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A direct bank (sometimes called a branch-less bank or virtual bank) is a bank without any branch network that offers its services remotely via online banking and telephone banking or through an independent banking agent network and may also provide access via ATMs (often through interbank network alliances), mail and mobile. Direct banks reduce the significant costs of maintaining a branch network.
The concept of a direct bank gained prominence with the advent of online banking technology in the early 1990s which led to a number of direct banks being created, although many were owned by traditional banks. A number of direct banks offer only online savings account and these banks typically offer higher interest rates than their traditional competitors as these banks can be very cost efficient to operate. Since mid-2000s online and telephone banking has become a mainstay of retail banking and most banks have incorporated these into their core services and transforming or reducing their branch network to mirror the advantages that direct banks have.
One of the world's first fully functional direct banks was First Direct, which launched telephone banking in the United Kingdom on 1 October 1989. A subsidiary of the then Midland Bank, it pioneered the concepts of no branches and 24-hour service through a call center. The commercialization of the Internet in the early 1990s was the biggest driver in the creation of full direct banking models. As the Internet became more widely accessible, traditional banks sought to reduce operational costs by offering internet banking services.
At the same time, internet-only banks or "virtual banks" appeared. These banks did not have a traditional banking infrastructure, such as a branch network, a cost-saving feature that allowed many of them to offer savings accounts with higher interest rates and loans with lower interest rates than most traditional banks. Virtual banks could operate virtually from a single PC and server administration without a substantial infrastructure. However, there was an initial consumer hesitation in conducting monetary transactions over the Internet, especially with an entity that they could not deal with face-to-face.
One of the first fully functional direct banks in the United States was the Security First Network Bank (SFNB), which was launched in October 1995, and was the first direct bank to be insured by the Federal Deposit Insurance Corporation. Though SFNB did not make much profit in its initial years, it demonstrated that the concept of direct banking could work.
Some direct banks focused only on online savings accounts, providing higher interest rates than traditional banks for customers who were happy to only have access to their account on the internet. One of the first and most successful adopters of this was ING Direct that launched its first such bank in Canada in 1997, expanding this to the UK, Australia and the United States before its owner sold them around 2010.
One of Europe's first full-service direct banks was First-e, launched by ENBA, a Dublin-based internet incubator company under the banking license of French bank, Banque d'Escompte. First launched in the United Kingdom in September 1999, it garnered appreciable attention, resulting in more such ventures all over Europe. After about two years of operations, it shut down its operations during the dot-com bubble bust. Rival Egg Bank was launched in October 1998 by Prudential plc as a direct bank, however it took several years before it became a full-service direct bank.
Asia's first direct bank was finatiQ, a division of the Oversea-Chinese Banking Corporation (OCBC) of Singapore, launched in April 2000. It was shut down in 2011 and its operations merged into the mainstream banking structure with its parent OCBC saying that "Internet Banking has since become a core part of OCBC Bank’s multi-channel strategy – which also encompasses branches, ATMs and Mobile Banking".
The direct bank model was used by many of the challenger banks created in the UK during the period 2015-2018.
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