Just how loyal are depositors at online banks? It is a question that has come into sharper focus at a time when the long-anticipated rise in interest rates finally appears to be just around the corner.
Online banks have traditionally relied on savers who are chasing the highest yields; unfortunately, those same customers have frequently bolted when a better investment opportunity arises.
But executives at two leading online banks Discover Financial Services and Capital One Financial told analysts Friday that their deposit businesses are more stable today than one might expect.
Speaking at an industry conference in Boston, Discover Chief Financial Officer Mark Graf said that the Riverwoods, Ill., company has shifted its strategy, and no longer relies as heavily on high yields to lure deposits.
"We are quite intentionally not leading with rate," Graf said. "Our experience has been that once depositors come to us, they stay with us."
Discover's retention rate on its certificates of deposit has risen from 78% in 2010 to 82% so far this year, the company stated.
Over the last several years, the $78 billion-asset Discover has come to rely much more heavily on deposits as a source of funding for its flagship credit-card business. One reason for that decision was that other sources of liquidity dried up during the financial crisis.
In 2007, Discover's direct-to-consumer deposits totaled just $3 billion; in the third quarter of this year, they were up to $29 billion, according to a company presentation Friday.
"I think this company did what it needed to do during the crisis, when its traditional funding sources dried up," Graf said. "So the mix of that book has changed pretty radically."
Discover Bank has just one branch, which is located in Greenwood, Del. The company sells savings accounts, money market accounts and certificates of deposits online. Discover has also launched a checking account, which is currently only open to current Discover customers.
On Friday, Discover Bank was offering savings accounts that paid a 0.85% annual percentage yield, according to Bankrate.com. The highest yield being paid on a savings account Friday was 1.05%.
While he downplayed the risk that depositors will flee, Graf also acknowledged that Discover's deposits are going to continue paying higher yields than traditional banks like JPMorgan Chase. "That's our business model," he said.
Capital One Chief Financial Officer Stephen Crawford, which has undergone a similar transition as Discover in terms of its reliance on retail deposits, made the same general pitch to analysts Friday.
"Our view is that these deposits are stickier than conventional wisdom around direct-to-consumer deposits," Crawford said.
A higher percentage of Capital One's deposits are insured by the Federal Deposit Insurance Corp. than at traditional banks such as Wells Fargo, PNC Financial, SunTrust Banks and KeyCorp, according to Capital One's presentation Friday. The company also pointed out that it has a smaller average account balance lower balances are an asset in holding on to deposits than peers like Regions Financial, U.S. Bancorp and Fifth Third Bancorp.
McLean, Va.-based Capital One has a much larger branch network than Discover, which is one of its main competitors in the credit-card business.
But Capital One, which has total assets of $299 billion, has come to rely more heavily on online deposits since its 2011 acquisition of ING Direct USA, which has since been rebranded as Capital One 360.
"While the ING business was originally founded on offering one of the highest rates, [Capital One 360 has] moved away from that strategy," Crawford said Friday. "The relationships we've built here are very long-lived."