Online banks are grabbing a growing share of U.S. deposits from traditional banks, even as interest rates rise, according to a new report from Fitch Ratings on deposits in the digital age.
U.S. retail deposit growth for larger online banks has outpaced deposit growth at branch-based banks, since the U.S. Federal Reserve began raising interest rates in December 2015.
Traditional bank deposits tend to be stickier than online deposits, the report say, but given how easy it is to move money online, it says, however “the ease with which customers can move money between online accounts increases the likelihood that customers will pursue the highest rates available, causing greater risk of decay in traditional banks’ deposit balances.”
While the market share gain for online banks is “contrary to expectations,” according to the report, it also observes that the gap between interest rates offered by online banks and traditional banks has widened in the past couple of years.
Longer-term, online banks may also benefit more from generational shifts, the report says.
“Millennials’ familiarity and comfort with using the internet and mobile phone apps may result in a greater willingness to transfer funds held at traditional banks to online banks, particularly if the pricing gap remains wide.”