Can credit unions compete in a battle royal for online deposits?

October 8, 2019 5:00 AM

An online war is underway for deposits, as a wide range of players — including credit unions, big banks, community banks, digital-only bank platforms and fintechs — offer high-interest savings and checking through apps and websites.

Competition has hit a fever pitch for several reasons despite two interest rate cuts by the Federal Reserve this year.

Digital firms, trying to build up market share and form new bonds with consumers, are paying far more than traditional institutions have in recent years. Yet commercial banks prize deposits, too, to fund loan growth and use as a base to cross-sell other services.

Meanwhile, more fintechs are entering the fray — either startups or existing players seeking to diversify beyond personal financial advice, investment or other services. The increasing number of partnerships between fintechs and small banks and CUs has crowded the market further.

With more choices out there, consumer loyalties are shifting, as some retail consumers switch banking relationships — or do business with multiple companies — in search of lower fees and better overall rates.

Digital-only firms first sought to outmaneuver traditional banks and credit unions with a marketing message of convenience, simple account opening, lower fees and higher interest rates on accounts. But traditional brands have responded by offering their own digital banking options.

Credit unions have put forth their own efforts to win the deposit wars, including prize-linked savings, certificate promotions, new checking account offerings, public deposit strategies, boosting nonmember deposits and more. But the playing field in this fight is rapidly evolving, and there are questions surrounding whether credit unions — the bulk of which are small institutions with limited resources — can compete against not just the old-school players but with new competition from fintechs. Many credit unions must overcome not only an awareness gap but also find a way to attract consumers' and businesses' attention without offering the same bells and whistles as their high-tech competitors.

Here is a breakdown of six drivers of the online deposit fight, and a big caveat about the offerings: Not all these accounts are alike. Differing requirements and limitations lie in the fine print, reflecting the strategies of the institutions offering them.

Upstarts are paying more for deposits

The gap between interest rates on savings and checking accounts being offered by brick-and-mortar banks and those being offered by digital-only banks is noticeable.

According to the Federal Deposit Insurance Corp., banks on average are paying 0.06% for checking deposits, and 0.09% for savings accounts. But a wide swath of digital-only banks are offering rates above 2% for checking and savings.

For instance, Green Dot is offering a 3% rate on its unlimited account. Varo Money offers a savings account with a 2.80% savings rate.

“Savings products are hot and getting hotter as banks and nonbanks are able to acquire deposits on lower-cost infrastructures while offering rates that incent customers to act,” said Lane Martin, partner at the industry consulting firm Capco.

A number of digital-only banks and fintechs have highlighted this rate gap in their online marketing.

Ally Bank, for instance, says on its website that “the rate of our Online Savings Account is 20x the national average of 0.09% APY.”

Customers are more willing (and able) to shop around

Of course, mobile and online trends have led customers to consider banking alternatives.

Among millennials, 65% have used online banking and 72% have used mobile banking, according to data from the U.S. Financial Health Pulse report.

That generation of consumers is also the least engaged with their primary financial institution (30% are fully engaged) and are switching FIs at a rate 2.5 times more than baby boomers, according to Gallup.

“Customers are redirecting their savings out of big-brand coffers to achieve yields that are regularly [10 times higher than the average]; this is worth the five minutes it takes to open an account,” Martin said.

Challenger banks’ customer base continues to grow. Globally, digital banking alternatives count more than 15 million users, according to CB Insights. Brazil’s Nubank has some 5 million active users. Chime leads in the U.S with more than 1.6 million accounts.

Marcus by Goldman Sachs has enrolled more than 4 million customers, with $40 billion in deposits in the U.S. and the U.K.

Community and regional banks that have launched high-yield savings accounts in recent years to expand their national presences usually appeal to consumers chasing the highest rates.

Fintech partnerships create new possibilities

Part of the added competition in banking, ironically, is the result of some banks and CUs partnering on high-interest checking and savings account offers from nonbank fintechs.

VyStar CU in Jacksonville, Fla. last month made news after pledging $10 million toward fintech partnerships, the latest in an ongoing trend of credit unions forging alliances in the fintech sphere.

Nbkc Bank has a number of partnerships with fintechs, providing federally insured checking and savings accounts to Joust, Truebill, and Tip Yourself. In July it agreed to provide checking accounts to the popular robo adviser Betterment.

Betterment in July launched its checking and savings accounts, which offer up to 2.11% APY.

But Brian Unruh, the president and CEO of the $719-million-asset nbkc, told American Banker, Credit Union Journal's sister publication, at the time that he viewed the partnerships as more than being just the "bank of record" for those startups.

“We're working on either a deeper integration into their technology or vice versa, and where we can help bolster each other's businesses in different ways.”

Wealth management firms can play the game, too

Wealth management firms, which credit unions compete with, have touted the message that by offering high-interest accounts, they are trying to help account holders get more bang for their buck.

Several, including Betterment, Personal Capital, the Carson Group and Wealthfront, have launched banking products to complement their investment services. SoFi has rolled up its lending with a high-interest savings and checking account and automated investment advice.

“This presents an opportunity for advisers to capture assets and a greater share of wallet that traditionally has been untouchable,” said Ron Carson, the CEO and chairman of the Carson Group. “It’s one more way advisers can further entrench themselves into helping manage their clients’ financial lives without them needing another service provider.”

But they also see it as a brace to support their business models. Independent robo-advisers are finding it more difficult to compete for customers as large wealth management and mutual fund giants, including Vanguard, Schwab and Fidelity, launch direct-to-consumer automated wealth advice platforms.

That is one reason why Wealthfront recently said it had $20 billion in assets. It counted the $8 billion it raised in cash accounts with the $11 billion in investment accounts it manages.

Interest-earning assets are profitable for traditional players, too. For example, Schwab earned an average yield rate of 2.42% on cash and cash equivalents in the first quarter, according to the company’s earnings statement.

Startups are trying to make banking fun

Fintechs are more willing to experiment with gamification as they attempt to differentiate themselves in the market.

Blast, created by Acorns co-founder Walter Cruttenden, managed to mix actual gaming with savings.

The video game-based savings app launched last year and rewards mobile and PC gamers for the titles they play on a regular basis. It enables users of high-interest checking accounts to essentially decide the daily APY based on an assortment of actions within the app.

Blast bases rewards on players reaching certain milestones over the course of their normal game sessions. Those milestones could be anything from solving a puzzle to defeating a certain amount of enemies.

Beam, co-founded by a former investment banker at JPMorgan Chase, gamifies tasks.

The idea behind Beam, according to CEO Aaron Du, was to create a savings mechanism not tied to a wealth management firm, or traditional bank, and one that caters to the majority of the U.S. population.

“I realized that I can have a greater impact by trying to identify and solve problems for 99% of Americans,” Du told American Banker about creating Beam.

Though combining gaming and banking might seem like a gimmick, it makes sense when considering roughly 70% of the population plays games on some kind of device.

And as gimmicks go, it is not a luxury car for customers who open a certificate of deposit.

Incumbents are pushing back

In the wake of these new high-interest offers, banks of all sizes have mobilized. Several have launched digital-only units, aggressively positioning them to fight back against fintech and challenger bank entries.

Currently, some of the highest interest rate offers in the market are from online units of brick-and-mortar community and regional banks.

Vio Bank, an online unit of MidFirst Bank in Oklahoma City, offers a 2.42% APY on its checking and savings accounts, with just a $100 account minimum. HSBC has an online-only option, HSBC Direct Savings, which offers a 2.20% APY with a $1 minimum.

Also giving them a lift: While millennials may be open to alternatives, younger Generation Z customers are gravitating toward major banks.

Still, the APY competition is tied to Fed interest rates, and offered rates across all banks and fintechs dropped after the latest interest rate cut.

The one advantage that venture capital-funded startups may have is that banks will likely have to contend with investor concerns about narrowing margins as a result of the Fed cuts.

Some accounts come with strings attached

Though there is a variety of offers in the market, the details in each represent differentiation in strategy among banks.

Some offers are tied to account minimums in order to achieve the advertised APYs. To earn Popular Bank’s 2.40% APY, customers need to have a minimum of $5,000 in their savings accounts. BBVA requires $10,000 for its 2.15% APY, while Northpointe Bank asks customers to keep a minimum of $25,000 to earn its 2.30% APY.

Instead of a minimum, Green Dot has an account maximum of $10,000 for which a customer can earn the 3% APY in its account.

Since these offers are teaser rates, most expire after a year. And as they continue to fine-tune their features, some fintechs have to be very specific about what qualifies for their APY offers. Betterment’s Everyday account replaced its earlier Smart Saver account offering. But some customers were unhappy that the promotional APY attached to Everyday would not be available to balances in their existing accounts.

A couple of fintechs have sought to put the APY rate in the hands of the customer as a way to put them to work in promoting their offer.

Beam, for example, starts with a 1.7% APY minimum rate with the ability to increase that figure to as high as 3% if a user’s referrals open an account. Beam users can boost the rate as high as 7% by collecting and using daily interest rewards from logging into the app for budget tips.

Some offers have account minimum requirements to avoid fees. State Farm Bank, for instance, offers a money market savings account with 2.00% APY and a $1,000 minimum to open, but requires a $500 daily balance minimum to avoid a $10 monthly fee.