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Legacy, digital banks risk overpaying for deposits as rate battle heats up

The field of banks competing for deposits with high-yield savings products is becoming increasingly crowded.

But those depositories, from the incumbent digital players to the banks with traditional branch networks now entering the fray, may need to start questioning whether those customers are worth the cost, experts say.

For years, a handful of digital banks have offered accounts that attracted consumers through high yields and digital convenience. Without branch networks, those companies, including Ally Financial Inc.Synchrony Financialand, more recently, Goldman Sachs Group Inc.‘s Marcus, were better able to shoulder the cost of offering high rates.

Now, some legacy banks are launching similar account products to build more traditional deposit funding. The efforts might help them keep up with heightened competition and access to new markets, but the retail funding is also prized because it helps banks comply with liquidity rules that apply to the nation’s largest institutions.

Outside of the savings account picture, legacy national banks have a “fairly strong advantage” over the digital incumbents because many customers want a checking product and local branch, said Henry Israel, director of the financial analytics firm Novantas. About 50% of deposit decisions are still related to branch network and density, and banks with big branch networks are getting the organic deposit growth that does not rely on increasing rates, he said.

“But I don’t think it’s going to be this landslide where everything starts floating over to the online incumbents or challengers,” Israel said in an interview. “Over the next five years, I’m still coming out on the side of the network banks.”

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