Comment: The Wonderland of Web Bank ‘Analysis’ (Or, ‘Duh’)

Only in the “Through the Looking-Glass” world of Internet-only banking is decimating your bank’s net interest margin by overpaying for deposits and undercharging for loans a viable strategy for enhancing shareholder value.

But even Lewis Carroll would have trouble imagining the “curiouser and curiouser” conclusions of Ms. Sherri Neasham, CEO of the research firm Financenter.com, as reported recently in American Banker. After conducting a survey of certificate of deposit rates at 35 banks (presumably by doing more than reading the morning paper or logging on to BankRate.com), Ms. Neasham asserts, “Brick-and-mortar banks will have to work to make their prices comparable.”

As proof of this amazing conclusion, we are offered a table showing that traditional banks — increasingly a pejorative term these days — pay less for certificates than Internet-only banks. Obviously, it never occurred to Ms. Neasham that traditional banks are paying less because they can.

The illogic that overwhelms most Internet market research would produce a conclusion that the temperature is freezing because it snowed or the sun is out because it’s hot.

It’s the same with Internet-only bankers’ intellectually bankrupt sales pitch. These guys would have the public and the banking industry believe that Internet-only banks pay high rates on deposit accounts because they can.

Folks, Internet-only banks pay higher interest rates on deposits because they must. Paying premium rates is the only way these institutions can even hope to attract deposits. It seems the only ones buying into this strategy are the research analysts.

As a funding strategy, overpaying for deposits isn’t working well. NetBank is the most outspoken proponent of this approach. Its loan-to-core-deposit ratio at March 31 was a whopping 147% versus its thrift peers’ traditionally elevated level of 128% and the more subdued commercial bank level of 113%.

Competing on rate is not competing. It is merely admitting that you have nothing else of value with which to attract customers. The last 20 years are replete with literally thousands of institutions that tried and failed. Internet-only banks are but the latest in a long line of struggling institutions to go down this path.

The companies and individuals that support and persist in this strategy are doing everyone, most especially their investors, a major disservice.

Our intrepid Ms. Neasham goes further to assert that “Banks are paying close attention to what is happening to CD rates online, and they are doing everything they can to adjust their rates and adjust their services in order to stay attractive.”

Nonsense. Long before there was Internet banking, it became obvious to everyone in the banking industry that customer satisfaction (and thereby retention of hard-won clients) is a critical factor in achieving financial success. Consultants have made millions of dollars working with bankers to improve service quality, understand customer propensity to purchase products, and build “share of wallet” — a term coined by Ed Furash that is now almost as overused and trite as “brick and mortar.”

The logical sloppiness of Ms. Neasham’s analysis is little different from far too much of what we see masquerading as market research. Can’t any of these people tell the difference between “coincidence” and “cause and effect”? These terms are not synonymous.

It is true that bankers continue to improve their operations. It is also true that irresponsible Internet-only bankers continue to offer uneconomic rates. The coexistence of these two facts is called coincidence — two items happening at the same time. There is no causal relationship that can be demonstrated, anecdotal or otherwise.

As for the Internet-only bank Mad Hatters: Surely they know that financial institutions that operate solely for the customer’s benefit are called credit unions. Credit unions are owned by their depositors, so technically there are no profits because the difference between the cost of operating the service and the revenue it generates is distributed to members as a dividend.

Internet-only bankers who are espousing the virtue of a “Who needs a net margin?” ideology might consider switching charters. Switching will obviate the need to pay lip service to shareholders’ interest.

But converting presents two insurmountable problems for Internet-only bankers. One, even credit union members expect a dividend (paid by the institution using their money to fund other members’ loans) and Internet-only banks’ income is woeful, even when compared with that of institutions lacking a profit motive in the first place. Second, credit union executives aren’t compensated at the levels that shareholder-owned banks pay their executives.

As for Ms. Neasham and other researchers of the “Alice in Wonderland” kind: Please do not fret. You can do a new study. It can claim bankers are reacting in some way or other because they are now concerned about credit unions stealing their customers. No doubt that a legitimate media outlet will then report that dubious insight as news.

Mr. McGrath is managing partner of Bank Earnings International LLP, a consulting firm in Orange, Va.