The Size Advantage in Deposit Pricing

by tom 26. February 2013 10:15
by DAN GELLER

The following is reposted from BAI.org Banking Strategies and was contributed by Dan Geller, Market Rates Insight’s Senior Vice President who has responsibility for rate and fee research.

An analysis of the link between the asset size of banks and the yield they pay on deposits shows that the bigger the bank, the lower the yield.

The notion that only the largest banks pay a lower annual percentage yield (APY) in return for the perceived status of “too-big-to-fail” is not entirely accurate. A more precise generalization of this phenomenon would be: the larger the bank, the lower the APY. These are the findings from a recent analysis by Market Rates Insight showing that the decrease in the APY portion of the cost-of-funds is consistent with the asset size of institutions and not unique only to the largest banks.image

In this analysis, we measured the average APY paid on deposits by five groups of institutions based on their asset size: A, under $1 billion; B, $1 billion to $5 billion; C, $5 billion to $10 billion; D, $10 billion to the top five; and E, the five largest banks. The average APY of all deposit products offered by group “A” was the highest among all groups: 0.50%. The next asset-size group, “B,” had an average deposit APY of 0.42%, which is down 8 basis points (bps) from the smaller institutions in group “A.”

Similarly, group “C,” with asset sizes between $5 billion and $10 billion, had an average deposit APY of 0.37%, down 5 bps from group “B.” Group “D” then had an average deposit APY of 0.26%, 11 bps lower than group “C.” And finally group “E,” consisting of the five largest banks, had an APY of 0.19%, 7 bps below group “D” and a full 32 bps below group “A,” which comprised the smallest banks.

The size advantage phenomenon is consistent across all major deposit types such as checking, savings, money market and certificates of deposit (CDs) of various terms. These findings suggest that the size advantage is not unique only to a particular type of deposit product and that the reasons consumers are willing to trade yield for size-of-institution are consistent in all deposit cases.

It appears that several factors are involved in consumers’ willingness to accept lower yields from larger institutions, both practical and perceptional. Chief among the practical reasons is location and convenience. Clearly, the biggest banks have the highest number of branches and greatest market presence, which benefits customers. On the perceptional side, the experience of the last recession with “too-big-to-fail” institutions may have had some lasting impact on consumers, who associate size with safety even though deposits in one FDIC-insured institution are just as safe as in any other insured institution.

The good news is that smaller banks can overcome some of their size disadvantage in regard to APY on both the practical and perceptional levels. With the increasing popularity of mobile banking, for example, smaller banks can compensate for their lack of branch distribution by offering and promoting mobile banking under the banner of a slogan like, “The distance between your smart phone and our bank is exactly the same as to any other bank.” Similarly, to offset some of the “safety-in-size” perception, smaller banks should keep reminding and reinforcing to their customers that no one ever lost a dime on an FDIC-insured deposit, regardless of bank size.

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APY | Market Rates Insight | Banking Trends

Weekly Term Accounts APY Spread and Index–February 25

by tom 25. February 2013 17:35

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index
The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

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Premium Index
Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

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Union Bank Forsakes Bundles for A la Carte Banking

by tom 21. February 2013 20:18

There was an interesting article in the Los Angeles Times this week profiling Union Bank, the second largest bank in California with other offices in Washington, Oregon, New York, Texas and Illinois. Union Bank is bucking the industry trend by unbundling its banking services, allowing customers to pick and choose the services that are right for their needs.

According to the LA Times article:

The new program aims to address criticism that banks bury the true costs of their services in fine print, said Arthur G. Smith, Union Bank's chief marketing officer. The San Francisco bank has always catered to business owners, who pick various services to suit themselves over time. It now wants to allow consumers the same ability to choose, he said.

"We think this approach sets the high-water mark for transparency," Smith said. "The consumer sees a discrete choice for every option, so this puts them in a position to make a value judgment about each one."

Unlike its competition, Union Bank has made all of its consumer services a la carte. They started a few months ago with a low fee (by inimagedustry standards) of $3.00 per month for basic checking waived with a monthly direct deposit of $250. Then they added 16 additional services. Six of those services, such as debit cards and mobile banking are available for free. Others have nominal fees: $1.00 per month for paper statements, $1.50 for a savings account, etc. There are even some innovative service fees, such as receiving preferential telephone support for $1.50 a month. Or online bill pay which starts out free and becomes a paid service for $1.50 per month at the end of the year.

This seems to be the best of both worlds for the bank and customers. Union Bank is able to offer services that promote customer loyalty and generate revenue. And customers get to pick they services they are willing to pay for to make their  banking easier.

Of course, Union Bank still offers service bundles, but at a premium price. They are charging $8 per month for checking with online statements and $10 per month with paper statements – roughly the same as other banks.

One of the criticisms that all banks are getting is that they hide their fees. Even Union Bank’s a la carte approach makes comparison shopping difficult. However, the a la  carte approach seems to be the first step toward promoting transparency as well as more potential profits from banking service fees.

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Fees | In The News | Blog | Banking Trends

Weekly Term Accounts APY Spread and Index–February 18

by tom 19. February 2013 16:14

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index
The APY spread is a simplified form of a standard deviation.  It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

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Premium Index
Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

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Banking Goes Mobile with Smartphone Bill Pay

by tom 14. February 2013 18:36

More banks are jumping on the mobile banking bandwagon, and for most bankers, mobile banking currently means mobile deposit. But now the trend is broadening beyond simple deposits. According to an article in this week’s Wall Street Journal entitled “Bank Customers Make Smartphone Connection,” First Financial Bank with 55 branches throughout Texas has now launched a new feature that allows customers to use mobile bill pay, where they use their smartphone to take a picture of a monthly payment coupon. The Journal reports that U.S. Bankcorp, the fifth largest bank in the U.S., is going to follow suit with their own mobile bill pay solution in March.Group_of_smartphones

This latest innovation is really targeting younger customers who are looking for convenience as well as cool. It’s not obvious, however, how much of a factor mobile banking convenience is when choosing a bank. Clearly smartphone applications appeal to younger customers, but older customers with more assets may be less willing to change banks or open a new account because of mobile banking.

Mobile banking is giving financial institutions a new means of competing with other companies like PayPal and  eBay that are encroaching on their market. According to AllixPartners, mobile banking now makes up about 8% of all transactions, online banking about 53%, and branch banking about 14%, with other methods including ATMs making up the rest. And nearly half of smartphone users who switched banks reported mobile banking was a major factor in making their decision. That’s up from 7% who said mobile banking was a consideration in 2010.

J.P.Morgan Chase was one of the first institutions to offer mobile banking in 2009 and reports they have 13 million customers using their mobile service. Bank of America started offering mobile check deposit in August and reports that they are now processing more than 100,000 checks daily from mobile phones.

While most banks offer mobile banking apps for free, our research shows that nearly 65% of depositors will pay for mobile deposit capture. With richer mobile banking features, it seems likely that fees for mobile banking could be higher.U.S.Bankcorp is one of the few institutions who gets fee revenue from mobile banking,charging 50 cents per smartphone deposit.

Some customers are still skeptical about the security of mobile banking. Infosys reports that 63% of non-users are skeptical about using their phones to make deposits. Others are worried about their accounts being hacked or what happens when they lose their phone. However, the majority seem eager to try these new mobile services. First Financial reports that within 24 hours of launching their new mobile bill payment service, 53% of their active mobile users had upgraded their mobile app

With the number of bank branches continuing to close, mobile banking could prove to be a real boon to banks. Now every customer can carry a virtual bank teller in his pocket or her purse, which means continued operational savings, reduced overhead, and the possibility of new fees.

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Mobile Banking | New Products | In The News | Fees | Blog

Weekly Term Accounts APY Spread and Index–February 11

by tom 11. February 2013 20:33

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices. 

APY Spread Index
The APY spread is a simplified form of a standard deviation.  It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

image

Premium Index  
Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

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Community Banks Learning to Adapt to Customers with Flexible Fees

by tom 6. February 2013 14:47

What do community banks know that the big banks are overlooking? According to a story this week in American Banker, community banks are starting to see a resurgence in revenue from service charges. That’s because the smaller banks have learned something that the large financial institutions are still struggling with; consumers want more control over their banking and they don’t want to pay service fees for things that they don’t see as a value-added service.

According to American Banker, a poll of 150 banks with assets of $35 billion or less shows that smaller banks increased their deposit fee revenue by 5% on average from a year ago. A large part of this revenue increase comes from experimentation with new revenue strategies and new product bundles; experiments that their larger competitors are not embracing.

For example, many large banks require a minimum balance to qualify for free checking. Smaller banks are waiving maintenance fees if customers sign on for other products, such as e-statements or a minimum number of debit card transactions. It also gives banks more opportunity for revenue. In the case of debit cards, for example, linking cards to accounts could lead to an uptick in revenue from interchange and overdraft income. At the same time, it gives consumers more sense of control since they get “conditionally free” checking.

Community banks also are bundling popular services, such as credit monitoring and identity theft protection – those same lifestyle banking services that our recent report shows consumers are willing to pay for. By embracing fees that consumers demand, the community banks have been able to avoid the backlash of new banking fees imposed by Bank of America and other large banks.

One other factor that has helped community banks is better communications with customers. Quoting Brad Tidwell, president and CEO of Citizens National Bank in Henderson, Texas:

"Historically, bankers have done a poor job showing customers the value of [services provided]. We do provide a value. Do you know of any other business that gives that away for free? We need to do a better job of justifying our value, but you can't be greedy about it."

Tidwell’s bank initiated a campaign to reach customers by mail and phone as part of a fee structure overhaul. The result was that customers were well-informed, and very few complained because the recognized the value they were receiving for their fees.

Weekly Term Accounts APY Spread and Index–February 4

by tom 4. February 2013 21:49

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index
The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

image

Premium Index
Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

image

Deposit Rates Vary by State, Depending on the Local Economy

by tom 1. February 2013 16:30

When it comes to deposit rates, all states are not created equal. According to a recent article in American Banker (and our own research), deposit rates in some states, such as Louisiana, Texas, and Virginia, deposit rates are higher because the local economy is healthier.

According to our own Executive Vice President Dan Geller (from his interview with American Banker):

Banks that are operating in those states should focus on lending "because it's a sign there is an increase in economic activity," Geller says. Those banks must also monitor and stay competitive with deposit pricing "to make sure they are attracting the right amount ofDan Geller Ph.D. liquidity."

In the struggle to keep funding costs low, banks have been largely unwilling to pay up for deposits. Nationally, the average deposit rate hit an historical low of 0.35% in December, Geller says.

Louisiana had the highest average deposit rate in December, at 0.51%, compared to just 0.24% in Ohio, Geller says.

Economic health seems to have a major influence on deposit pricing. Average unemployment was 5.2% in December in the five states — Louisiana, Texas, Iowa, Nebraska and Virginia — with the highest deposit pricing. States with the lowest deposit rates — Ohio, West Virginia, Indiana, Michigan and New Hampshire — had an average unemployment rate of 7.4%.

"There's a link between the highest interest rates paid on deposits and state unemployment," Geller says. "These rates are clearly a reflection of economic activity."

Of course, there are outliers. In New Hampshire, for example, the unemployment rate is low at 5.7%, but deposit rates remain low as well at an average of 0.27%.

Other factors, such as the types of industries prevalent in each state, the number of small businesses, and the level of household income play a role in deposit rates as well. Another factor is the number of competing banks in the state. For example, the five states with the highest deposit rates average about 32,000 individuals per bank (customers and their families). The states with the lowest deposit rates average 49,000 per bank; they just don’t have the competition to encourage higher rates.

According to Market Rates Insight research, rates on deposits have leveled off in recent months, although rates on long-term CDs continue to decline slightly. Be sure to check in with our Research Store to learn more about how to get the latest information about deposit rates in your competitive markets.

Weekly Term Accounts APY Spread and Index–January 28

by tom 28. January 2013 17:07

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index
The APY spread is a simplified form of a standard deviation.  It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

image

Premium Index  
Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

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