Source: Wall Street News
Americans are tired of the 0.01% yield and are turning to higher-yield investments. Wall Street banks were forced to raise deposit interest rates to stop loss of deposits, which also led to a decline in their net interest income and hit banking stock prices hard. However, the Fed's interest rate cut is far from over, providing customers with more high-yield investment options. The rise of fintech companies and money market funds has also added “trauma” to the US banking industry.
For every $100 you deposit, you can earn interest of $0.1/year, would you like it?
However, this is not a dream; this is the daily operation of J.P. Morgan Chase Bank.
According to information, if users deposit $5 or $500,000 into J.P. Morgan Chase Bank's Sapphire, Premier Plus, or Private Client checking accounts, they get an annual interest rate of just 0.01%.
The same goes for savings accounts, where no matter how much money you deposit, the interest you earn is still very low. Even customers with a “relational interest rate” can only get a slightly better interest rate — 0.02%.
In this case, customer deposits are mainly due to safety and liquidity considerations rather than to obtain high interest income.
Americans, however, are slowly getting tired of the 0.01% yield, and this low interest rate pushes them to look for other higher-yield investment options.
In order to attract and retain deposits, Wall Street banks had to raise deposit interest rates and pay more interest. This pressure has offset the benefits they have received from rising interest rates on loans, leading to a decline in their main source of income, net interest income.
J.P. Morgan Chase's net interest income fell, and the stock price plummeted 6%
The US banking sector initially benefited from the rapid pace of interest rate hikes because they could issue loans with higher interest rates, thereby increasing loan revenue. At the same time, they have been slow to raise interest on depositors, leading to a surge in net interest income last year.
However, on April 13, J.P. Morgan reported that compared to the fourth quarter of 2023, its net interest income (the difference between loan earnings and interest paid to deposits) declined for the first quarter, the first month-on-month decline in 11 consecutive quarters. This news caused J.P. Morgan's stock price to plummet 6% on the same day, the biggest one-day decline since June 2020.
Also, Wells Fargo's net interest income fell short of expectations. Both banks said that the increased pressure to raise interest rates on deposits has offset the benefits brought by rising interest rates on loans.
Customers abandon “low interest rate accounts” and choose larger deposit statements with higher interest rates
Faced with meager interest, one of Americans' options is to abandon low-interest accounts and opt for larger deposit accounts with higher interest rates.
According to Federal Reserve data, by the end of 2023, the amount of large term deposits of 100,000 US dollars or more held by US commercial banks reached 2.26 trillion US dollars, an increase of 615 billion US dollars over the same period last year, the biggest annual increase since records began.
Also, Wells Fargo said last week that its interest-free deposits are down 18% from a year ago, while interest-bearing deposits have increased.
These changing trends highlight consumer preferences for higher-interest deposit products, as large deposit certificates (CDs) usually offer higher interest rates than regular checking or savings accounts because they have a lock-up period.
Jeremy Barnum, chief financial officer at J.P. Morgan Chase, said during the Q1 earnings call: “The transfer of deposits from checking and savings accounts to large deposit slips is a “major trend.” In the context of a policy interest rate of about 5%, if interest rates on checking and savings accounts are close to zero, investors have to move to larger deposit statements with higher yields in order to obtain higher returns.”
He added that the company is committed to adapting its services to attract and retain those seeking higher returns. Currently, banks are forced to raise deposit interest rates in order to attract and retain deposits.
Customers are turning to higher-yielding monetary funds, stock markets, and other financial products
Another option for Americans is to avoid banks altogether and choose other investment channels, such as money market funds, stock markets, or other financial products, to seek higher returns.
Money market fund capital inflows surged more than $1 trillion in 2023, the biggest increase in history, according to the Association of Investment Companies. These funds offer a yield of around 5% and don't have the lock-up clauses found in time deposits, making them an increasingly popular deposit alternative.
As consumers easily transfer their deposits to financial products that offer higher interest rates via smartphones, banks are forced to compete on interest rates. While this pressure is less for large banks like J.P. Morgan Chase and Bank of America, it may be stressful for regional lenders.
Fintech companies also pose a threat to banks by offering savings interest rates more than 10 times higher than the national average to attract consumer deposits. LendingClub Corp. and Betterment offer high-yield savings accounts of up to 5%, while SoFi Technologies Inc.'s interest rate is around 4.6%.
Moreover, the Federal Reserve's interest rate policy is driving this trend. As the Federal Reserve keeps interest rates high for longer, savers will have more time to find higher-yield investment options. With two-year Treasury yields above 5% this week, banks may have to raise deposit interest rates again.
edit/lambor