Banks face increasing competition from digital-only players courting would-be customers with easy-to-use applications and higher rates, but traditional institutions are investing in their own platforms to keep up with the changing landscape.
In the latest Street Talk podcast, bankers and advisers discuss the growth of digital-only deposit platforms, the pressure they have put on deposit costs despite Fed rate cuts, and the investments that community and regional banks are making to combat the threat and improve their product offerings.
The newer digital entrants have grown their customer bases notably, with direct banks from institutions such as Ally Financial Inc., CIT Group Inc. and Goldman Sachs Group Inc. building their consumer deposits at a far faster clip than the industry, often by marketing attractive rates. Fintech-backed platforms have made waves as well, with the likes of Chime attracting 5 million users and a valuation of nearly $6 billion. Big tech has also entered the fray, with Apple marketing a credit card and Google announcing plans to unveil a checking account in 2020 through partnerships with Citigroup Inc. and Stanford FCU.
"Street Talk" is a podcast hosted by S&P Global
David Sandler, co-head of investment banking and principal at Sandler O'Neill, spoke about the planned Google partnership at a Dec. 2 event hosted by S&P Global Market Intelligence and questioned who actually owns the customer relationship if Google acquires the deposits and provides the technology to service them.
More recently, PNC Financial Services Group Inc. Chairman, President and CEO William Demchak addressed the Google partnership at a Dec. 10 investor conference, noting that a bank makes a mistake the moment it puts its distribution strategy in the hands of someone else. "You effectively sold yourself to the devil," Demchak said at the event.
Technology companies could continue to move into the banking business, which will likely further pressure net interest margins, Sandler said at the Dec. 2 event. He believes technology companies could very easily build products and services to acquire the customers without a balance sheet and then bid the loans and deposits out to banks that become more like hedge fund balance sheets.
"When you look at the attack that's coming from a place that's exogenous, it's not so much new and improved technology, it's the financial model. It's a negative cost of capital that is balance sheet lite, can grow to the moon, and mistakes aren't penalized by two years in a regulatory jail," Sandler said in the episode. "We've had a lot of Fed easing so far, and the high rates getting paid on BankRate right now are still quite high and haven't tracked fed funds reductions. That tells you how banks are competing for that marginal customer in a different way. And I think it's reflected in margin really."
Renee Brooks, COO at Columbia, S.C.-based South State Corp., which has worked to modernize its digital offerings in recent years, said at the Dec. 2 event that technology has changed the competitive landscape. She noted that years ago, when a CD customer came to a bank to withdraw funds, the institution had the opportunity to talk to them and convince them to stay. That is no longer the case with customers using digital channels, she said.
"Today, you find you can get a higher interest rate from whoever, they move immediately," Brooks said in the episode. "It's a very different dynamic."
Still, the executive said customers tend to change banks for better customer service, and her institution has updated its digital channels to meet customer needs. Those efforts have yielded positive results, with 10% of checking accounts now being opened through more cost-efficient digital channels. She further noted that digital channels are responsible for 80% of new checking accounts opened at the bank.
"Without the channel, you could miss out," Brooks said. "80% are brand-new customers coming to the bank. They wanted to open their account at 9 o'clock at night, and they couldn't find you online, then they're just going to go to the next bank."
Brooks and others at the Dec. 2 event said banks need to invest in technology for commercial customers as well. Steve Valadie, senior vice president of fintech strategy at First Horizon National Corp., said at the event that commercial customers not only expect effective technology but connectivity with their own software.
"It's not a case of using your treasury management system to do some function and then their internal system to do some other function. They just want it to be seamless," Valadie said.
A number of banks in sizable mergers, including First Horizon's planned merger of equals with IBERIABANK Corp., the tie-up of BB&T/SunTrust and most recently, Independent Bank Group Inc./Texas Capital Bancshares Inc., have touted the importance of scale when announcing their transactions. Those institutions have noted that the larger size will allow for greater efficiencies and necessary investments in technology.
Sandler said those deals allow banks to cut significant costs and generate strong earnings accretion. There is less risk associated with the expected earnings growth from those deals, he said, than trying to drive results by rolling out new products, expanding into new markets or growing the balance sheet significantly, particularly at such a late stage in the credit cycle.
"Those all have a return on investment that are not as well defined and as low risk," Sandler said. "That is the most motivating transaction in financial services right now. Scale for cost savings."