We have said in the past that bank customers are attracted by better customer service rather than rates, especially when deposit rates are low. Well it seems that convenience remains king whether you are banking at the local branch or online.
American Banker reports that at a recent financial conference, both Discover Financial Services and Capital One Financial executives indicated that their online depositors remain quite loyal. Market perception has been that online banking has traditionally been for those seeking the best rates and when a better rate comes along, depositors jump ship in favor of better yields. Now that deposit rates have remained at such a low point, online banks are changing tactics and it’s paying off. Discover’s depositor retention rate has risen from 78 percent in 2010 to 82 percent in 2014. As reported by American Banker, Mark Graf, CFO of Discover, said:
"We are quite intentionally not leading with rate. Our experience has been that once depositors come to us, they stay with us."
Discover has only one Delaware bank branch but is offering checking, savings, money markets, and CDs online. Graf indicated that their business strategy includes offering higher yields, but they are relying more heavily in direct-to-consumer deposits following the financial crisis, when other sources of liquidity disappeared. In their latest report Discover indicated that direct-to-consumer deposits totaled $29 billion, up from $3 billion in 2009.
Similarly, Capital One reports similar findings. CFO Stephen Crawford termed retail deposits as “stickier” than the industry at large believes, and they also are relying more extensively on consumer deposits. Crawford also reported that Capital One has more FDIC insured deposits, but that the average account balance is smaller than average which makes it easier to hold on to deposits. Crawford also noted that since its acquisition of ING in 2011, the company has moved away from offering higher rates to promoting relationships.
So is the depositor loyalty reported by Discover and Capital One a trend or an anomaly linked to their credit card business?
U.S. News and World Report writes that American consumers are still wary of online banks, largely because of fears of lack of control over their personal information and susceptibility to fraud or identity theft. While more consumers are trying online banking (more than 60 percent), highly publicized data breaches at Target and even Chase have made many depositors skeptical.
At the same time, the mobile and online payments are booming. Analysts predict that 40 percent of Generation Y households will adopt online banking. As the new generation of depositors that have grown up with Web technology mature as bank customers, more customers will migrate to online banking. They are used to buying on Amazon and ordering takeout food online, so online banking is just part of everyday life. The online experience will become more important than the branch experience, and smart bankers are taking a page from online retailers and working to develop an omnichannel strategy for a consistent customer experience.
At the end of the day, consumers want convenience and peace of mind, whether it’s online or in the branch. If they can find a bank that can deliver convenience and a sense of security, they are likely to stay with that bank. The days of rate chasing are behind us, at least for now, and as long as customers get the service they need and they can be assured of privacy and security, online banking loyalty is likely to continue.