from BAI OnLine Banking Strategies SEPTEMBER 13, 2006
The fight for deposits is being waged in earnest online. Some online bank accounts are promising annual interest as much as 5% or more—often four or five times the rate that a regular savings account might offer—for customers who are willing to open (and often manage) their account over the Internet.
The banks include Washington Mutual Inc., ING Direct, HSBCDirect, EmigrantDirect.com, and most recently, Citigroup Inc.
"The growth has been vastly better than we expected," says Stephen Cohen, a spokesman for HSBCDirect, which gained about 250,000 customers and $5 billion in deposits since launching its account in November 2005. The account currently pays 5.05% APY.
Washington Mutual also began piloting its account in November 2005, according to bank spokeswoman Mary Kelley. She says the Seattle-based thrift is marketing the account in 39 states, primarily those in which Washington Mutual doesn't already have a major presence.
In late July, WaMu began offering an online checking account that can be bundled with the savings, offering more flexibility to customers and giving them a bit of a rate boost. (Customers who choose to open an online checking with a savings account currently earn 5% annually on their online deposits, compared to 4.25% with just the savings account.)
At the bank's Investor Day presentation on September 7, WaMu CEO Kerry Killinger noted that the bank has been adding 700 net new online checking accounts per day.
According to The Wall Street Journal, Citicorp has attracted $6 billion to its online savings account since offering it in March. In a May conference call, CEO Charles Prince announced Citi had drawn more than $3 billion in deposits to its online savings account in less than two months-two-thirds of which was new to the bank, according to press reports.
Online savings accounts can be traced back to 2000, when ING Direct offered its Orange Savings Account (currently offering a 4.40% annual rate) as a way for the Dutch-owned company to break into the U.S. banking market. The online units of Emigrant Savings Bank of New York and the U.K.'s HSBC Holdings PLC followed suit in 2005.
Jim Bruene, editor of the Online Banking Report, estimates there are as many as 8 million online savings accounts. He says that while many banks had an eye on ING Direct's product, the success of Emigrant attracted the most attention.
"Here comes this [small] bank out of New York City and in 2005 they double their deposit base from $6 billion to $12 billion in one year just on the strength of their online savings," Bruene says. The success came at a price, he says, estimating that Emigrant may have spent at least $1 million per month just in online advertising.
Ray Montague, manager of deposit product research for Informa Research Services of Calabasas, Calif., says online account providers can profit because they can use new deposits to make loans and other investments that, in turn, produce a higher yield. Montague adds that the most successful banks were early to market with these accounts and may lose some of those deposits when lower interest rates make them less attractive.
Bruene warns that banks may be simply transferring some funds from other, lower-yielding accounts. "They can't keep from cannibalizing their deposits to some extent," he says. Such concerns may keep some banks from jumping into the online savings market too aggressively, he adds.
