Online banks are starting to feel more heat from depositors seeking higher-yielding savings options, but the increases so far are modest in light of the Federal Reserve’s large rate hikes.
The Fed’s aggressive moves, including another 75-basis-point rate increase on Wednesday, have led online banks to pay higher rates to individuals with high-yield savings accounts. Critically, however, those banks have been able to raise their rates by less than the Fed’s hikes, a lag that is putting a lid on rising deposit costs for now.
While competition in high-yield savings accounts is heating up, it “doesn’t seem to be getting out of hand,” said Ken Tumin, the founder of DepositAccounts.com. The somewhat benign outlook may continue for some time given worries about a looming recession, which increasingly has traders
“With the slowdown in the economy, I think banks are being a little hesitant in placing big bets on big rate hikes,” Tumin said. “And that might continue, so we might see further slowness.”
Online banks typically offer higher interest rates on savings accounts than traditional banks, thanks in part to expense savings from having few or no branches. But their customers’ desire for more yield has raised the possibility that depositories will start competing heavily.
Decades-high inflation has forced the Fed to tighten monetary policy fast, with the central bank raising its benchmark rate from effectively 0% to a target range of 2.25% to 2.5% in the span of a few months.
While they described the pressures as manageable, executives at online banks such as Synchrony Financial, Ally Financial and Capital One Financial told analysts this month that their funding costs may rise faster than they previously thought.
“It’s competitive. We’re going to continue to move with the market,” Synchrony Chief Financial Officer Brian Wenzel told analysts, though he anticipated the higher funding costs will be “largely offset” by higher income from credit card interest rates.
Synchrony now pays savers a 1.65% rate, up from 0.6% in mid-May. Despite the significant increase, the bank’s high-yield savings rate is still below the 2.25% rate the company paid in early 2019, before the Fed started cutting interest rates slightly due to economic uncertainty, according to DepositAccounts.com.
Other prominent digital banks have also raised their high-yield savings rates in recent weeks. Capital One and Discover now pay a 1.3% yield, while Goldman Sachs’ Marcus pays 1.2% and Ally Bank pays 1.25%.
DepositAccounts.com’s online savings account yield index, which tracks average rates at prominent online banks, climbed to 1.04% this month from 0.5% in May. The increase has been relatively sharp, but high-yield savings rate averages remain below their 2019 peak of around 2.3%.
Online banks are certainly feeling some competitive pressure to keep up with the market, but the deposits are “a lot stickier than many people think” and therefore are not overly prone to leaving for slightly higher-paying options, said Adam Stockton, director of retail deposits at the consulting firm Curinos.
Some of that inertia is due to the simplicity of avoiding a switch of banks, Stockton said. He likened the situation to someone considering driving further to pump gas at a cheaper price. At some point, the calculus makes the trade-off worthy, but that price and distance will vary for different people.
Then there’s the loyalty factor — knowing the gas station attendant, or accounting for the fact that the convenience store carries a certain item.
The equivalent at online banks is their tech platforms and other services — ranging from rewards credit cards to mortgages, depending on the bank — which executives say keep customers engaged with the company rather than looking elsewhere for higher savings rates.
Ally, for example, offers auto loans, mortgages, budgeting tools and investments, and is
While Ally’s funding costs are moving higher thanks to the “rapid increase” in rates, the company remains “confident in our ability to manage interest expense due to our customer value proposition that goes beyond rate,” Ally Chief Financial Officer Jenn LaClair told analysts this month.
Synchrony, a credit card issuer that partners with retailers ranging from Lowe’s to Amazon, said some customers do try often to shop around for rates. But those frequent rate-shoppers make up a “very low percentage” of the company’s customers, who typically stay with Synchrony and enjoy its financial education, tech platform and products, said Wenzel, the firm's CFO.
The Federal Reserve’s aggressive rate hikes are leading corporate clients to demand higher deposit rates, according to industry consultants. Some banks are better positioned than others to weather the changing landscape.
“Those consumers develop allegiances,” Wenzel told American Banker in April. “It really goes back to the ease of use, it goes back to the affinity for the brand, it goes back to how well they want to engage with you — are you providing financial education, are you providing other things to them?”
Capital One, which has some branches but also a large digital operation, sees itself as a bank that is “not about just the highest rate paid, but really about high-quality products, a great customer experience and a full-service set of capabilities,” CEO Richard Fairbank told analysts this month.
While the company expects higher deposit costs to be a headwind this year, deposits will help fund the strong credit card
“I think the card margins are such that it's hard to imagine that we wouldn't continue to make the trade,” he said, “that even if we have to pay more for deposits, we would not turn down the growth opportunity.”
