The banking industry is still in recovery mode after an era of heavy fines and a greatly-increased level of regulatory scrutiny.

But the industry is also grappling with major technological shifts that are upending the old ways of doing business. Smaller, more nimble firms are taking non-traditional approaches to banking, which is creating headaches and headwinds for big banks.

The Vast, Costly Branch Network
The idea of a physical bank location on every street corner is dying. 30% of the U.S. population hasn’t visited a bank branch in more than six months, according to a study by Bankrate.com. As a result, established banks are slowly adjusting to the new paradigm.

The PNC Financial Services Group, Inc. (NYSE: PNC), the seventh largest bank by assets, reduced its number of retail branches by 6% over the last two years. JPMorgan Chase & Co. (NYSE: JPM) is spending millions to revamp current branches to be more automated and need fewer employees. Still, large retail banks can’t move quick enough to shrink their branch networks, which will result in additional costs for years to come.

On the other end of the spectrum, the banks that never bothered to build a branch network now provide the most interesting investment opportunities. Capital One Financial Corp. (NYSE: COF), Bofl Holding, Inc. (Nasdaq: BOFI) and Ally Financial, Inc. (NYSE: ALLY) are taking advantage of a lower cost structure to deliver greater profits.

A bank’s efficiency ratio, a measure of non-interest expense as a percentage of total revenue, shows how well a bank controls costs (as it neutralizes the effects of changing interest rates). The lower the number, the better.

As you can see in the graph below, Ally and BofI are much more efficient than the consumer divisions of the big traditional banks.

Capital One Financial’s efficiency ratio spiked higher in 2014 following management’s decision to boost  marketing spending in order to acquire new customers. The consumer division also had one-time additional costs associated with an acquisition. I expect Capital One’s costs to come in line with the other online banks in 2015.

In fact, Capital One Financial is one of the best ways to get in on the tech revolution in the banking space. The company, best known for its credit card business, has been expanding into other consumer niches. For example, a 2012 purchase of ING Groep N.V.’s (NYSE: ING) U.S. consumer banking operations (better known as ING Direct) is leading to growth in consumer lending such as home equity loans.

Capital One is also a growing provider of auto loans. Loan originations rose by 20% last year. Capital One’s separate divisions make it a good choice for investors who prefer the safety of diversified revenue streams.

#-ad_banner-#BofI Holding, or Bank of Internet, is a pure play on the technology-driven consumer bank theme. Its asset base has grown at a compounded annual rate of 32% since 2011. And at a time when most big banks are struggling to reach high single-digit returns on equity, Bank of Internet routinely generates a return on equity in the mid-teens.

However, there are a number of risks with this company. Bank of Internet is almost exclusively a mortgage lender. Single and multi-family real estate mortgages make up around 80% of loans. BofI also trades like a technology stock, with a valuation that prices shares at roughly three times book value.

But this company is shaking up the industry and for investors that can ride the ups and downs of a growth stock, Bank of Internet provides the potential to deliver robust long-term upside.

Risks To Consider: Both Capital One and Bank of Internet have grown rapidly as the economy has improved, but both could be greatly harmed by an economic downturn. Bank of Internet’s valuation and direct exposure to the real estate sector adds addition risks.

Action To Take –> Capital One is a good buy at today’s prices. It trades for just 10 times earnings, at 1.6 times book value and will benefit from rising interest rates. For investors willing to take a risk on a potential game-changer in the industry, buy Bank of Internet and then hang on for the ride.

My colleague Andy Obermueller devotes his time to identifying exceptional companies that are poised to return triple-digit gains investors — much like Capital One or Bank Of Internet. This has led readers to investments that went on to gain triple-digits.

More recently, Andy has been talking about the threat that cyber criminals pose on individuals, multinational corporations and even governments. This is a serious problem, in its infancy and one that will take decades to fight. But don’t let this scare you. Andy has identified four companies that specialize in protecting sensitive information from criminals. These are young firms, just like Bank Of Internet, that provide robust upside potential for early investors. If you haven’t heard about this opportunity yet, then I urge you to check out his comprehensive report on how to profit from the world’s greatest threat, by clicking here.