The Federal Reserve has raised interest rates four times this year to cool inflation, pushing the reference rate from near zero to a range of 2.25% to 2.5%. The average savings account at a large bank now offers 0.13%. Don’t expect the disparity to disappear any time soon, especially if you stick to your physical branch.
“Deposit rates more than anything reflect the efforts of banks to attract new deposits” or at least retain existing deposits, said Greg McBride, Bankrate.com’s chief financial analyst. And banks “sit on a mountain of deposits” after the pandemic increased account balances, he added.
But there are some safe, federally insured options to squeeze a little more interest out of your idle cash, and even the big banks may eventually raise rates, at least a little. It all depends on your willingness to go digital or lock your money for a period of time.
First, it is important to understand the dynamics that affect the deposit rate of banks. The benchmark fed funds rate is only loosely correlated with the returns banks offer their depositors. Simply put, banks make money by making loans, says Chris Kotowski, director and financial analyst at
and banks’ net interest income increased by an estimated 16.5% from 2021 to 2022, according to Oppenheimer’s analysis, after falling 3.2% from 2020 to 2021.
Major banks now benefit from a greater difference between the rate they charge borrowers and the rate they pay their depositors. And now that deposits are high, old big banks aren’t feeling much pressure to raise deposit rates right now.
That’s not to say the deposit rates of major banks won’t budge, analysts say. They can get higher as the year goes on, and you can already score marginally higher rates with higher deposit levels at many banks. Once the central bank stops raising rates, which some say could be sooner rather than later, bank deposit rates will generally continue to rise for the next two or three quarters, said David Konrad, director of equity research at Keefe, Bruyette & woods. “The banks are benefiting from the slowdown early on, but consumers are catching up at the back,” he said.
Online-only banks, on the other hand, currently have returns of 1.5% and even 2%. Their low overhead means they can offer higher yields than physical banks in any interest rate environment, so they started building a higher base. And given the competition facing online-only banks, they have further increased their fees in recent months.
Many customers have two accounts, one at a major bank where they receive their salary and pay their bills, and another at an online-only bank where their savings yield much higher interest. About 27% of consumers have an online banking relationship, according to JD Power, and 79% of them have a checking account elsewhere. Financial professionals say it’s important to research the ease with which you can transfer and access your money, as some banks have more restrictions than others.
“The core relationship with banking tends to be very sticky,” McBride said, but consumers are increasingly realizing that they don’t have to separate from their original bank to move some of their money elsewhere and earn higher rates.
Only online banks include established names that have their own federal banking charter, such as Ally and
Marcus, and “neo-banks” like Chime, which are run by fintech companies and provide banking services through another entity. Either way, your money is insured by the Federal Deposit Insurance Corp.
In general, traditional online-only banks offer higher savings rates than neobanks. Traditional online-only customers tend to be older and more focused on savings and interest rates, while neobank customers tend to be younger and more likely to select their bank based on free services and low rates, said Paul McAdam, senior director, banking, J.D. Power.
There are still some differences between the neobanks and the more established online banks. The neobanks are focusing more on the kind of free checking accounts that are popular with younger consumers. Legacy online banks typically get higher customer support marks than the neo banks, according to JD Power.
Another option to score higher rates, if you can tolerate the tying of your money: Certificates of Deposit. While liquidity is paramount to your emergency fund, CDs today offer competitive rates for cash that you can lock up for a few months to five years or more. Here too you score higher rates online compared to brick and mortar. For example, Marcus offers 2.30% APY for a one-year online CD and 3.20% for a five-year online CD.
Given the rate difference between brick-and-mortar banks and online-only banks, “savings account” may be a misnomer for major bank offerings. Big banks may be giving preferential treatment, including better rates, to customers with high balances or multiple accounts, but for the most part, they’ve relinquished the interest-sensitive portion of the market to the online-only banks, McAdam said.
Large bank accounts are primarily a place to keep “transaction balances,” such as your salary and the money to pay your bills, Kotowski said. He recently bought a car and needed a check. “There are still things you need your bank branch for,” he said.
Write to Elizabeth O’Brien at [email protected]