Online savings accounts are raising rates. Big banks aren't.

Ethan Wolff-Mann
Writer
Bank of America and other big banks are still swimming in deposits, but their interest rates are on the low end for savers. Source: AP

If you’ve been wondering when the Federal Reserve’s two most recent interest rate increases were going to trickle down to your savings account, we have good news. A handful of online banks have begun boosting rates for savers.

Typically, when the Fed hikes rates, it affects rates on loans first—and anything with a variable rate. Credit card interest rates (APRs) generally go up within a month, and mortgage rates float up unless they’re fixed. On the slow end of things is savings account interest rates. In the line for gains, the deposit consumer is at the back.

Even though the federal funds rate of 0.75% to 1.00% is still a far cry from the 5.25% seen before the financial crisis hit back in 2008, many deposit accounts have begun to pay consumers more in interest—specifically those for online savings accounts. The increases consumers are getting paid aren’t life-changing, mostly increases of around 0.05%. For example Discover’s online savings account just raised its rate by six basis points, from 0.95% to 1.01% APY, the interest rate that includes daily compounding.

In addition to Discover, Ally raised rates from 1.00 to 1.05%. CIT didn’t give existing customers a raise from 1.05%, but instead started a new savings account program that pays an impressive 1.15% APY. (You can search banks and rates on Bankrate.)

However, in many cases these five-odd basis point hikes are more than the entire rates offered by big brick-and-mortar banks.

According to the FDIC, the national average interest for a savings account is just 0.06% APY.  

For larger banks, they’re often especially low. The standard annual percentage yield on a Bank of America (BAC) regular savings account is now 0.01%. Its money market alternative pays 0.03%. Chase’s (JPM) regular savings account pays 0.01%, though if you have Chase Plus Savings, you could get 0.08% if you have $10 million tucked away in there. The difference between these online banks and their brick-and-mortar counterparts is stark.

“What’s unique to this particular cycle of interest rate hikes is that the majority of banks aren’t following suit,” Greg McBride, CFA and chief financial analyst for Bankrate, said. “The improvement we’re seeing in deposit products is almost exclusively among online banks and others that are already competitive.”

Some banks just don’t need your money

The reason why extends beyond the Fed’s moves, and to bank margins and even the nature of why banks even take deposits. To begin with, online banks can pay higher rates because their overhead is low without any physical locations—brick-and-mortar is expensive. And since they work just as well for someone who’s in Omaha as for someone in Jacksonville, they have the ability to reach a large swath of people and take deposits.

These online savings accounts need deposits, says McBride, because online banks make money from their loan businesses so they need cash to loan borrowers. But for full-service banks with physical branches, like Chase and Bank of America, savings accounts are just one service in a larger package of services customers use, and so they don’t have to work to lure more consumers with more attractive rates. “They don’t need more deposits, they’re swimming in deposits,” says McBride. “The last thing [big banks] need is to raise rates and bring in more.”

This has been reflected in extremely strong deposits for many big banks like Bank of America and Chase. In the first quarter of this year, total deposits for Bank of America were up $55 billion from last year to a whopping $1.272 trillion. Total deposits for JPMorgan Chase showed similar strong numbers, up $101 billion to $1.423 trillion. Consumer banking deposits in particular are up 10% year-over-year for both banks, illustrating that low interest rates for savings accounts have not alienated customers.

A spokesperson from one major bank told Yahoo Finance that its consumers aren’t particularly concerned about interest rates for savings accounts and prefer brick-and-mortar convenience and the overall package of financial services to a high-yield account.

But perhaps more compelling than the “because we can and you won’t leave us,” answer for why big banks don’t pay more is something else: The Fed cut rates over 5% after the financial crisis, but interest rates on savings accounts for many banks didn’t similarly fall 5. If they had rates would have gone below zero, and banks would have effectively charged customers to park their cash. However, free checking accounts became less common and other bank fees crept up—a sort of back-door version of a negative interest rate for a deposit acount.

Holding savings interest rates steady as Fed rates normalize allows banks to breathe some life back into their margins, McBride said. As one bank put it to Yahoo Finance, waiting for a few hikes to raise deposit interest rates lets the banks pay themselves back.

Much of this is unique to the current situation, said McBride. “If you look at last cycles, you saw banks raising rates. Not everyone pays the same rate, but the biggest rates were increasing,” he says. The last cycles of the mid 2000s were marked by irresponsible mortgage origination that torpedoed the economy, and the hunger for cash isn’t the same today, pushing down hikes.

For now, expect only deposit-hungry institutions to participate in these new raises, typically online savings account players like Ally Bank—which told Yahoo Finance it simply raises rates to be competitive—or companies like Goldman Sachs (GS) that are looking to diversify revenue streams or maintain a supply of cash.

“That’s where the arms race is,” said McBride. But despite the growth, things are tempered. As he pointed out, the Fed went up 75 basis points, but savings interest rates only went up a few. “You will continue to see this arms race, but it’s going to happen in 5- and 10-basis point [increments.]”

Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, tech, and personal finance. Follow him on Twitter @ewolffmann. Got a tip? Send it to tips@yahoo-inc.com.

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