The Consumer Federation of America's new report, Savings Accounts: Their Characteristics and Usefulness, looked at savings accounts and found that they vary widely when it comes to consumer-friendliness.
The report is based largely on a new analysis of Federal Reserve Board Survey of Consumer Finance (SCF) data and on research of accounts at the 50 largest banks, 50 representative medium-sized banks, 50 representative small banks, and 10 largest credit unions. The research on the 150 banks and 10 credit unions started with a review of their websites and was supplemented, where necessary, by calls to the institutions.
Basic savings accounts are a go-to for LMI, as well as middle-income families, when they get hit with the unexpected. While available to most anyone, with many institutions opening accounts with $50 or less, there is room for improvement, according to the CFA's report.
Savings accounts are guaranteed by the government, can be linked to ATMs, and can be free if minimum balance requirements are met, or at many branches, if automatic deposits of as little as $25 are made monthly, according to CFA. Many institutions offer incentives to savers who meet certain criteria, like authorizing monthly transfers from the bank's checking to savings. According to the report, High Plains Bank offers a .70% rate for autosavers, and BankCorp South Bank and CapOne Bank offer a 0.50% rate. Some institutions offer bonuses – 1% at SunTrust Bank and $50 at Commerce Bank. Others pay higher interest rates to online savers – 0.75% in CapOne Bank's online 360 Savings account.
What did the savings accounts reviewed have in common? Paltry interest rates. The 17% of banks paying 0.01% or less pay no more than 10 cents in interest annually on a $1,000 balance, only 4% of the banks it reviewed pay more than 0.25% on basic savings accounts.
Pay attention to details
But CFA's research also identified differences in account characters. For example, more than half of the banks analyzed did not disclose monthly fees (when balance requirements are not met). There were also great differences in minimum balance requirements to avoid monthly fees. Fourteen percent of the banks had monthly minimums of $25 or less, while 34% had minimums of at least $300. At half of the banks, the minimums ranged from $200-$300. There were variations in monthly fees as well. Thirty percent of the banks charged $2 or less, and 35% charged at least $5.
Where else did they differ? Sixteen percent of large banks waived monthly fees for savers who authorized monthly transfers, typically $25 or more, from checking to saving. A small number of banks waived fees for savers who also had a checking account with them.
While a federal rule permits up to six withdrawals from savings accounts, a handful of banks surveyed allow even fewer than that before charging fees. According to the report, Claxon Bank and Queensborough National Bank and Trust permit only three withdrawals per quarter, then charge $5 for each additional withdrawal. Urban Trust Bank gives you three withdrawals per month and then $10 for each afterward. “Limiting withdrawals to only one or two a month limits the effectiveness of a savings account as an emergency fund,” said Stephen Brobeck, CFA's executive director and author of the report, in a prepared statement.
Banks can also charge a “dormancy fee”. You get dinged for having no deposits or withdrawals over a specified period of time. When such a fee kicks in can be as short as six months or three years, with fees ranging from $1-$12, according to the survey. One internet bank charges a $10 monthly fee after six months of inactivity. “One problem with inactivity restrictions is that some savers want to build up an emergency fund then let it sit for emergencies. If there are no emergencies, then they may be whacked with inactivity fees.”
What does this mean for you?
So what's the takeaway for consumers? Big banks are more likely than smaller banks to require higher minimum balance requirements (to avoid fees) and to charge higher fees. Big banks are most likely to disclose these fees and interest rates on their websites. The big banks are also most likely to offer innovative accounts and savings incentives.
However, credit unions included in the survey tend to require much lower minimums to avoid monthly fees, often only $25, and tend to pay higher interest rates, though they are usually below 1%.
CFA is urging banks to eliminate any anti-consumer practices and make customer saving a higher priority. CFA is also calling on regulators to take steps to eliminate anti-consumer practices and learn more about bank savings account experiences to identify model practices and turnaround and promote them. CFA has a challenge for policymakers too. CFA says they should consider a new limited subsidy to “small savers”. It says that such a subsidy, say if it was a 3-4% interest rate reimbursement to banks and credit unions on the first $500 of statement savings accounts, would cost only several hundred million dollars, “a small faction of upper-income tax breaks, even when paid on millions of accounts,” points out CFA. “Low- and moderate-income families need meaningful and widely accessible savings incentives,” said Brobeck. “Bank experience has shown that an interest rate well above market rates can serve as an attractive incentive, especially if coupled with automatic saving.”
Brobeck in the CFA tele-conference announcing the report's findings also offered a bit of advice to consumers. “There's little you can do about low interest rates. But if you save regularly you will benefit.”
He also said that because finding disclosures about dormancy fees can be a challenge, people should explore the financial institution's savings account page, especially any links on that page. Also check under consumer and personal accounts sections and look for a statement of terms and conditions.
Ideally, in the best of worlds, as banks enhance savings accounts says Brobeck, “They would be the most cost effective for banks and what's best for consumers.”