of their former competitors I would think the market would be ripe for an upstart online bank to gobble up some decent market share. ING and Ally certainly opened a few eyes when they presented a radically different option than what was previously the norm in Canada. Perhaps a little new and innovative blood (see our Borrowell Review as a perfect example) is exactly what the Canadian market needs.
For our sake as consumers, I hope that the online model stays strong. The low costs puts a lot of pressure on the traditional power players in the market and can only mean positive outcomes for all of us in the long term. One would think that with more and more young people realizing the benefits of online banking and the easy utility it promotes, that the model would become more attractive, not less right? Many young people today rarely visit the branches at all. I know that personally the only time I make a point of talking to an actual teller is when I access my safety deposit box which I keep at the bank (admittedly this is a function online banks could never perform). At the end of the day there is a reason why no-fee online accounts are a favorite amongst personal finance bloggers. Those monthly savings and the nickel-and-dime stuff that big banks are infamous for can add up in a hurry, and if you look at them in terms of a drag on compounded returns the results can be substantial over a lifetime.
Anyone want to offer up a guess at what will happen to ING and/or Ally from here on out? Will we see the offerings change in the short term, or will it be a gradual process (if any at all)?