JPMorgan Chase is seeing slowing deposit growth

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JPMorgan Chase, the US' largest bank by assets, has seen deposit growth slow as its customers withdraw their money and instead park it with competing banks that offer higher interest rates, according to a bank executive cited by Reuters.

Although customers are withdrawing parts of their deposits in search of higher yields, they continue to keep JPMorgan Chase as their main banking relationship, per the bank's copresident and chief operating officer Gordon Smith.

Here's what it means: Fintechs and challengers have been quick to seize on US incumbents' reticence to pay higher interest rates — and it's costing traditional banks customers.

The majority of big banks in the US continue to offer anemic interest rates. Over the past five years, there's been a steady increase in Federal Reserve interest rates, currently standing between 2.25% and 2.5%, per Reuters. Yet, established players continue to pay chintzy rates on savings deposits: In fact, commercial banks, which hold around $8 trillion in deposits, are paying an average of just 0.10% interest, perQuartz citing Bankrate data. In an effort to capitalize on incumbents' unwillingness to pay more for deposits, a mishmash of online-only lenders — including Goldman's digital-only offshoot Marcus, fintechs like SoFi and Wealthfront, as well as neobanks like Simple — have launched saving products that pay between 2% and 2.45% interest.

And challengers are winning over customers as higher-paying alternatives. Even though these newcomers have been pushing interest rates for several years, consumer inertia has enabled entrenched players like JPMorgan Chase to continue to pay meager rates without much harm. However, US consumers' reticence is beginning to subside: During its Q4 2018 earnings report, Goldman reported that US deposits for Marcus reached $28 billion — an impressive figure considering Marcus has only been available in the US since 2016. We anticipate more consumers will look for better-paying alternatives, as upstarts and challenger brands like Marcus become more well known. Further, European fintechs — like Raisin, which operates a savings marketplace — are also set to enter the fray in the US, which will likely heat up the competitive pressure on incumbents even more.

The bigger picture: Incumbents have been investing heavily in digital transformation to fight back against these insurgents — but competitive pricing will still be key.

Established firms like JPMorgan Chase have started spending big to beat these upstarts at their own game. JPMorgan Chase, for instance, is committing a whopping $11.4 billion to technology in 2019 alone, while in June last year it rolled out its stand-alone digital offshoot, Finn, in an attempt to fight back against fintechs on their own turf.

These efforts should help JPMorgan Chase and other incumbents catch up to fintechs when it comes to digital capabilities. But offering banking services with an improved digital experience for customers is not going to be sufficient. Digital transformation also enables incumbents to reduce their costs and improve operating efficiency: 88% of IT professionals at US banks with assets of over $100 billion cite this as a top benefit of technology spend, per UBS Evidence Lab data seen by Business Insider Intelligence.

Passing on the savings that digital transformation generates to customers, like by paying more competitive interest rates, will also be key in incumbents' efforts to stave off competition. Otherwise, as illustrated by Smith's comments, consumers will find another company that will.

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