Banking on the web
Companies struggle with an onslaught of deposits from Internet accounts
For most of its history, Emigrant Savings Bank kept things simple. It was a local bank serving local customers, seldom reaching much past New York City's borders to grab new deposits. But last October, when the family-owned institution took over an old bank building in Ossining, N.Y., the idea wasn't to turn the town's art-deco centerpiece into another traditional branch. Instead, most of the employees and much of the new real estate would be used to service tens of thousands of new clients who had never set foot in any of Emigrant's 36 branches but were already plowing millions of dollars in deposits into the bank.
Attracted by Emigrant's offer of some of the highest interest rates in the country, these customers--about 260,000 by last count--were pumping money into new savings accounts that could only be accessed over the Internet. And this was a flood, with about $7 billion coming in since the bank started offering the accounts in January 2005.
Cash flow. That money and those customers needed a home, says Emigrant's chairman, Howard Milstein, adding that in just a year and a half EmigrantDirect had taken in more deposits than its brick-and-mortar counterpart had accumulated in 155 years. "This is the 'next idea' for banking," he says.
Internet banks such as NetBank have been around for more than a decade, but brick-and-mortar banks in search of deposits have increasingly joined the fray. Nearly all banks have greatly improved their online services. Many have pushed to increase their number of branches as well. But with more and more customers searching out higher rates of return for their parked cash, banks that might have shunned the idea of Internet-only savings accounts a few years ago are now lining up to offer them.
Capital One, HSBC, Countrywide Financial, Washington Mutual, and Citibank are among the big names now offering high-yield savings accounts for Internet clients, moves that have quickly bolstered their deposits--sometimes at the cost of more established players. ING Direct, the online subsidiary of the Dutch financial conglomerate ING and the 26th-largest bank in the country, is one now feeling the heat. Its share of new customer applications dropped to 33 percent from 63 percent during 2005, according to an April survey by the research firm comScore Networks.
The heightened competition has made consumers more aware of high-yield offerings, and so they have been pouring money into such assets. Richard Brown, the chief economist of the Federal Deposit Insurance Corp., notes that the amount of money being put in interest-bearing accounts has been rising rapidly, registering a 19.6 percent year-over-year growth rate as of March 31, nearly double that experienced by all deposits over the same time frame. And online rates have been among the most attractive, with some Internet-only savings accounts promising rates above 5 percent on deposits, compared with less than 1 percent at a brick-and-mortar bank.
Emigrant's Milstein says that he would have had to open 350 branches to bring in the amount of money Emigrant accumulated through its online operation. "That's the power of the Internet," he says. "It is a much more powerful way of raising deposits than traditional banking."
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