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US banks take divergent paths in hunt for digital deposits

Big banks are vying for customers online through two strategies increasingly at odds with each other: paying the highest rate or reinforcing a relationship.

At least four major U.S. institutions launched a digital banking product to gather deposits in 2018, entering a space already crowded with banks like Synchrony Financial and Ally Financial Inc. that made banking online a core part of their offering years ago. For some new entrants, high-yield savings accounts quickly attracted billions of dollars in new — albeit expensive — funding as interest rates rebounded. Others have avoided the rate battle altogether and focused their energies on launching mobile apps to woo younger banking novices or experiment with new kinds of checking accounts.

The digital race is heating up as customers appear to shift more and more toward online-focused banks. Year-over-year deposit growth at digital-only banks far outpaced growth at the country's largest banks in the fourth quarter of 2018.

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Two regional banks, Citizens Financial Group Inc. and PNC Financial Services Group Inc., launched high-yield savings accounts in the second half of 2018, both with a bid of gathering deposits outside of their branch footprints.

Citizens Access, launched in July 2018 with an account minimum of $5,000, currently offers a rate of 2.35%. Total deposit costs at the bank for the fourth quarter of 2018 were 82 basis points, lower than the industrywide overall cost of funds of 97 basis points, according to S&P Global Market Intelligence data. For interest-bearing transaction accounts, the industrywide cost hit 1.47% for that quarter. While more expensive relative to other consumer deposits, the bank thinks of the funds as core and sticky, and not likely to leave for an incrementally more expensive rate.

"Counter-intuitively, this is not hot money — it's rate-sensitive money. Some may argue whether there's really a distinction," John Rosenfeld, president of Citizens Access, said in an interview. "What we've seen … with other direct banks is their deposits are incredibly stable as long as you're offering rates that are within a competitive margin, what I call a 'margin of indifference.'"

Less than 10% of U.S. mobile bank app users surveyed by S&P Global Market Intelligence in February 2018 had switched their primary checking account within the last year. Of those who switched, about 35% said they did so for lower fees, followed closely by about 34% for better customer service. More than half of respondents who had not recently made a switch said lower fees would be most important in choosing a new bank, while about 43% valued higher interest rates on deposits.

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Banks betting on a digital, high-rate savings product seem to be taking a page from the playbook of Goldman Sachs Group Inc., which launched its digital high-yield savings offering for consumers, called Marcus, in October 2016. In the years since, it has raised $35 billion in the U.S. and the U.K., according to a company spokesperson. That sum is more than the total deposit base of all but 42 banks in the U.S.

Citizens Access has also seen immediate success, raising funds from all 50 states within weeks of launching. Executives announced that the accounts had raised more than $3 billion in deposits at the end of 2018, surpassing their goal by $1 billion. The average account balance is about $72,000.

Management chose to treat the digital account as a "distinctive, separate bank" from Citizens Bank, Rosenfeld said. A Citizens Access account does not show up on a Citizens Bank account page. The bank targeted what Rosenfeld called the "behavior customer segment," people aged 35 to 64 who are internet savvy and like to optimize their choices, including on savings rates.

Goldman Sachs' Marcus may be the model for that approach as well. Goldman Sachs was not associated with consumer banking, so executives decided to rebrand the consumer product as a separate entity tied to the larger company.

In an effort to keep deposit costs controlled, Citizens added a minimum balance requirement. Rosenfeld said the threshold helped attract customers who were serious about putting their money at the bank and avoided driving up costs in return for minimal value.

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A long-term trend in the bank industry has been a shift in consumer demand away from branches toward online and mobile channels. About 5% to 8% of consumers are comfortable with having their entire financial relationship online and do not want access to a branch, and that percentage has been stable in recent years, Brandon Larson, managing director at bank analytics and advisory company Novantas, said in an interview. A growing percentage want more online services but still like having a branch, he said.

PNC Financial Services' online account pairs a high rate with the bank's branch expansion strategy. The accounts, which have no minimum balance, are part of crafting "a new, balanced ecosystem" between digital products and an "ultra-thin" branch network in new markets, said Kevin McCann, PNC Bank's national retail digital strategy executive. A thinner branch network lets the bank deploy some of those savings into paying the higher online rates. The digital product is being offered only in states where the bank does not have a branch, a move intended to prevent the accounts from cannibalizing existing deposits that might otherwise move into a higher-rate product.

McCann said a high-yield savings account was a logical way to introduce the bank to new customers but not disrupt their finances. PNC wanted to design a product that would be "irresponsible [for customers] not to have," he said. The bank also offers a digital wallet to all customers, giving those with high-rate accounts a way to expand their banking relationship with PNC.

"This strategy for us is about much more than a savings account," he said. "This is the starting point to say, 'We do this well, but we also do a lot of other things well that we think will benefit you.'"

PNC does not publish the account's metrics, but McCann said adoption in the first three months has been "phenomenal" and "dramatically exceeded" expectations.

Some banks are opting out of competing on rates and using long-term relationships and specialized mobile applications to keep customers engaged or attract new ones. Both JPMorgan Chase & Co. and Wells Fargo & Co. have announced mobile-native bank accounts targeted at consumers new to banking with personal money management functionality.

Wells Fargo designed its mobile-only bank, Greenhouse, after researching what bank novices needed to improve their money management confidence and habits, said Lisa Frazier, head of the bank's innovation group.

The app helps users learn and practice personal money management through two checking accounts: one for bills and monthly expenses and one for personal spending. The accounts, which allow unlimited transfers between each other, replicate the "mental math" that many bank users perform when they check their accounts and figure out how much of the balance must go toward bills, Frazier said. Greenhouse does not currently offer a savings account because those accounts carry monthly transfer limits that could carry a fee, Frazier added.

PNC's McCann called the digital-only banks "worthy competition," but he believes consumers prefer a banking relationship that offers more services.

"We've been around 160 years, and we understand how to do a lot more than just a savings account," McCann said. "It's about balance. We are really trying to have a more modern mix of digital and physical."

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For more digital bank coverage, check out:

Deposits flocked to digital bank accounts in 2018
Big banks turn to nationwide digital accounts in renewed hunt for deposits
Legacy, digital banks risk overpaying for deposits as rate battle heats up
Higher rates shaking up deposits, national digital platforms more than hype