This was the year in which savers finally started to see widespread deposit rate increases. Average rates haven't increased much, but if you look at the rates from internet banks, it's clear that rates are going up.
First, let’s look at the average savings account rate for all banks and credit unions that DA tracks. The vast majority of these savings accounts are from brick-and-mortar banks and credit unions. As you might expect, these rates are much lower than the rates you can get at most any internet bank. The current savings account average is only 0.194% which is up from 0.179% from a year ago, an increase of 8%. The chart below shows how the average has changed in the last year.
I thought it would be more interesting to see how much online savings account rates have risen this year. In addition, I wanted to see how the online savings account rates moved in relationship to this year’s three Fed rate hikes that occurred on March 15, June 14 and December 13.
I chose to look at the average rate from the top 10 savings accounts from the big internet banks. I define "big internet banks" as banks with assets of at least $10 billion that operate online-only divisions. This excludes several of the rate leaders such as Incredible Bank, DollarSavingsDirect and Live Oak Bank. These are small banks with assets under $10 billion. It also excludes money market accounts including Capital One’s 360 Money Market. I thought by including only the big internet banks, it would provide an average that would be more representative of internet banks. I choose to exclude money market accounts for simplicity.
You can find the highest rates by using our savings account table and money market table. To review the highest rates in these tables, enter a large deposit amount at the top of the table to see higher rates that are available for larger minimum balances.
Below is a table showing the 10 top savings accounts from the big internet banks. I included the asset size next to the name. I also included the rates of the savings accounts at the end of January 2017 and at the end this month. As you can see, the average has increased by 33 bps in 2017.
|Internet Bank Brand (Parent Bank - Assets)||Jan APY||Dec APY|
|Marcus by Goldman Sachs (Goldman Sachs Bank USA - $158B)||1.05%||1.40%|
|FNBO Direct (First National Bank of Omaha - $19B)||0.95%||1.40%|
|PurePoint Financial (MUFG Union Bank, NA - $119B)||1.25%||1.40%|
|American Express Bank, FSB (American Express Bank, FSB - $52B)||0.90%||1.35%|
|CIT Bank (CIT Bank, NA - $40B)||1.05%||1.35%|
|Synchrony Bank (Synchrony Bank - $76B)||1.05%||1.30%|
|Discover Bank (Discover Bank - $96B)||0.95%||1.30%|
|Barclays (Barclays Bank Delaware - $33B)||1.00%||1.30%|
|Ally Bank (Ally Bank - $130B)||1.00%||1.25%|
|SmartyPig (Sallie Mae Bank - $21B)||1.05%||1.20%|
I also wanted to see how the rates changed in relationship to the Fed rate hikes. I did that by generating the chart below. Note, I chose to use the bottom range of the federal funds rates. Also note that the rates are shown to increase at the end of each month. I just took an average of the rates at the end of each month.
As you can see in the chart, most of the savings account rate hikes occurred starting in June after the second Fed rate hike. We are seeing another rate bump-up for this month.
One thing you might be asking is why did savings account rates on average only rise by 33 bps when the federal funds rate increased by 75 bps. One thing to note is that savings account rates at most internet banks never did fall much below 1% during the years of the zero interest rate environment. For example, the lowest rate of Ally Bank’s savings account was 0.84%. On the other hand, money market fund yields were very close to zero during this time. For example, the Vanguard Prime Money Market Fund had a yield of only 0.01% for much of this time. The Vanguard Prime Money Market Fund now has a yield of 1.37%. My guess is that many of the internet banks were using their savings accounts as loss leaders to keep customers. Now that interest rates are rising, the internet banks are cutting back this practice.
When interest rates were high back in 2005 to 2007, internet bank savings account rates tended to be close to the federal funds rates. For example, when the federal funds rate first reached 5.25% in June 2006, we started to see a few internet banks reach 5% APY in July 2006. As the federal funds rate held at 5.25%, a few internet savings accounts had rates that exceeded this for a period of time such as E-LOAN with a 5.50% APY and FNBO Direct with a promotional 6.00% APY.
The good news for savers is that we should continue to see savings account rate hikes in 2018 as the Fed hikes rates, and now that savings account rates are close to the federal funds rate, we may see savings account rate hikes that are more inline with the 25bps Fed rate hikes. In my opinion, there’s a good chance we’ll see 2%+ internet savings accounts in 2018.