Academic journal article ABA Banking Journal

Online Banks Follow Customers into Stocks and Bonds

Academic journal article ABA Banking Journal

Online Banks Follow Customers into Stocks and Bonds

Article excerpt

Time was, not so long ago, that interest-free deposits were a bank's biggest and most dependable source of loanable funds. Add the right rates, and you got the right spread and the right profits. This tidy arrangement required the collaboration of banks' customers: they had to agree that the best place for their financial assets was in bank deposits. And they did.

A recent study by the Federal Reserve Bank of San Francisco noted that while deposits were the largest single category (at 39%) of household financial assets in 1978, they had slipped to a slim 17% by 1996. Those numbers draw into focus the degree to which households have moved their money out of deposits and into stocks and bonds, which by 1996 had become the most-favored category of financial asset, accounting for-42% of the total. Elizabeth Laderman, who did the study, expects it to continue.

Part of the explanation lies in demographics, but Laderman doesn't think that demographics accounts for all of the shift. Three other trends are having a bigger effect, she says:

1. The demand for deposits is weakening. Through securitization, banks are moving more of their loan assets off their balance sheets. And they are finding that fee income can be more profitable than spread income.

2. Individual preferences are changing. Older people are getting more sophisticated -- both financially and technically. Perhaps most significant is the trend to self-service investing.

3. Improvements in computer technologies and telecommunications are bringing down the transaction costs of investing.

Who will be the winners?

Responding to these challenges, today's home-banking services are as likely to include online brokerage as account balances and bill paying.

The "holy grail" of online financial services is the net-worth statement, which consolidates all of a customer's financial assets and liabilities. But this service has been slow in coming. For one thing, coordinating banking accounts with third-party financial services, arriving in various formats via various media, is a daunting technical challenge. …

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