What killed First Republic? Failure to gather deposits at 'digital scale'

Four recent bank collapses — First Republic Bank, Silicon Valley Bank, Signature Bank and Silvergate Bank — have sparked widespread concern about bank liquidity, interest rates, and whether the string of failures will have a knock-on effect across the sector. But emerging from the reporting around First Republic's collapse is a somewhat different take.

It was reported by the New York Times that SVB, Signature and First Republic combined held more in assets than the 25 banks that collapsed to kick off the 2008 financial crisis. The Times also mused that a higher interest rate environment is likely to blame for these events.

"Higher interest rates have eroded the value of assets on banks' balance sheets, stressing the financial system and making it harder for banks to pay back depositors if they decided to withdraw their money," the paper observed.

The CEO of First Republic, Jim Herbert, appears to have thought differently.

In a board meeting back in February, amidst the departure of many well-heeled customers from the bank, the 78-year old founder reportedly slammed his fists on the boardroom table, exclaiming, "We've got to get more deposits!" First Republic did pivot to offering higher interest rates on certificates of deposit, but that clearly wasn't successful.

By comparison, Forbes reported that Apple's recent rollout of a new savings account drew in nearly $1 billion in deposits in its first four days. While Apple offers a competitive savings rate, at 4.15%, First Republic offered an even more aggressive 4.95% on CDs.

Apple's rapid acquisition of deposits shows what is possible in today's digital space with respect to customer acquisition generally. This is where First Republic's strategic options were severely limited by their bank platform, and the outmoded experience of their executive team.

When Alipay's Yu'e Bao peaked at $268 Billion in deposits back in March of 2018, Western financial pundits wondered how it could possibly have created what, at the time, was the largest deposit pool in the world. Yu'e Bao remained the world's largest money market fund for more than half a decade, powered not by an APR, but simply by being able to acquire deposits very quickly and at low cost.

When we look at the glaring difference between Apple's deposit boom, and First Republic's desperate attempt to lure back fleeing depositors, it becomes clear that interest rates were not the deciding factor.

Politics and policy

Is the banking crisis over? Depends what you mean by over

May 2, 2023 3:20 PM

Apple's secret sauce was and is the roughly 2 billion iPhone users globally. In the United States alone it is reported that 58% of the approximately 300 million smartphone users have an iPhone. Alipay has reported that they have 681 million users on their platform globally. In both instances these are a pool of highly passionate, active digital advocates and customers. The task of persuading regular digital wallet users to become depositors is a fairly trivial customer experience design issue, compared with getting those same potential customers into a bank branch or to a website to similarly transfer funds. Apple signed up 240,000 savings accounts in just 4 days, and approximately $400 million in deposits just on Day One of the new feature.

The fact is, if you need rapid scaling of deposits, branches just aren't going to cut it in an era where funds can move at internet speed. In the current environment the ability to engage your customers through a wallet ecosystem, social media or just digitally, is clearly becoming a core differentiator for a healthy pool of both engaged customers and deposits.

First Republic just wasn't ready for this transition to primarily digital deposit acquisition, and neither are many banks in the United States. Despite its tech pedigree, even SVB still acquired customers in a traditional way, compared to the likes of Alipay, Apple, Venmo, Chime and Varo.

Apple and Alipay have a further advantage, in that they already have a value-store relationship due to their wallet ecosystem. For them, turning a customer into a depositor is just a matter of a simple change in how the wallet stores funds.

For banks to survive, it is increasingly clear that the ability to acquire customers and deposits digitally is no longer a "nice to have." It's now a core capability, as customers vote with their feet and can move deposits on a whim. It's getting harder for traditional institutions to hold onto deposits. Acquiring them is even tougher for banks that haven't developed basic digital acquisition competency.

If we look at deposit pools in the U.S. today, we see that the ones growing fastest are those that are enabled by digital acquisition. In fact, all of the fastest growing financial institutions in the world share this common capability — acquiring customers at digital scale.