Balance Transfer

Online Banks Are Winning in Germany

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Millions of Germans said bye to traditional banks and never looked back. Source: Soeren Stache/DPA.

German retail banks that operate solely online, such as ING-Diba, DKB and comdirect, have 18.2 million customers and counting. At the end of 2016, online banks in Germany held deposits of €286 billion  ($328 billion), a market share of 14 percent.

This growth is at the expense of savings banks, cooperative banks and credit unions, which are likely to continue losing market share, corporate consultancy Investors Marketing says. By the end of 2020, they expect the number of customers of direct banks in Germany to increase to 22 million; in 2000 that number was just 3.9 million.

One big advantage of online banking is that the costs are far lower than classic banks with branches, which must spend more on staff and buildings. “The direct banks are holding their own in times of low interest rates and increasing digitization,” says Investors Marketing CEO Oliver Mihm. They have already invested heavily in IT and service, lowered costs and reduced dependency on traditional banking. Their main focus is on the customers, he says.

Low interest rates have been nibbling away at German lending institutions’ incomes for some time. Margins are dwindling in the lending business, as the banks earn less when they want to safely invest money on the capital market. That hits savings banks and credit unions particularly hard, because they rely heavily on the classic banking business of deposits and loans.

Since the costs are low, the fees are often low or nonexistent at internet banks. There is no charge for maintaining an account, and debit and credit cards are also often free. That attracts customers especially since many German savings banks and credit unions have recently hiked their prices. “The fee increase at branch-based banks brought the online banks a lot of new customers last year,” Mr. Mihm says.

That is particularly true for young customers. According to Investors Marketing, online banks are above average in gaining young people at the start of their careers, as well as customers in the 30-to-45 age group who are cost-conscious. The loss of this high-potential clientele is a painful problem for savings banks and credit unions, Mr. Mihm says.

While 10 percent of people worldwide use an online bank as their primary financial institution, 20 percent of Germans do.

Switching banks in Germany is now less complicated than it used to be. A law that went into effect in September last year makes the process easier for customers, who are now able to instantly transfer all their existing direct deposits and automatic payments to their new bank. A recent survey by the consultancy firm Eurogroup Consulting found that more than 10 percent of consumers planned to close their current account and switch to a new one this year.

Worldwide, 75 percent of people consider a traditional bank their primary financial service provider, and in Germany it’s 74 percent, according to an EY study. But while only 10 percent of people worldwide use an online bank as their primary financial institution, 20 percent of Germans do. A 2016 global banking study from EY found that while 81 percent of US consumers use a traditional bank as their primary bank, 43 percent of Americans had used an online or mobile-only bank in the past 12 months, and another 23 percent would consider doing so in the future.

Germans may be more open to online-only banks because consumers are more accustomed to paperless transactions. Europe-wide, the paper check system was discontinued at the end of 2001.

Germany’s banking system is made up of nearly 1,800 banks in total — about 1,000 more than any other country in Europe. Those banks are divided into three distinct tiers. The first consists of about 200 private banks, led by the famous and often infamous Deutsche Bank. The second tier contains some 400 publicly owned savings banks, and the third is made up of 1,100 member-owned credit unions. Online-only banks, called direct banks in Germany, are a newly-sprouted fourth tier.

Even while online banks are growing considerably, the classic lenders also consider themselves winners: All tiers of banks say they gained customers in 2016. The 400 German savings banks have a total of around 35 million checking accounts; the some 950 credit unions almost 29 million.

At ING-Diba, Germany’s largest online bank, the number checking accounts grew by 24 percent in 2016 as compared to the previous, to 1.7 million. In total, ING-Diba has more than 8.8 million customers, making it the third largest of all banks in Germany. Germany’s next largest online bank, DKB, has 3.5 million customers, and the third largest, comdirect, has 2.1 million customers.

 

Grace Dobush contributed to this report. Elisabeth Atzler has been the banking correspondent of Handelsblatt since 2012. To contact the author: atzler@handelsblatt.com.

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