Barclays’ (NYSE:BCS) off-and-on romance with the U.S. retail banking industry turned a new chapter recently with the banking group’s decision to offer online savings accounts to customers in the U.S.  This is the ideal solution for the U.K.-based bank which does not want to open any branches in the U.S. but is still looking for a cheap and stable source of funding from the country’s retail banking market. These funds will help its plans to expand Barclaycard operations in the Americas. HSBC (NYSE:HBC) and ING (NYSE:ING) are prominent players in the global online retail banking industry – offering their services as HSBC Direct and ING Direct respectively.
We maintain a $15 price estimate for Barclays’ stock, which is around 15% above its current market price.
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Barclays ventured into U.S. retail banking way back in 1965 with the establishment of the Barclays Bank of California in San Francisco that year. But following an organization-wide reorganization in the mid-1980s, the bank sold this business to Wells Fargo (NYSE:WFC) in 1988.
Barclays, however, has a presence in the country’s credit card business since its acquisition of Juniper Bank in 2003. The business still operates as Barclays Bank Delaware.
The decision to launch online savings accounts in the U.S. has a lot of merit for Barclays. Firstly, the bank stands to gain significantly from the difference in interest rates prevalent in the U.S. and the U.K. The bank normally shells out 3-4% as interest for instant access online accounts and five-year deposits in the U.K. In contrast, the interest rates for online accounts in the U.S. are set between 0.35% and 1.75%. In essence, the new service can potentially cut funding costs for Barclays to almost a third.
Secondly, funds for Barclays’ credit card business in the U.S. are largely arranged by transferring funds from overseas through the parent company – a process that adds to the cost of funds. This issue is also expected to be side-stepped.
The lower costs should eventually help raise the net interest margins for the Barclaycard business.Notes: