You may be disappointed by the recent rate cuts at Ally Bank and Discover Bank. Both lowered their online savings account rates to 0.80%. For Ally, the 0.80% APY is an all-time low. The previous all-time low was in 2013 when the savings account rate reached a bottom of 0.84%. For Discover, the new 0.80% rate ties the all-time low that occurred in 2012 and 2013.
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A few of the new and smaller online banks have been cutting their rates much more aggressively. WebBank is the latest example. It just recently lowered its online savings account rate to 0.40% (half of what Ally now offers).
In late April, WebBank was offering 1.66% APY while Marcus was at 1.55% and Ally was at 1.50%. Last year, WebBank looked promising when their online savings account rate reached 2.50% in May 2019. Since May of 2020, their rates have been falling like a rock. This week’s cut lowered the online savings account rate from 0.75% to 0.40%.
How low will rates go?
I am worried that we will see more rate cuts to online savings accounts. During the last zero bound years from 2008 to 2015, most online savings account rates bottomed out in a range of 0.70% to 1.00%. It took three to five years after the Fed first lowered the federal funds target to its zero bound (0-0.25%) before these online savings accounts reached their bottoms in 2012 and 2013. We’re now seeing new bottoms after only four to five months of this new zero bound period. In the next year, I’m afraid many other online banks may join WebBank with an online savings account rate that’s under 0.50%.
One reason I think we should expect more rate cuts is how banks have been cutting their CD rates. Ally Bank’s 5-year CD rate was recently cut to 1.00%, and its 11-month No-Penalty CD rate was cut to 0.75%. Other online banks have cut their 5-year CD rates far under 1%. These include Barclays (0.65%), VioBank (0.60%) and PurePoint Financial (0.50%). WebBank’s 5-year CD rate is now only 0.25%.
Alternatives for savers
Savers who prefer keeping their money in deposit accounts don’t have a lot of options. There are still many high-yield reward checking accounts with yields over 2%, but these have requirements and limitations. Also, these aren’t immune to rate cuts and balance cap cuts (as seen at The Bank of Denver and at ECCU). Nevertheless, I think it’s likely that rates of many reward checking accounts will hold up better than online savings accounts. I reviewed a few in this post that have long histories of high rates.
Savers should be cautious about companies that advertise products with high yields. One example is the fintech Linus which claims that customers can earn up to 4.50%. According to Linus’s FAQs, deposits are not insured by the FDIC or SIPC. The FAQs also state that “your deposit is protected from default using borrower collateral.” I can’t say how safe it is. All I can say is that accounts at Linus and at similar fintechs have more risk than at FDIC-insured or NCUA-insured institutions. For more discussion on the importance of FDIC and NCUA deposit insurance, please see my article, Safety of Your Money - Importance of Deposit Insurance.