Community Banks: Dethroned by Decaffeinated Deposits?

In an article titled Community bankers fear big-bank cafes will eat their lunch (pw required), American Banker reported:

"[Capital One's] cafes represent another threat to community banks as larger institutions rely more on their deep pockets and technological know-how to take market share. Since they are not branches, the storefronts are easier to open and less expensive to operate. And they are popping up at a time when interest rates are rising, making it more important for banks of all sizes to bring in low-cost funding."

The article went on to say, however, that over the past four years, deposits at Capital One 360, the firm's digital bank, grew by roughly 27%, while deposits at the institution's other branches increased by just 8.6%.

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American Banker also concluded that, "Several factors have worked in Capital One’s favor. The cafes fall short of the definition of a branch, defined as a place where deposits are received, checks are cashed and money is lent, according to the Office of the Comptroller of the Currency."

If community bankers fear big bank cafes, they're blind to the real threats. It's a fact that community banks are falling behind on deposit growth. According to the FDIC, deposits at FIs with less than $10 billion in assets declined by roughly 1% in the year ending 9/30/2017, while $10b+ banks grew deposits by 4.5%,

Attributing the difference--even partially--to big bank cafes is wrong. Even Cap One's own numbers--27% deposit growth at the digital bank, 8.6% at the other branches--help support this conclusion.

Broadly speaking, there are two explanations for why community bank deposit growth isn't keeping pace.

Deposit Displacement

The less important of the two reasons--but still important for the long run--is deposit displacement. Here are four examples of how deposits are being displaced, or redirected away from the traditional banking system:

  • Health savings accounts. Devenir Research projects that deposits in health savings accounts will approach $45 billion by the end of 2018, up from less than $14 billion in 2012. Where’s that money coming from? It’s siphoned away from consumers’ primary checking accounts and into HSA accounts that are probably not held at the same bank as the primary checking account.
  • P2P payments. A personal source told me that Venmo has $2.2 billion of funds sitting in users’ accounts—money that isn’t sitting in banks’ accounts. Displacement through P2P payments will only increase, as Apple has announced that its P2P payment tool will park users’ funds in an Apple prepaid debit card, and not in the users’ checking accounts.
  • Retailer mobile apps. In 2016, The Wall Street Journal reported that Starbucks had $1.2 billion in deposits on customers’ loyalty cards. As other retailers copy Starbucks’ approach to mobile apps, deposits held in retailers’ mobile apps will continue to grow.
  • Robo-advisor tools. Consulting firm AT Kearney estimates that assets held in robo-advisor tools will reach $2.2 trillion by 2020. While this might point to a business opportunity for banks, it’s also a threat. Kearney believes half of those assets will come from currently non-invested assets—in other words, bank deposits.

The Millennial Effect

Over the long-term, deposit displacement is a trend that banks of all sizes will have to contend with. But the more important of the two reasons why community bank deposit growth isn't keeping up is demographics: Community banks have done a horrible job over the past few years of attracting Millennials as checking account customers. I'm not even sure they're trying to.

Nearly six in 10 Millennials have their primary checking account with a megabank, 17% have it with a large regional bank, 13% are with a credit union, and just 6% are with community banks.

It would be a mistake to think these "young" Millennials don't have deposits, by the way.

According to a Bank of America study, 47% of Millennials have at least $15,000 in savings, up from 33% in 2015. In addition, 16% have at least $100,000 stashed away, twice as many that had that much saved two years earlier. Overall, 63% said they're saving--one percentage point less than the percentage of Gen Xers who save.

How did mega- and large regional banks capture three-quarters of the Millennial market? Not from cafes.

What's a Branch, Anyway?

One more thing about the American Banker article worth commenting on here: The definition of a branch. According to the article:

"The cafes fall short of the definition of a branch, defined as a place where deposits are received, checks are cashed and money is lent, according to the Office of the Comptroller of the Currency. Prospects can open accounts at Capital One Cafés, but the only way they can deposit cash into their accounts is through the ATMs."

I've never asked consumers about this in a survey, but I bet that if I asked them "If a physical location has a bank's name on the door, and you can go in and talk about banking with the employees that work there, would you consider that location a bank branch?" 99.9% of respondents would say "Yes."

The 0.1% who'd say "No" are the ~4,000 employees of the Office of the Comptroller of the Currency.

And anyway, my pundit and futurist friends keep telling me cash is dead.

Ron Shevlin
Director of Research
Cornerstone Advisors