In an attempt to compete with online-only institutions and nonbank competitors, some traditional banks have begun to offer high-rate certificates of deposit (CDs) through the Internet to attract customers, according to Dan Schatt, senior analyst for Celent Communications (Boston). "If you're not tied to geography, doing this is something that enables local and regional banks to compete with the national [institutions]," Schatt says.
One such bank is Cleveland-based Ohio Savings Bank ($14 billion in assets), which started selling high-rate CDs online through its direct bank, AmTrust Direct, at the beginning of 2006. According to Harlan Miller, the bank's SVP, Ohio Savings typically offers among the highest rates for CDs in its market territory and wanted to expand its reach. "We have been among the leaders in CD rates in the branch, so doing it online isn't rocket science," he says. "We have physical branches in only three states -- there are 45 more states in the contiguous U.S."
For most institutions, offering high-rate CDs only makes sense if they can cross-sell checking accounts, savings accounts or other products as a requirement for the customer to get the best CD rates, notes Celent's Schatt. Customers opting for only the CD product would receive much lower rates.
Ohio Savings' Miller explains, however, that one of the reasons Ohio Savings has been so aggressive with its CD rates is to obtain low-cost funds for its wholesale mortgage division, which makes loans across the country. The bank also is using this opportunity to attract younger customers, he adds, who tend to shop for their financial products over the Internet, rather than through physical branches, he adds.
When promoting the online offering to potential customers, AmTrust Direct highlights that the CDs can be applied for and confirmed in as little as 10 minutes. The online CDs pay a higher rate than those offered at Ohio Savings' branch locations, though the exact difference depends on local market factors (i.e., rates offered by other banks), according to Miller. "We wanted to be aggressive online due to the lower cost of the online channel," Miller says. "We've been very pleased with the performance so far." Citing competitive reasons, Miller declines to be more specific about the success of the online CDs.
No Special Treatment
Yet not all financial institutions see a compelling reason to offer online customers a better rate than branch customers. For example, Cleveland-based National City Bank ($130 billion in assets), a direct competitor to Ohio Savings, enables customers to apply for CDs online, but they must come into a branch to complete the transaction. And they get the same rate as someone who applies at a branch. "We have a very competitively priced CD," says David Bowen, National City's EVP. "We don't see any reason to reward someone differently whether they've started the process online or in the branch."
But Celent's Schatt and Ohio Savings' Miller both agree that the online CD market will expand as other banks seek to maintain their hold on CD funds or, as in this case, expand their reach. Because of this, says Schatt, getting out with such a product early gives Ohio Savings/AmTrust Direct a quick advantage. "The first movers tend to get the best bang for the buck," he says.
But that advantage could be short-lived, Ohio Savings' Miller acknowledges. "The Internet is here to stay," he says. [Competition] is going to grow -- other people will probably be in the space." And in order to respond to that competition, the bank's online offerings are always a work in progress, Miller adds. "We've made the site a little more user-friendly as we've gone along," he says. "We want to make it a real positive experience for our customers." *