Too many digital-only brands are smoke and mirrors — new brands offered by legacy banks, providing the same fundamental products and using the same core as the parent bank. The point of an online-only brand is usually to gather deposits and, sometimes, to grow the loan book. But it’s also a chance to introduce a modern core to offer products at a lower cost and in some cases set the stage for a greenfield modernization plan. The two are entirely different strategies, and a brand that’s marketing-only misses a key opportunity to innovate.

To be clear, some digital-only brands are good business decisions without the long-term cost reduction from a modern core. They’re often marketing plays for an affinity group, and sometimes sub-brands. They typically have limited offerings — checking and savings accounts, CDs, and sometimes money market accounts. Lending products are less common, although sometimes online-only brands offer credit cards, personal loans, or mortgages.

Setting aside the sometimes-missed opportunity to modernize infrastructure, affinity brands can be very colorful customer acquisition tools. Redneck Bank (tagline: “Where bankin’s funner!”) is the online-only division of All America Bank. Others are the outdoors-focused Timbr, by Bridgewater Bank, and Peak Bank, by Idaho First Bank. Panacea, by Primis Bank, is for healthcare workers; Fitness Bank, by Affinity Bank, is for “member-athletes” (any guesses about who’s running a modern core?).

Digital-only brands don’t have to be an exciting affinity play for a new customer segment. They can also just be a way to test modernization: Citizens Access and BMO Alto are two US online-only banks that don’t gave meaningful cosmetic differences from their parent banks but would make sense as test cases for sidestepping old core technology. JPMorgan Chase took a sidecar-like approach when it built its UK consumer bank from the ground up on top of a 10x core, and it’s surely applying lessons learned as it migrates its US consumer bank to Thought Machine.

Customer demand for better banking experiences and longstanding issues with legacy cores suggest the need for a truly innovative experience that, under the hood, depends on modern infrastructure. The “how” of infrastructure modernization can include middleware, gradually replacing enterprise applications, or implementing a sidecar core that takes on more of an FI’s processes over time — the C-level bankers who responded to CCG Catalyst’s US Banking Study 2023 preferred to minimize their risk by choosing among the three.

The last option would pair nicely with a cleverly designed affinity brand. Banks can take advantage of a sidecar core to quickly innovate — like by building a digital-only brand — at low risk to existing systems and products while spending less to run it than a legacy stack. In the long run, it’s an opportunity to migrate applications used by the full-service bank to the modern platform. In the meantime, banks have an opportunity to grow and diversify outside of their traditional footprint.

The sidecar approach to modernization plus an affinity brand should be on the agenda for discussion at banks’ board meetings. First, the affinity brand would invite another source of deposits or loans that supersedes a branch footprint. Second, by putting a ledger for new products on the sidecar core, bankers should be more comfortable with the gradual migration of accounts from the bank’s legacy system. This dual digital-brand and sidecar-core approach may be a long-term solution for banks wedded to a branch network and a concentrated customer base.