Discover Financial Services may be best known for its credit cards and invention of cash-back rewards in 1986, but the company was also one of the first big names to introduce an online savings account. As a growing number of banks explore launching a direct bank, The Novantas Review chatted with Roger Hochschild, Discover’s president and chief operating officer, about the company’s experiences with its online offering.
Q: Discover first introduced an online savings product in 2007. What was the online industry like then and what were some of the surprises that you encountered?
A: Prior to 2007, we had a small CD business. But our funding needs were changing dramatically after our separation from Morgan Stanley. We needed a more robust funding model as a stand-alone. At that time, there were not that many direct players and certainly not that many direct players that had a well-known brand, so there was not much competition. The biggest surprise is how quickly it became so important. In 2008, the securitization market shut down and so all of a sudden direct-to-consumer deposits became so much more important and became our largest funding source.
Q: What are some of the biggest challenges in building a bank that doesn’t have branches?
A: There are some overall challenges in the online deposit space — creating trust and credibility. As opposed to a credit card where someone is lending you money or a personal loan, if you’re giving someone your money, it’s a different degree of trust. Branches are a tangible element of that. Given the brand we have built over time, we do have a physical presence. People see a Discover logo 100 times a day.
Q: Most people would assume that online banks skew to a younger demographic. Who is your typical bank customer?
A: If you think about CDs, they will skew a lot more toward Boomers. We see a very mature base for CD and IRA products. Online savings accounts start to skew more broadly, more Gen Xers. With our re-launched checking product, that is skewing younger. More digital natives find that product easy and convenient. There is inertia around checking. People tend to not want to move their checking accounts. The beauty of checking accounts is how sticky they are, but it’s always a challenge if you are trying to get them.
Q: Discover Bank has introduced some creative features, such as the new fee forgiveness program. Is it more important to keep the brand fresh when you don’t have branches to fall back on for awareness?
A: Innovation has been part of Discover’s heritage from the beginning — from the idea of giving rewards for purchases to putting the FICO score on the statement to “Freeze It” (in which a credit-card account can be frozen so that new purchases, cash advances or balance transfers won’t be authorized.) We try to bring that heritage across all our products. The key advantage we have for it is on cost. We don’t have that high-cost branch infrastructure. We are always looking for ways to create value and leverage that cost advantage. We also have invested in a next-generation platform. I feel like we have a very strong technology team and that also helps us.
Q: Why is Discover a better option for consumers than a traditional retail bank?
A: On the savings account, I would start with rate. If you look at the rate paid on savings by most branch banks, it is in the single-digit basis points. You are going to get a lot more value with Discover and better customer service. You want your savings to work as hard as you do and you’ll get a lot more for your money at Discover. We try to offer a good value. If you are offering the highest rate in the market, you will get people for whom that is their only criteria and then your beta on your deposits will be off the charts. And as soon as you don’t have the highest rate, those people will leave you.
Q: How important is the call center for a direct bank versus a bank with branches?
A: With credit cards, we were the first out with 24-7 customer service. I believe customer service can be just as effective at dispute resolution in direct channels. A lot of banks see their call centers as pure cost and take strategies to move offshore or make it challenging for the customer to get past the main menu. Clearly, we don’t look at it that way. The defining customer experience is talking to one of our representatives.
Q: What is the most effective way to attract new customers without a branch presence?
A: For us, it’s really about direct marketing. We have the advantage of being able to cross-sell. When you have done a good job serving a customer with one product, they are eager to buy another product from you. But we never sell when you call our call center because people are in a hurry. We present our other products online and it is a very effective channel for us. We have done some print advertising, but most of the marketing is digital. It is very hard to build that type of expertise from scratch.
Q: A growing number of traditional banks are starting to launch or think about launching an online bank as a way to grow out of footprint. What do you think about the competitive environment?
A: It’s neutral. On one hand, it is a validation of the direct model. It is now starting to extend into checking, which was the last product to shift. We always viewed our competition as the branch banks. It doesn’t really change the competitive set. They are well-run organizations and will bring a lot of capabilities. It shows we are in the right place. But it is hard for a branch bank to operate with a direct model. It becomes very complex, confusing and challenging from a resource-allocation standpoint as opposed to us — we have the simplicity of the direct model. There is a real chance for channel conflict. You saw some of this with traditional retailers. Trying to maintain one price in a branch with a different price in direct channels will be very challenging and does not send the right message to your customers.
Q: Do you think we will eventually see a standalone online savings or checking product from Amazon, Facebook, Google or a fintech? Or do you think we will see more partnerships with traditional banks?
A: Partnerships between retailers and banks are not new. Unless the regulatory environment changes dramatically, I can’t see any of these tech companies getting into banking and launching a product on their own. I don’t see any of them doing a stand-alone product. But yes to partnerships. A lot of them will have to make a decision about whether they want a single partnership or to establish themselves as a platform and I think you will see them trying to work through that.
Q: When is the last time you were in a bank branch?
A: My wife owns a bookstore and so they have an account with a branch bank because they need cash for the drawers and then will deposit cash. Sometime last week I took the cash in at the end of the day for a deposit. But In terms of my personal business, I am very, very digital.
Director, New York