Provident Bankshares Corp. of Baltimore says it is developing an Internet banking unit with high-yield accounts to retain customers it thinks otherwise might move their funds to an Internet-only competitor.
The $6.4 billion-asset company said that even though the unit could drive up deposit costs, paying higher rates is preferable to losing customers.
The plan is to offer the high-yield accounts to customers Provident deems more likely to defect, said Lillian Kilroy, the managing director overseeing the initiative.
"I am not just automatically throwing up an opportunity for disintermediation," Ms. Kilroy said in an interview Monday. "I'm strategically managing that disintermediation."
Many community banking companies have started an Internet banking unit, but often with a focus on gathering deposits from outside the markets where the companies have branches. Provident will promote its unit mainly in its local area, she said.
Some analysts were skeptical about the strategy.
"They could be cannibalizing their own deposits," said Albert Savastano of Fox-Pitt, Kelton Cochran Caronia Waller. "So instead of attracting new money, you're just raising the cost of your funds."
Ms. Kilroy said that some cannibalization is unavoidable. However, rather than "lose my entire customer relationship because they're moving to an online bank," Provident is willing to pay up. "At the end of the day, it's going to cost me a lot more to go out and get a whole new customer."
The unit is in test mode but should be rolled out fully by mid-2008, she said. It will offer high-yield savings accounts, an online checking account, and special rates on certificates of deposit.
In addition to retaining customers, the company hopes to "entice" noncustomers who prefer high-rate online products to choose its local direct bank over competitors from out of the area, she said.
The unit will have its own Web address, provident-direct.com, which Ms. Kilroy calls a "micro-site." She said that customers who use Provident's main site almost exclusively would see ads for the new unit.
Customers of the Internet unit would be able to use Provident's bank branches or any other channels, she said. "I don't want to preclude you from the occasional time that you would want to use the phone center or come into a branch. We want you to feel good about banking with Provident wherever and whenever you want to do that."
The unit will be part of Provident's newly formed emerging businesses group, which also includes an investment unit and an employee benefits unit. The investment unit will focus on growth in retirement planning, and the employee benefits unit will promote health savings accounts, which Provident began offering two years ago, she said.
Provident has reported lower net interest income each quarter this year, as customers have shifted money from checking and savings accounts into CDs. Its third-quarter net interest income fell 6.6% from a year earlier, to $47.8 million.
Total deposits were roughly flat, at $4 billion. Zero-interest deposits shrank 6.6%, to $709 million, while interest-bearing deposits increased 3.4%, to $3.38 billion.
"Whether they've woken up to the new world, or whether the actuarial tables are thinning them out, this fabulous, low-cost deposit base they have buried within Provident just simply hasn't grown," Jeff K. Davis, an analyst with First Horizon National Corp.'s FTN Midwest Research Securities Corp., said. "The new channels would be an effort to obtain retail funding, although it's going to be a little more expensive than it would be otherwise."
