Big Banks Draw Digital Battle Lines

The big bank versus online lenders battle is heating up even more as the wait continues from the Fed to finalize the impending interest rate rise.

What the industry has seen, particularly as the alternative lending space has grown, is that big banks like JPMorgan Chase and Bank of America have felt threatened from the rapidly changing environment that’s paved way for online lenders to jump into the mix. While the big banks have been anticipating the Fed’s interest rates increase, that hasn’t changed the fact that it could place them in a tougher position to attract depositors.

The Fed last upped the interest rates in 2006, and in the nine years since, the way banks operate has changed drastically. That changing ecosystem has created a flurry of fear among big banking executives about what to expect when the rate change goes into effect.

“If rates finally go [up], it’s going to be the headline on every newspaper for two weeks running,” William Demchak, chairman and chief executive of PNC Financial Services, a Top 5 bank by deposits in nine states across the U.S., said at a recent New York conference, according to Financial Times. “It’s going to wake up consumers [to say], ‘I should be doing something about something. I don’t know what it is yet, but I’m going to figure it out.’”

But, on the contrary, having years of low rates have cut into the business model of those big banks, which has led to layoffs and branch shutdowns. Once rates pick up, the margins that banks can earn can help them alter their lending structure in a way to possibly better compete in the market.

The benefit banks have in the deposit sector is that, according to an unnamed U.S. Bank executive who was quoted by FT, “there is real value in having a safe, convenient, nationwide checking system.” That’s something the Internet lenders can’t offer on the same level, according to that source.

The changes in the rate cycle, of course, could shift the impact on depositors, leaving the top banks vying to compete with the top Internet banks even more. According to Bill Carcache, an analyst at Nomura, the Top 8 Internet banks have brought their total deposits up to $247 billion in this year’s Q2, which is more than double what it was in 2009’s first quarter of $102 billion. That gives them a 2.1 percent share in the total U.S. market.