High rates still drew consumer deposits into E*Trade despite bankruptcy chances

In November 2007, Prashant Bhatia, a Citi Investment Research Analyst, wrote that E*Trade had a 15% chance of bankruptcy due to the effects of the decline in the subprime market. E*Trade’s shareholders clearly took this statement to heart as the company’s share price declined 59% in one day. Just as interesting however, is the question of whether E*Trade’s online depositors shared those fears.

While not as well known as its brokerage business, E*Trade also has a significant deposits business with nearly $30 billion in consumer deposits. At Compete, we utilized our panel of two million users to investigate what impact, if any, this analyst report had on the behavior of E*Trade’s online high-yield savings (HYSA) shoppers. If E*Trade’s online consumers reacted in a similar manner as its shareholders, we would expect to see a comparable drop in new submitted online account applications after the report was released.

Approximately one month before the Citi analyst report was released, E*Trade reduced its rate on high-yield savings from 5.05% to 4.70% APY. However, shortly after the report E*Trade increased its rate back at 5.05% APY. This rate increase may have been an attempt by E-Trade to stem consumers’ fears about its financial condition. Did this rate increase successfully offset the negative news about E*Trade from the Citi analyst report?

*Competitive set includes high yield savings products of E*Trade, HSBC Direct, ING Direct, Emigrant Direct, CapitalOne, & Countrywide

The chart above illustrates E*Trade’s weekly share of submitted online high-yield savings applications among its key competitors. The vertical dashed lines correspond to the specific events mentioned above: the decreasing of E*Trade’s high-yield rate, the publishing of the analyst report, and E*Trade moving its rate back up again. When E*Trade lowered its rate on October 12th, it experienced an immediate drop in account openings and a loss of 6 share points from 19% to 13%. E*Trade’s share of applications remained flat at 12% for the next four weeks. On the week of November 11th, when the analyst report about bankruptcy was published, E*Trade’s share of online submitted high-yield savings applications instantly dropped another 4 points. Shortly thereafter, E*Trade raised its interest rate back to competitive levels and within a week, its share of online high-yield savings applications increased 10 points!!

Decreasing its high-yield interest rate as well as the release of the analyst report were both followed by losses in E*Trade’s application share. However, once E*Trade returned its rate to a level in line with key competitors, its share of applications went higher than ever, despite any fears of bankruptcy! This just goes to show that, like investors, consumers will take a risk for the right return. And apparently that there is still plenty of faith in the FDIC to bail us out if things go wrong.

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