Friday, December 1, 2006

The Decline and Fall of Internet-only Banks

Many people know that I have been following approaching demise of NetBank (Nasdaq: NTBK) on this blog. The story began when I decided that I was going to close my NetBank money market account because it was underperforming other money market accounts, and I was tired of the long delays it took to make deposits. I hinted that NetBank would no longer be able to pay competitive interest rates due to some significant losses that they suffered earlier this year. There were questions about where I was getting my information from, so I wrote another post explaining that I got most of my data about NetBank's deteriorating financials from NTBK press releases and the NetBank website. Only one day after I posted that article, NetBank publicly admitted that the company was both unprofitable and unstable. As a result, NetBank ousted their CEO that same week.

At this point, I have gotten all of my money back from NetBank, and redeployed it to some safer institutions. I wanted to point out that the NetBank website offers existing customers a 2.99% APY interest rate for their Standard Money Market. However, I can get a 5.oo% APY at both Citibank and Washington Mutual (WaMu), and they have real branches and ATMs. Note: Please do not misconstrue that I am an advocate for either for Citibank or WaMu here. I am only pointing out the facts about their higher interest rates. The truth is that I've had other issues with both Citibank and Washington Mutual in the past. I have a saying that "There are no good banks, only some that are less bad."

Anyway, I've digressed. On the same web page that notes NetBank's 2.99% APY money market, there is a statement that touts "Earn over three times the national average." However, according to the average MMA is said to pay 3.41% APY.

Am I reading something wrong? It seems like NetBank's rate is actually below the national average. I don't know what y'all folks in Georgia call that, but here in California I call that a bald-faced lie!

At the same site, this is their assessment of Netbank:

We have come to believe that, as of June 30, 2006, [NetBank] exhibited a significantly below average condition, characterized by lower then [sic] normal overall, sustainable profitability, questionable asset quality, below standard capitalization, and lower than normal liquidity.

NetBank could say that other online banks are making similarly outrageous claims. And they wouldn't be wrong. The Orange Savings Account offered by ING Direct pays only 4.50% APY (recently raised from 4.40% APY). At the same time, they claim that the average bank's money market rate is only 0.84% APY. I don't know how they can keep a straight face, when the website shows an average rate much greater than 0.84% APY. Somebody answer one question for me: why do online banks feel it is necessary to outwardly lie in order to attract new customers?

The claim to fame of NetBank, ING, and other internet-only banks is that they save money by doing business online and not incurring the expenses associated with maintaining branch locations. Unfortunately, they are starting to be outmaneuvered by their bricks-and-mortar competitors. The historically high interest rates that online banks used to offer on their deposit accounts was the only compelling reason for their competitive advantage. You can mark my words now: if they fail to compete, this will be the beginning of the end for internet-only banks.



mOOm said...

The online savings accounts compare themselves to the rates on "savings accounts". These are typically very low. And so the claims are true.

HSBC Direct though beats almost all money markets too.

pfstock said...

I will assume that the online banks are comparing their money market accounts to savings accounts. Then this is an unfair comparison. Money market accounts are distinguished from regular savings in that they restrict the number of transactions per month. In NetBank's case, this is 6 transactions, no more than 3 of which can be by check. Exceeding this limit will cause extra fees to be charged. Real savings accounts don't have this restriction.