Online Banks Are Winning This Year’s Deposit Wars

(Photo Credit: Alexander Grey/Unsplash)
(Photo Credit: Alexander Grey/Unsplash)

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That’s another win for the internet.

Online banks — such as Goldman Sachs’ Marcus or Ally Financial — scored more deposits than outflows in the most recent quarter, bucking an industry-wide trend, according to analysis this weekend by The Wall Street Journal. Is it the latest nail in the coffin for bank branches?

‘You’re Money’s Not Here, It’s in the Cloud!’

America’s banking industry has something of a love-affair with both physical branches and online banking. Brick-and-mortar locations are expensive to operate and maintain; the annual costs of branches can run anywhere between $500,000 and $1.3 million, depending on the location, Brian Riley, Javelin Strategy & Research’s co-head of payment strategy, told the WSJ. There’s a reason, after all, that banks closed around 6,100 branches between 2019 and 2022, according to the FDIC, the highest ever in a three-year period. Still, branches often attract new customers while in-person appointments are still often the best way to complete complex transactions.

Online banking, meanwhile, offers convenience and access to customers — though that same convenience cuts two ways, helping fuel the runs that doomed Silicon Valley Bank, First Republic, and Signature Bank earlier this year. And as regional banks spiraled, all that money from fleeing customers had to go somewhere. While bigger banks offered stability, hyper-online alternatives — free from the costs of maintaining many physical locations — offered something brick-and-mortar locations often couldn’t: higher interest rates.

That may have been enough to win this round:

  • Goldman Sachs said deposits increased at Marcus, though didn’t reveal specifics. Meanwhile, Capital One, primarily an online bank, saw deposits climb 5% quarter-over-quarter, while Ally Financial saw deposits tick up 1%.
  • That’s in stark contrast to the banking industry writ large, which saw deposits collectively fall by 3%, or some $472 million, in the first quarter, the largest quarterly decline since at least 1984, according to FDIC data.

Capital One and Ally paid average interest rates on deposits of 2.4% and 3.2%, respectively, both roughly 2 percentage points higher than a year ago, according to WSJ, and far better for customers than the 1% average interest rates on deposits paid by Bank of America and Wells Fargo in the first quarter.

Dimon in the Rough: Standing out, as always, however, is JPMorgan. Unlike Wells Fargo and BofA, Chase actually saw deposits increase in the quarter by a full 2%. And it’s more delicately walking the digital transition tightrope, closing hundreds of branch locations since 2018 while opening dozens of new ones in locations it considers prime real estate. Even when everyone else is losing, Jamie Dimon somehow always finds a way to win.

– Brian Boyle