General Electric Co. is following a well-worn path with its deal to acquire most of MetLife Inc.’s deposit business.
Deposits have been easy to come by for most banks — so much so that a few institutions, hard-pressed to profitably deploy the funds, have introduced measures to discourage them. But deposit growth’s been especially robust for a pack of online upstarts that are wagering their funding strategies on the branchless model.
Among the nation’s largest stand-alone direct banks, deposits have increased by 70% since the first quarter of 2008 to a combined $330 billion as of Sept. 30, or roughly four times the industrywide pace. (The group considered here consists of banking companies with more than $30 billion of deposits at June 30, 2011, and fewer than 15 branches, except for Goldman Sachs Group Inc. and Morgan Stanley.)
Online banking has become a favored avenue out of the shadow system, and into the federal safety net, for several household names once classified as nonbank financial services companies. At Ally Financial Inc., American Express Co. and Discover Financial Services — all of which, like GE, turned to deposits after the financial crisis showed how unstable wholesale funding could be — deposit growth has ranged from 55% to 190% since early 2008.
Even for ING Direct, the largest and most established Internet deposit business, deposit growth of 27% since the first quarter of 2008 to $82 billion at Sept. 30 was far ahead of industrywide growth of 17% to about $10 trillion. Growth was strongest at Charles Schwab Corp.’s direct bank — 250%, to $54 billion — and weakest at E-Trade Financial Corp.’s bank, where deposits were roughly flat at about $30 billion over the period. E-Trade sold about $1 billion of savings accounts to Discover in 2010. It said most of the customers who held the deposits were not active brokerage clients and that the move was part of a strategy of focusing on its core business and trimming its balance sheet.
Most of the online banks have accomplished growth while simultaneously reducing their use of brokered deposits in favor of more durable direct relationships with savers (see the second chart).
Most still have higher interest costs than traditional banks, however (see the third chart). E-Trade and Charles Schwab are exceptions, paying next to nothing for what are mostly sweep accounts, which hold excess cash of brokerage customers. The comparison equalizes after taking overhead into account, though, according to Capital One, which has agreed to buy ING Direct.
Capital One, which itself transformed from a monoline credit card lender through acquisitions of three major regional banks over the past decade, said that noninterest expenses for deposits at ING Direct run about 33% of the rate at a typical large bank, and just 29% after giving effect to new restrictions on debit card fees.