Citi Credit Cards: A Foundation for their Virtual Bank

by Brian Riley 0

citi

Citi, a New York bank that pioneered virtual banking with their circa 1985 national expansion program was ahead of its time, but it appears consumers are now ready, willing and able.  Virtual banking fills a void for Citi, a company that has certainly seen retail banking ups and downs over the past few decades.

  • Citigroup Inc is facing a unique dilemma among the four largest U.S. banks: it is light on deposits from individuals, an important funding source that costs little and tends to stick around.

  • While big rivals grew deposits dramatically after the 2007-2009 financial crisis from their broad networks of branches, Citigroup backed out of all but six U.S. cities and closed one-third of its branches.

Payment cards will likely play a role in transacting, depositing and withdrawing.  The big question is “will consumers be willing to forgo the physical branch, even if they only drive by their local Chase or Bank of America building”.

  • Citigroup has 700 branches, compared with Bank of America’s 4,400 branches and JPMorgan’s 5,100.

  • Citigroup, the third-biggest U.S. bank by assets, has 4 percent of U.S. deposits, compared with about 11 percent at JPMorgan Chase & Co, Bank of America Corp and Wells Fargo & Co, according to S&P Global.

  • Its deposits also cost more, because a bigger portion comes from institutions and wealthy customers who demand higher rates. Citigroup paid 0.81 percent on U.S. interest-bearing accounts in 2017 compared with less than 0.30 percent at the other three big banks, according to their annual filings.

  • Citigroup has more than enough to fund its loans, but its earns only one-third as much revenue from U.S. consumer deposits as JPMorgan and Bank of America do, said Peter Nerby, a bank analyst at Moody’s Investors Service.

As Citi found in its early national expansion effort, it is easier for a remote bank to give out credit cards than it is to launch a virtual bank.  However, consumers have since conceded that the idea can work.  USAA is a perfect example, and so are others.

  • Citigroup is not the first bank to try to grow deposits without branches.

  • Companies including former General Motors subsidiary Ally Financial Inc, Discover Financial Services American Express Co and Goldman Sachs Group Inc have gone after deposits through mailings, call centers, and digital tools. Those efforts, some going back decades, have gathered about 5 percent of U.S. deposits, according to consulting firm Novantas.

So, nice to see Citi enter the market, though this will not be a cakewalk when you consider facing off against Chase Onlne and others.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

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