For much of this year it appeared we had reached the bottom of the interest rate cycle. It seemed like interest rates would stay low, but at least we wouldn't see many more rate cuts. That ended last month when the Fed made its mid-2013 pledge. We saw the return of mass rate cuts. With very low Treasury yields and with talks of QE3 and another recession, it does seem likely that deposit rates will continue to fall.
One thing banks should consider is that as they lower rates the interest rate becomes less important for depositors. When rates are so low, the differences in earnings shrink. Eventually, it's no longer worthwhile for a depositor to change banks just for the interest rate. Here's an example that demonstrates this.
The following example shows three cases with generic internet savings account rates from 2006, from today and from what they may be in the future. These are compared with generic brick-and-mortar savings account rates which are one-fifth the internet savings account rates. You can see how the differences in earnings shrink as the interest rates fall.
- Example of rates in 2006
- 5.00% with $10K for 1 year = $500 (+$400)
- 1.00% with $10K for 1 year = $100
- Example of rates today
- 1.00% with $10K for 1 year = $100 (+$80)
- 0.20% with $10K for 1 year = $20
- Example of possible rates in the future
- 0.50% with $10K for 1 year = $50 (+$40)
- 0.10% with $10K for 1 year = $10
The intent of this example is to show that internet banks are becoming less relevant as interest rates fall. Interest rates that are 5x the national averages become less important as rates fall. If an internet savings account rate falls to 0.50%, the extra $40 in interest over a year on a $10K balance isn't enough to influence many people to open the account.
I'm sure internet banks are hoping their new banking features will be able to attract depositors. In my opinion, interest rate is still the main reason for people to move their money to an internet savings account. If rates keep falling, internet banks will suffer.
So in today's poll, the question is when do savings account rates no longer matter? What savings account interest rate is so low that it will no longer influence your decision about opening a new account?
For example, would you open a new savings account with a 1.00% APY? a 0.50% APY? or a 0.25% APY?
In the poll, select the rate that's too low for the savings account to be worth it for you.