US banks prepare for assault from online rivals

The big brick-and-mortar banks in the US are bracing themselves for a fresh assault from rapidly growing online lenders, as an imminent interest rate rise from the Federal Reserve intensifies a war for deposits.

The big retail banks such as JPMorgan Chase and Bank of America have been eagerly anticipating the advent of higher rates, as loans and other assets with floating rates instantly offer more income. But at a conference in New York this week, executives appeared wary of the effects on the other side of their balance sheets, suggesting that depositors could be lured away by better rates elsewhere.

Since the Fed last raised rates in 2006, the banking landscape in the US has changed radically, with specialty finance outfits such as Ally Financial, American Express and Discover Financial Services converting to bank holding companies in the wake of the crisis to access the Fed’s support programmes.

Lower cost structures allow these new banks to offer significantly higher rates on deposits — a spread that could widen, once the Fed pulls the trigger and the newcomers compete more aggressively for funds.

“If rates finally go [up], it’s going to be the headline on every newspaper for two weeks running,” said William Demchak, chairman and chief executive of PNC Financial Services, a top-five bank by deposits in nine states across the US, at the New York conference, which was put together by Goldman Sachs. “It’s going to wake up consumers [to say], ‘I should be doing something about something. I don’t know what it is yet, but I’m going to figure it out.’”

Seven years of near rock-bottom rates have eaten into the traditional banks’ margins, forcing them to cut staff and shut branches. Once rates begin to pick up, the banks are counting on earning a bigger margin between what they pay for funding and what they charge to lend, on the assumption that they can hold off from offering higher rates to depositors.

One senior executive at a top US bank said that deposit rates are already much higher at internet lenders, but people do not move because “there is real value in having a safe, convenient, nationwide checking system.”

But once the rate cycle begins in earnest, “dragging feet” on giving depositors a better deal could be costly, said Bill Carcache, an analyst at Nomura. He notes that the top eight internet banks have increased their combined deposits from $102bn in the first quarter of 2009 to $247bn in the second quarter this year, pushing their share of the US total from 1.1 per cent to 2.1 per cent.

All remain keen to support growth in assets by attracting more deposits, which is seen by regulators as the most solid and dependable form of funding in the event of a crisis.

If Janet Yellen, Fed chair, does achieve the long-awaited “lift off” next week, then savers across the US are likely to become more sensitive to rates, said Gary Zimmerman, a former Citigroup banker. He now runs MaxMyInterest, which allows depositors to improve returns by sweeping pools of savings around multiple accounts.

“For the past few years people have resigned themselves to the idea that cash is a zero-return asset class, which is patently false,” he said.

On bankrate.com, a portal for comparing products, Synchrony Bank is currently advertising a snowman-themed savings account at 1.05 per cent a year on all balances — 10 times the national average — urging customers not to “let this great offer melt away”.

More online lenders such as Synchrony, which was spun out of GE Capital last year, are bracing themselves for battle, said Amol Shah, a director at AlixPartners, a consultancy.

“This is one of the best opportunities they’ve had in over a decade,” he said.