Can deposit costs be a strong competitive advantage?
Banking is a financial intermediation business. Banks get funds from their depositors. Banks can also borrow by issuing bonds in the capital market. They use the deposits and borrowed funds to lend money to various customers for a variety of credit needs.
The cost of deposits is an important cost for the bank. If a bank is able to keep its cost of deposits low, it will have a competitive advantage.
Wells Fargo (WFC) focuses on keeping the cost of deposits low. It has the lowest cost of deposits among its peers—despite having a very high deposit base. There are two main types of deposits:
- interest-bearing deposits
- demand deposits
A bank has to pay interest on interest-bearing deposits. This interest carries a low cost for Wells Fargo. In contrast, demand deposits are essentially free. They don’t cost Wells Fargo anything.
Wells Fargo is number one in low cost deposits
If we analyzed funding sources—deposits and debt—for its peers, we would find that 27% of Wells Fargo’s funding comes from demand deposits. Demand deposits account for 21% and 18% of funding for Bank of America (BAC) and JP Morgan (JPM), respectively. For other peers—like Citibank (C) and many other banks in an exchange-traded fund (or ETF) like the Financial Select Sector SPDR (XLF)—this number is even lower.
Demand deposits are one of the most important competitive advantages for Wells Fargo.
Visit the Market Realist Investment Banking page to learn more.