With E-Trade deal, Morgan Stanley moves deeper into consumer banking

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It was less than a month ago that the investment banking giant Morgan Stanley made its first foray into consumer banking with the launch of a brokerage account that includes a debit card and mobile banking capabilities.

On Thursday, it took an even bigger step into consumer services with the announcement that it’s buying the discount brokerage E-Trade Financial for $13 billion.

While the deal is largely being billed as a wealth management play, it comes with roughly $56 billion of low-cost deposits that will not only help fund Morgan Stanley’s core businesses, but also fill some gaps in its lineup of banking products and services.

Morgan Stanley has "a bunch of deposits, but not the full suite of products they’ll have now,” Jeff Harte, managing director and senior research analyst at Piper Sandler, said Thursday. “Checking accounts, savings accounts, they didn’t traditionally offer these things. Now they will.”

Though E-Trade, which has had a bank charter for more than two decades, largely abandoned lending after the financial crisis, it continues to offer consumer banking products, including checking accounts and high-yield savings accounts.

In a conference call with analysts Thursday, E-Trade CEO Michael Pizzi said that Morgan Stanley has every intention of expanding its product offerings to its wealth management clients.

“Morgan Stanley will now be able to offer an expanded suite of banking products including checking and savings accounts and mobile wallet capabilities,” Pizzie said. “Together we will now be able to offer banking capabilities faster to all clients.”

Morgan Stanley expects to retain the E-Trade brand. Pizzi will continue to run that business within the Morgan Stanley franchise and lead the integration of the two companies. He will report to Chairman and CEO James Gorman and join the Morgan Stanley operating and management committee.

Other industry observers said that Morgan Stanley could use E-Trade’s digital bank, with its significantly lower funding costs, to start offering consumer loans, as rival Goldman Sachs has done through its consumer bank, Marcus.

The influx of deposits is “probably reason No. 1 or No. 1A as to why Morgan Stanley wanted to do the deal,” said Greg McBride, the chief financial analyst at Bankrate.com.

The online bank "was really the appeal,” McBride said. “That’s the conduit for bringing in those low-cost deposits that are highly desired and, if anything, it may put some horsepower behind the online bank going forward. … I think growing the deposits is probably going to be the first objective.”

Saule Omarova, a Cornell Law professor who specializes in financial regulations and banking law, said the deal would make Morgan Stanley an even more formidable competitor to Goldman Sachs and other Wall Street giants.

“The really important thing here is that [Morgan Stanley] will have an established base on which to grow its own cheap and reliable retail deposit base,” she said. “That cheap source of funding, in turn, can power a variety of business lines the company currently pursues or chooses to pursue in coming years.”

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M&A Wealth management Morgan Stanley E-Trade Financial James Gorman Consumer banking