The competition for online savings accounts is heating up.

MUFG Union Bank aims to fund its loan growth by pursuing deposit customers through a whole new division called PurePoint Financial.

PurePoint is offering an annual percentage yield of 1.30% on deposits — far more than traditional banks. For months, it was also better even than the interest rates offered by digital competitors such as Ally Financial, Synchrony Bank and Goldman Sachs, though each of those has since been increased their rates to match or nearly match PurePoint's.

PurePoint is more selective about its customers, accepting only those who can make a minimum deposit of $10,000.

And it doesn't yet provide any products beyond savings accounts and certificates of deposit. The product lineup is comparable to Goldman's GS Bank, which launched in April 2016.

Though it is an MUFG Union unit, PurePoint operates independently, with its own logo, core banking system and financial centers. It attracts and serves customers primarily through digital channels.

While MUFG Union isn't the first traditional bank to launch a separately branded division as a way to get new customers, PurePoint is different from other entrants in some ways.

Goldman entered the direct banking market through its acquisition of GE's deposit platform, which has remained essentially unchanged since its rebranding as GS Bank. Though revising its approach lately, Capital One started out with a similar strategy, acquiring ING Direct in 2012 and rebranding it as Capital One 360.

In contrast, PurePoint is homegrown.

"This is not a new, new thing, but I think we have moved ahead of a lot of people with our willingness to disrupt ourselves," said Steve Cummings, the chief executive of MUFG Union and of the U.S. operations for its Japanese parent company, Mitsubishi UFJ Financial Group.

Being owned by the world's third-largest banking company means that PurePoint can rely on compliance and risk management expertise on the back end while still starting fresh with a modern technology platform.

"It's a unique position for me to be in," said PurePoint President Pierre Habis. "In many ways I feel very entrepreneurial. But I'm also part of one of the largest firms in the world."

Pierre Habis, president of PurePoint Financial
"We're trying to be the no-fee, no-asterisk bank," says Pierre Habis, president of PurePoint Financial.

At least some of the cost savings are passed on to customers: There are no monthly fees on PurePoint accounts.

"We're trying to be the no-fee, no-asterisk bank," Habis said.

Additional products are said to be in the offing. But even in its current form, observers said PurePoint, which launched in February, should be able to grab market share from incumbents. Like other new online banking operations before it, PurePoint launched with a market-leading interest rate on deposits, which is an effective attention-getter, even if competitors have started to catch up recently.

PurePoint ultimately should help boost MUFG Union's bottom line as well. The bank had a loan-to-deposit ratio of 87.80% at June 30, according to data from the Federal Deposit Insurance Corp. At this level the bank has more room to grow loans than it did with the ratio of 94.36% a year earlier.

A visit to PurePoint's recently opened flagship store on Park Avenue in Manhattan shows the extent to which MUFG Union's new division is rethinking the traditional bank branch. Tasteful minimalism prevails. There are no teller windows or rope lines. A reception desk and a few glass-walled offices staffed with bankers and outfitted with Microsoft Surface Pro 4 tablets suffice for customer service.

"A check is the only piece of paper you might see in here," Habis said. "When you take away all the costs that don't give you a return, this is what you get."

The changes are more than surface. To keep costs low, PurePoint did away with MUFG's legacy technology and obtained a modern core banking system from FIS. The key question, said Habis, was, "Why would you build the bank of the future on the bank of the past's platform?"

PurePoint opened its first financial centers in Chicago and Miami. The addition of the New York location in August brought the total to 18 branches, with some of the others located in Dallas, Houston and the Tampa Bay area.

More openings are slated this year, though PurePoint isn't looking to recreate the vast retail networks of the biggest banks. Its financial centers average just 2,000 square feet and 2.5 employees.

"You don't need to be on every corner," said Habis. "You just need to be accessible to folks."

"Most people never need personal service, but they like to believe that they can have it."
— Todd Baker, managing principal at Broadmoor Consulting, on PurePoint's advantage over online competitors

As Habis gives an overview of PurePoint's growth, the business model becomes clear. PurePoint serves more than 20,000 customer households, and their average deposit balance is $150,000 — exponentially greater than that of the typical American bank account. Those funds, about $3 billion so far, can be used by MUFG Union to make loans.

While PurePoint may have its own branding — evidenced by the plush red chairs and sprays of artificial roses in the Park Avenue branch — its ties to MUFG Union offer a business advantage. Through PurePoint, MUFG Union is claiming an early lead in what it anticipates will be a future of higher interest rates while also acquiring a pool of capital to drive its other businesses.

"MUFG has businesses that generate a significant amount of assets, and this is a lower-cost way of raising funding to support asset growth than trying to push more volume through the existing system or raising corporate deposits through the New York operation," said Todd Baker, the managing principal at Broadmoor Consulting and a senior fellow at Harvard University's John F. Kennedy School of Government.

Baker, who was involved early on in the process of brainstorming what became PurePoint but left MUFG Union before it moved forward with the idea, suggests that banks have gotten too comfortable with low interest rates over the past decade. Hardly anybody has been competing on price for customer deposits.

Even online-only banks, which tout high-yield savings accounts, rarely offered much more than 1% interest before PurePoint came along.

"They teach you about the time-value of money in business school, but there is no time-value in our world" due to chronically low rates, Baker said.

That may be one of the reasons people aren't saving much these days. According to PurePoint's own research, the vast majority of New Yorkers have less than $10,000 in savings — the minimum deposit to open a PurePoint account. Among city residents, only 27% of women and 20% of men could come up with the minimum.

But for the mass affluent and high-net-worth customers that PurePoint is targeting, "there's an enormous pent-up demand for low-risk or zero-risk, high-yielding deposits," said Baker. "If you go back to periods in history when significant interest was being paid on deposit accounts, it was typical to see very large balances as part of people's retirement and asset allocation strategies."

Baker said he thinks most of PurePoint's market share will come from big banks, those groaning under the weight of legacy infrastructure and extensive branch networks. For years, banks on the order of Wells Fargo have offered interest rates of a tiny fraction of 1% on their basic savings accounts. (Even with a balance of $99,999 — let alone $10,000 — Wells Fargo's Platinum Savings account provides an APY of only 0.03%, with the potential for a "bonus" APY of 0.08% if certain requirements are met.)

Like Habis, Stephen Scherr, the CEO of GS Bank, thinks banks will soon be forced to compete more fiercely for customer dollars. His ambition for GS Bank is to stay at or near the top of available interest rates.

As of early September, GS Bank offered a 1.20% interest rate on all deposits of $1 or more, as well as one-year and five-year CDs. More recently its rate increased to 1.30%.

"I think customers are voting with their deposits. They gravitate, as one might expect them to, to the institutions that offer both value and ease of use," said Scherr, who also had been the chief strategy officer at Goldman until this week. "There's little question that if a bank wants to remain competitive, interest rates paid on deposits are going to be the principal basis on which a consumer makes a decision."

Stephen Scheer, CEO of GS Bank
"I think customers are voting with their deposits,” says Stephen Scherr, the chief executive of GS Bank, who intends to keep the interest rates that customers are paid on deposits at or near the top of the range available in the market.

The nation's largest banks may be starting to act on that insight. Over the summer, Capital One twice raised the rate on its 360 money market account, first from 1.00% to 1.10% APY for balances of $10,000 or more, then to 1.20% APY. It hiked the rate again this fall and now is paying 1.30% APY.

The account has no minimum balance requirement, but balances of less than $10,000 earn only 0.75%. The McLean, Va.-based company introduced the account only 18 months ago.

But while MUFG Union and Goldman are looking at their digital units "as a platform on which we can grow new businesses," in Scherr's words, Capital One is phasing out the separate brand.

Earlier this year, Capital One 360 was absorbed into Capital One, after it had gone several years as an independent division following the acquisition of the popular ING Direct online banking operation. Although some products still carry the "360" branding, the division is no longer separate.

Goldman plans to combine GS Bank with Marcus, its online consumer lending platform, by the end of this year. When that is done, Marcus likely will develop a mobile app for its online offerings, Scherr said. Additional products may follow.

Goldman also plans to launch a U.K. online deposit platform in the second half of 2018.

Against direct banks like Goldman's, PurePoint's chief advantage is the peace of mind consumers get from physical branches, according to MUFG Union executives and others.

Having a physical location shows people "that your brand is real," Baker said. "Most people never need personal service, but they like to believe that they can have it."

Even so, PurePoint's growing network of financial centers runs counter to the industry trend.

Goldman is betting that the cost savings make being entirely digital the way to go. "We don't have — and we have no intention of building — branches," Scherr said.

Scott Blackley, Capital One's chief financial officer, said at an industry conference in June that his company had shrunk its branch network from 900 branches to fewer than 600 over the past five years. "Having more branches is not something that we're after," he said.

"We don't have — and we have no intention of building — branches."
— Stephen Scherr, chief executive of GS Bank

Mark Schwanhausser, director of digital banking at the research firm Javelin, said that PurePoint's singular focus on savings products — at least for the time being — gives it a lower cost basis than competitors that are trying to do more, such as Capital One.

"The digital features necessary to oversee idle cash are much different than those for consumers who are coping with a fuller range of on-the-go financial chores and activities such as paying at the checkout, monitoring cash flow, scheduling bills, trying to ensure the credit card balance doesn't outstrip the checking account balance, paying roommates for rent and utilities, monitoring the strength of one's borrowing power and paying debts smartly, saving for an emergency fund or longer-term goals, and so forth," Schwanhausser said.

While PurePoint offers only savings and CDs right now, Habis said it intends to roll out checking accounts, credit cards and digital mortgages eventually.

He's not worried about a Wells Fargo or JPMorgan Chase starting a nimble new division of its own and beating PurePoint.

"There's nothing to stop them," Habis said. But a big national bank would risk cannibalizing its existing business if it were to launch a new brand offering superior rates, he argued.

PurePoint has thus far avoided opening its financial centers on the West Coast, where MUFG Union has branches.

Some community banks also have separately branded digital banking units to pursue customers outside their market area, such as Customers Bancorp with its millennial-focused BankMobile.

But Habis said most smaller banks likely would struggle to raise the funds to build a whole new division — something that wasn't a problem for MUFG Union.

Baker said its initial interest rate could give PurePoint a head start. "It's not surprising to me that the reception has been very strong."

Competition for deposits is about to get much more challenging, Baker added. "The last 10 years, any idiot could raise deposits," he said. "But now it's going to start to go back to being a delicate dance."

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