Maria Irene

The banking industry is witnessing a tectonic shift. A record-breaking reduction in bank deposits, the rise of tech giants into the banking sector, and a surge in interest rates by the Federal Reserve (Fed) are together creating a new financial landscape. The era of “free” money for large US banks, it seems, is drawing to a close.

Over the past year, a staggering $1 trillion has been withdrawn from banks, while total deposits have declined by $500 billion in the last two months alone – the biggest two-month drop in history. What has led to this unprecedented scenario?

The crux of the issue lies in the interest rates paid on deposits. Major banks such as Wells Fargo, Citibank, Chase, Bank of America, and US Bank are offering paltry interest rates, ranging from 0.01% to 0.15%. On the flip side, alternatives to bank deposits such as Certificates of Deposit (CDs) and Money Market Funds are offering a whopping 5.0% and 4.5% respectively, with Treasury Bonds also looking attractive at 3.0%.

Depositors have finally woken up to this reality, pushing the financial industry to a pivotal crossroads. 2022 marked the first annual decrease in US bank deposits since 1948, but it also saw JP Morgan’s net interest income increase by 28%, to $67 billion. This stark contrast is a product of banks paying negligible interest on deposits and then loaning them out for a higher return, effectively making “free” money.

However, the zero-interest-rate era is waning. As the Fed raises rates, attention has been shifting towards more lucrative financial instruments. The market cap of all US regional bank stocks has dropped by a staggering 80%, to $100 billion, further highlighting the challenges facing traditional banking institutions.

Technology giants are also stepping into the arena, threatening to disrupt the banking industry further. Apple’s recent foray into the banking space exemplifies this change. The tech behemoth is offering a savings account with a 4.2% interest rate to depositors. This move, coupled with Apple’s unrivaled user interface and ecosystem integration, is set to transform banking as we know it.

The ongoing regional bank crisis might serve as a distraction, but the larger picture is clear: banks must raise interest rates on deposits, or capital will continue to flow out. If JP Morgan were to match Apple’s interest rate, their interest expense would rise to approximately $100 billion per year, a ten-fold increase.

The current disruption in the banking sector is opening up new avenues for innovation. With Google search interest for “Money Market Funds” at its highest since the 2008 financial crisis and a challenging banking environment, there has never been a better time for industry disruptors like Elon Musk and Twitter to make their entry into the payments space.

The future of global banking is on the brink of a significant transformation. Banks must adjust to the rising interest rates and fierce competition from tech giants, or risk being left behind. As the saying goes, “Every day counts.” We are standing at the dawn of a new banking paradigm where the balance of power is shifting. The next few years promise to be interesting, to say the least.


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