Online Banks Are Winning the Deposit War

Deposits in the first quarter fell from December at regional-bank powerhouses such as U.S. Bank, Truist Financial and Citizens Financial. They were down more sharply at the smaller regional banks that have been under investor scrutiny, like Western Alliance and PacWest.

But deposits were up quarter over quarter at Ally Financial and Goldman Sachs Group’s online bank Marcus, which don’t have branch networks. Deposits were also up at Capital One, which has far fewer branches than the other big regionals. Online-focused banks can often offer higher rates, as they don’t have to pay for the real estate, employees or equipment required to run a traditional network of branches.

Broadly, regional banks are dealing with twin problems. The collapse of several midsize banks this year has made some customers want to keep their money at only the biggest lenders. And with the Federal Reserve pushing interest rates up, customers are moving money to Treasurys and money-market funds for higher returns. Deposits at U.S. banks collectively fell by the most on record in the first quarter, according to Federal Deposit Insurance Corp. data.

Even the biggest banks aren’t immune to that search for yield. Deposits were down slightly at Bank of America and Wells Fargo, even though they picked up deposits from customers who left smaller banks. (JPMorgan Chase was the exception: Deposits rose 2%.)

Those dynamics make the deposit gains by some online-focused banks stand out. Deposits climbed 5% at Capital One from the previous quarter and 1% at Ally Financial. Goldman said deposits in its online bank Marcus increased, though it didn’t give specifics.

“The future of everything in banking is digital," Capital One Chief Executive Richard Fairbank told analysts on a call in April.

 

That growth came at a price. The average interest rate paid on deposits was 3.2% at Ally in the first quarter and 2.4% at Capital One. Both were more than 2 percentage points higher than a year earlier. At Bank of America and Wells Fargo, average interest rates on deposits were around 1% in the first quarter.

The shift toward online banks adds another layer to the debate over the value of branches. Customers have been increasingly relying on tech for routine transactions, especially since the Covid-19 pandemic. Banks closed roughly 6,100 branches between 2019 and 2022, according to FDIC data, bringing the total number to just under 71,200. That is the highest number of closures over a three-year period in history.

It can cost a bank up to $500,000 a year to run a small branch in a city like Tampa, Fla., and as much as $1.3 million to operate a midsize branch in a major city such as New York, said Brian Riley, co-head of payment strategy at Javelin Strategy & Research. Those estimates don’t include the cost of office equipment and other capital.

On the other hand, tech also turbocharged the deposit runs at Silicon Valley Bank, Signature Bank and First Republic, as online banking made it relatively easy for people to yank out their money.

Traditional banks also say that even the tech-savviest customers still want to come inside a branch for more complicated transactions like getting a mortgage. Branches can be a key way for banks to drum up business—when they are in the right places.

JPMorgan, for example, has opened branches in 25 new states and the District of Columbia since 2018, but has reduced its overall network size by hundreds of branches since then.

“Our approach to expansion is deeply analytical," Jennifer Piepszak, co-CEO of consumer and community banking at JPMorgan, said at the bank’s investor day last month. “So it is a love affair with branches, just to be totally clear. But that doesn’t mean that we can’t optimize the footprint over time."

Banks are expected to continue cutting branch costs. Many banks lowered their bottom-line forecasts in the first quarter, saying they expected the interest they pay on deposits to continue to catch up to what they earn from loans.

“If you’re a traditional branch-based bank and you need to start paying more for your deposits, it’s going to hurt," said Donald Fandetti, an analyst at Wells Fargo.

Banks better known for their credit-card businesses have seen customers pour cash into certificates of deposit and other accounts over the past year. Deposits were also up on a quarterly basis at American Express and Synchrony Financial.

Card issuers don’t rely on traditional branch networks. They also tend to make more money on loans or transaction fees than other banks.

At Discover Financial, deposits rose by roughly 4% over the first quarter. The majority of deposits that Discover picked up were from the megabanks, according to Chief Executive Roger Hochschild.

“Without the cost of branches, we can offer a high rate," said Hochschild. “I think a lot of the traditional banks have to adjust their models because people are focused on getting a good return for their money."