How To Take Advantage Of Rising Deposit Rates

It’s been more than a year and a half since the Federal Reserve first increased a key benchmark rate from zero. Four hikes later, with the federal funds rate rising a full percentage point, the results are not largely in the consumers’ favor.

With each increase, banks have been quick to hike their prime rate, which determines interest rates on credit cards and variable-rate loans. What banks haven’t done for the most part is raise the rates they pay consumers for deposits. According to data from SNL, rates on most money market accounts have inched up by just two-hundredths of a point in the last 12 months, while rates on regular savings accounts haven’t budged at all from an average of 0.13%.

Those paltry increases are driven by major banks who feel no competitive pressure to boost rates. As John Shrewsberry, chief financial officer at Wells Fargo, put it in the company’s most recent earnings call: “As we’ve talked about in the past, we are trying not to compete on price and that’s what you’re seeing across the rest of the industry.”

Fortunately for consumers, some institutions aren’t following the big-bank playbook. You can capitalize on rate hikes and enjoy higher deposit earnings overall, if you’re willing to move at least some of your money to online accounts or smaller institutions. Here are two options for doing that.

Move to a Online Savings Account

As ValuePenguin has long pointed out, the highest savings rates are largely found at online banks. Unlike the major retail banks, online banks have increased their savings rates in bigger increments as the federal fund rises. For instance, both Goldman Sachs Bank USA and Ally bank have upped their online deposit rates by 15 basis points (or 0.15%) since March, to 1.2% and 1.15% respectively.

The difference could mean a modest hike in interest earnings if you’re willing to switch banks. For example, say you have $5,200 in your savings account—the median balance according to ValuePenguin. At a big bank offering 0.01% interest rate, your money would earn just 52 cents in a year. Move that balance to DollarSavingsDirect—with a 1.4% rate—and you pocket $72.80 instead.

Online Savings Accounts with the Highest Rates

These are the rates ValuePenguin found in late July on online savings accounts with no minimum deposits. Note that rates can change at any time. For instance, Barclays increased its rates by 5 basis points while ValuePenguin prepared its analysis.

BankAccountAnnual Percentage Yield
DollarSavingsDirectDollarSavings Direct Dollar Savings1.40%
BankPurelyBankPurely SavingPurely1.30%
CIT BankCIT Bank Spring Savings1.30%
GS BankGS Bank Online Savings1.20%
Barclays BankBarclays Dream Account1.20%
Barclays BankBarclays Online Savings1.20%
Ally BankAlly Onine Savings1.15%

Move to a Rewards Checking Account

Another way to get higher rates is to put your money into rewards checking accounts at smaller institutions that offer online availability to any U.S. customer. “Many community banks and credit unions are going heavily [into] this [area],” according to Michael Moebs, founder and CEO of Moebs Services, an economic research firm.

For instance, Northpointe Bank in Grand Rapids, Michigan, offers 5% on checking account balances, up to $10,000. Even if you take the more typical rate of 3% on the best accounts we found, you’d realize about $150 a year in additional interest compared with keeping the money in a typical big-bank account. Note that some accounts come with monthly requirements like making a certain number of debit-card purchases (independent of any ATM withdrawals) and having at least one automatic direct deposit each month.

Rewards Checking Accounts with the Highest Rates

These are the rates ValuePenguin found in late July on rewards checking with no minimum deposits.

BankAccountAnnual Percentage YieldMaximum Balance
Northpointe BankNorthpointe Bank Ultimate Account5.00%$10,000
Consumers Credit UnionCCu Free Rewards Checking3.09%$10,000
Lake Michigan Credit UnionLMCU Max Checking3.00%$15,000
BellcoBellco Boost Interest Checking2.25%$25,000
Redneck BankRedneck Rewards Checking2.00%$10,000

On the Horizon…

The Federal Reserve forecasts the federal funds rate to end the year at 1.4% and to eventually increase to 2.6% in 2018. At some point, if online banks keep upping their savings rates and enough consumers switch to those accounts, the big banks may be tempted to raise their rates.

They’ve already done that for corporate clients. Wells Fargo shelled out $683 million in interest expense in the second quarter, more than double from last year, but it went mostly to corporate clients who are “much more price sensitive,” said Wells Fargo’s Shrewsberry.

Right now, though, major banks are betting their other services will keep regular consumers. “I think we believe we deliver a lot of value to depositors,” said Bank of America CFO Paul Donofrio, ticking off such features as transparency, convenience, mobile banking and rewards. “There’s some real value to having a relationship with us…plus the fact there’s been a lack of market pressure so far.”

In a way, consumers themselves are to blame for those measly to nonexistent boosts to deposit rates. That’s because they continue to deposit more money at bigger institutions, even as their returns stalled. In the second quarter, consumer deposits grew 5% year over year at Wells Fargo, 9% at Bank of America, and 10% at Chase, even though their rates are between 0.01% and 0.05%.

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