No room for rate chasers: Online banks try new pricing strategies

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Online banks have long paid some of the industry’s highest rates on deposits. But as the competition for consumer dollars heats up, two digital banks are tweaking that strategy — offering attractive yields, but also taking steps to avoid a heavy reliance on those savers who chase the best rates.

Simple, which is backed by BBVA Compass, recently started offering a 2.02% yield, but only for funds that its customers earmark on a regular basis to save for a specific goal.

And CIT Bank has begun paying yields of 2.15% to depositors who save at least $100 each month.

Both offers are examples of online banks experimenting as they strive to remain competitive in a rising-rate environment without getting into a price war. The requirement that customers make regular contributions to savings in order to qualify for the higher rate figures to discourage rate chasers.

“We’re not really looking for hot money,” said Dickson Chu, executive chairman at Simple. “We’re looking for … consumers that actually want to save for something.”

Digital banks, which typically use high rates to lure consumers away from brick-and-mortar institutions, are at the leading edge of the embryonic battle for deposits.

The leading online depositories pay the market rate for 95% of their deposits, according to a May report from Vining Sparks. Meanwhile, the top national retail banking franchises pay the market rate for only 63% of their deposits.

As of last month, online banks were paying a median of 1.78% annual percentage yield on savings accounts of at least $1,000, up from 1.18% a year earlier, according to a report Tuesday from Keefe, Bruyette & Woods. By contrast, national banks were paying a median of just 0.16%, which represented a small increase from 0.13% from September 2017.

Traditionally, digital banks have lured depositors by offering attractive rates with no strings attached. And some of them are still using that approach. Ally Bank, which has enjoyed annualized deposit growth of 14% over the last five years, is currently offering 1.90% on balances of all sizes.

Other digitally oriented banks, including PurePoint Financial, a division of MUFG Union Bank, pay their best rates only to customers who maintain a large enough balance. The downside of that approach is that the money may disappear when another bank offers a higher rate.

CIT Bank is offering a 2.15% annual percentage yield to depositors who meet one of two conditions. They must either maintain a balance of at least $25,000 or make a monthly deposit of $100 or more.

The Pasadena, Calif., bank said that the latter offer is designed to encourage customers to save on a consistent basis. “We are looking to build long-standing relationships with our customers and offer them smart savings products to meet their needs,” Ravi Kumar, head of internet banking at CIT, said in an email.

Simple, which launched as a startup in 2012 and was later acquired by BBVA Compass, has traditionally used a different value proposition than most online banks to attract deposits. Rather than paying high rates, it positioned itself as a partner in enhancing its customers’ financial health. Now Simple is adopting more of a hybrid approach.

The digital bank’s latest offer gives its customers a financial incentive to maintain bigger balances. The 2.02% annual percentage yield kicks in once the customer has set aside $2,000 for a specific savings goal.

The new offers from digital banks could prove more effective at persuading existing customers to build their existing balances than they are at luring new depositors.

“While these types of offers have an attractive rate, they are being compared to similar rates at other online banks with no conditions,” said Hank Israel, an analyst at Novantas. He added that when customers must take certain actions in order to qualify for the higher rate, they may balk.

Aaron Fine, a partner at Oliver Wyman, identified another potential pitfall for online banks that require regular savings behavior in order to qualify for the highest rate.

“The challenge with something that’s goal-based is, the person is likely to spend the money when they get there,” he said.

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Deposits Consumer banking Online banking Digital banking Interest rates Simple BBVA Compass CIT Group Ally Bank