‘Price matters’: new online bank hopes to attract cost-conscious customers
The flat yield curve everyone in finance is talking about these days is a gift to Canada’s newest online bank.
Motusbank, brought to you by Ontario-based Meridian Credit Union, is a virtual bank that charges nothing for chequing accounts, pays a good rate on savings, and offers a unique mortgage deal: all terms one to one. five years have the same interest rate.
All of these characteristics have to do with the flat yield curve, a term that refers to an unusual phenomenon where short-term interest rates are roughly the same as long-term rates. Usually there is a reward in the form of higher rates for buying a longer term bond or term deposit.
This eccentric rate environment can be a signal of a coming recession, especially when the yield curve reverses as it did at the end of last month (inverted means short-term interest rates are higher. higher than long-term rates). For publicly traded banks, this presents a challenge to maintain upward momentum on earnings.
Here’s the problem: Banks are used to paying depositors a modest rate and then lending that money at a higher rate. A flat or inverted yield curve makes this more difficult because savings account rates are guided by short-term interest rates and loans are made at long-term rates.
The other day, Royal Bank of Canada advised its customers that the monthly fee for its RBC Signature No Limit bank account will increase by $ 1 on June 1 to $ 15.95. A few other banks are already at this price point – for now. If their profit margins are squeezed, banks will look for ways to increase fees and prices on everything, including master checking accounts which now cost close to $ 16 per month in some cases.
“In maybe 18 to 24 months we could see these go down to $ 20,” said Bill Maurin, president and CEO of Motusbank and Meridian.
Motusbank’s fees for checking accounts are zero, and this includes unlimited debits, including wire transfers, and an interest rate of 0.5 percent (competitive for a checking account). On savings, the bank will pay a rate of 2.25% on regular accounts and 2.5% on tax-free savings accounts.
As a division of a member-owned credit union, Motusbank is not under the same pressure as shareholder-owned banks to keep revenues, profits and dividends on the rise. This is an important competitive advantage in attracting cost-conscious customers.
“Based on our research, price was the # 1 consideration when we asked people what was important to them,” said Maurin. “The harsh reality of financial services is that price matters. “
Motusbank sees itself as a branchless online bank offering everything but credit cards and investments (at least for now) through a website, mobile app and call center. Its competitors are the big banks as well as the online companies Tangerine (owned by the Bank of Nova Scotia) and Simplii Financial (owned by the Canadian Imperial Bank of Commerce). Other competitors include Alterna Bank, another online bank owned by a credit union, and EQ Bank, which specializes in savings accounts and guaranteed investment certificates.
These players have offered free checks and relatively high savings rates for years, but they have yet to significantly reduce the market share of the big banks. Mr Maurin said Motusbank has the advantage of launching at a time when Canadians are more comfortable than they have ever been with digital banking services by phone or computer (Motusbank is part of the Canada Deposit Insurance Corporation).
A flat or inverted yield curve also helps Motusbank, and not just to put upward pressure on competitor fees. It also supports a unique introductory mortgage offer where a single rate of 3.09% applies to all one to five year mortgages, variable and fixed. Normally, there is a rate premium to lock in your mortgage over the longer term.
“The rate itself is a special launch,” Mr. Maurin said. “It’s designed to make a bit of noise, without being ridiculous on the price. The fact that all prices are the same is something that we are likely to stick with for a while. “
Coast Capital Savings, a large BC credit union, announced a nationwide expansion that would add another competitor to the big banks. We could see even more low-cost online banks, but only if customers respond.
Attracting customers is where Mr. Maurin’s spirit is at the moment. “With something like that, you always face the ‘if you build it, will they come?’ risk.”
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