The launch of a new digital-only Canadian bank on Thursday marks a stark contrast to the extensive branch networks of traditional banks and suggests that the threat of financial disruption is rising.
EQ Bank, an arm of Equitable Bank, will offer customers an interest rate of 3 per cent, which is considerably higher than anything offered by the Big Six, and an online sign-up procedure that takes just five minutes.
The goal: attract 10,000 accounts and $200-million in assets in the first year – which might not be enough to make the big banks feel any pain, but it could reveal the advantages of digital banking over the longer term.
"There are nine publicly traded schedule 1 banks in Canada. We're one of them, and we are actually the most efficient of those banks, and by quite a margin," said Andrew Moor, chief executive officer of Equitable Bank, a subsidiary of Equitable Group Inc., which trades on the Toronto Stock Exchange.
While it takes an average big bank about 50 cents to generate $1 in revenue, for an efficiency ratio of 50 per cent, Mr. Moor said that Equitable Group needs just 33 cents to generate $1 in revenue. Having no branch rent to pay is a large part of this efficiency.
The big banks recognize that their extensive branches can weigh them down in an era when most consumers are doing their day-to-day transactions online. However, they believe that shrinking branch footprints, rather than jettisoning entire branches, is a better approach, given their belief that many consumers still want human contact for transactions that are more complex than, say, paying bills and withdrawing money. Tellers are becoming advisers.
Mr. Moor agrees that EQ Bank isn't for everyone: It is targeted at consumers, young or old, who are comfortable doing all their banking on smartphones and tablets.
"There are some people who want the comfort of talking to a bank teller," he said. "There are other people who are probably more comfortable in a digital world, where they don't have to line up in a bank branch. It is that sort of consumer where this product makes more sense."
A couple of the big banks have been taking the branchless approach themselves. Bank of Nova Scotia operates Tangerine, a digital bank formerly called ING Direct; and Canadian Imperial Bank of Commerce operates President's Choice Financial.
But digital, branchless banks can be an awkward fit with traditional banks, at least from a brand perspective, which is why some of the big banks have shied away from this approach: Why would consumers stick with branch banking if they can get better rates and slick online service within the same bank?
No doubt, Mr. Moor will be posing a similar question to prospective customers.
"We see a digital future that we're trying to embrace, and we see banking being disrupted," he said. "And we want to be part of the solution."