Businessman On Smartphone Using Banking App

During this year’s first quarter, online banks increased their total deposits while small and regional brick-and-mortar competitors were seeing depositors flee.

Deposits at U.S. banks fell the most on record, the Federal Deposit Insurance Corp. (FDIC) reported.

In contrast, deposits grew by 1 percent at online Ally Bank. Marcus, Goldman Sachs’ digital bank, also reported an increase but did not give numbers.

Citizens Bank, Truist [sic] Financial, and U.S. Bank all lost deposits. PacWest and Western Alliance, whose vulnerabilities were spotlighted following the mid-March collapse of Signature and Silicon Valley banks, were hit especially hard.

Even some megabanks saw deposits trickle away. Bank of America and Wells Fargo both reported losses.

Online banks pay higher interest on deposits because they have no cost for buildings housing branches and employees.

The annual cost of operating a single branch can run from $500,000 to as much as $1.3 million, Brian Riley at consulting firm Javelin Strategy & Research told the WSJ.

From 2019 through 2022 as the COVID War raged, banks closed about 6,100 branch offices, the FDIC said, the highest number of branch closures on record.

“The future of everything in banking is digital,” Richard Fairbank, Capital One’s CEO, told analysts in an April call. Capital One, which has fewer branches than most other major banks, grew deposits by 5 percent during the first quarter, in part by offering an average of 2.4 percent on savings.

However, U.S. banks still operate more than 71,000 branches, the FDIC reported. Some branches will remain as places where people can meet to discuss loan possibilities with a human, close loans, and handle other chores in which dealing person-to-person can be more satisfying.

Branches also are a traditional way for banks to attract new customers.

Much of the money leaving banks altogether is going into money market funds, as we reported in “Money Market Funds Continue to Rake In Record Cash” (30 May 2023).  

The funds, which typically invest in short-term government bonds and other highly-rated debt, provide a measure of safety that depositors are seeking in the wake of the banking crisis.

Money market funds also are paying dramatically higher interest rates than conventional banks. Savings accounts at the funds can pay 4 percent or more, while the returns on savings accounts at banks averaged 1 percent during the first three months of this year, according to The Wall Street Journal.

Many banks have lowered their profitability forecasts for this year, expecting to be forced to pay higher interest rates to compete. However, paying higher rates also narrows their margins, especially as deposits move to megabanks and money market funds.

TREND FORECAST: With deposits leaving, interest rates rising, and the need to keep more cash in reserve against bad loans, more banks will be sold to bigger competitors.

In the past, businesses and individuals could form personal relationships with local bankers who could offer help in individual circumstances.

The coming wave of bank consolidations will make banking even less personal than it has become. People will find themselves dealing even more with bots and call centers.

The result will be fewer loans to small businesses and individuals to help the economy remain strong while giving the “Bigs” all they need to get bigger.

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