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Fed Meeting Preview and Deposit Rate Forecast - Oct 25, 2023National Online Bank Day - Effects of Falling Rates
In addition to Columbus Day, today is National Online Bank Day. Ally Bank established National Online Bank Day in 2015 to “emphasize the value, ease and convenience of banking with online-only institutions on Columbus Day, a day when most traditional banks are closed.”
I was told by an Ally official last week that they did not have any specific plans this year for National Online Bank Day, and it appears they didn’t even have a press release for the occasion. In 2018 on National Online Bank Day, Ally emphasized the interest rate advantage of online banks. With all-time low deposit rates at Ally Bank and at other online banks, I have a feeling Ally didn’t think today would be a good time to boast about rates.
Advantage of online banks in a zero-rate environment?
Today’s National Online Bank Day had me thinking about how online banks will compete in this new zero-rate environment. Can they offer interest rates high enough to pull consumers away from brick-and-mortar banks and credit unions?
When does an online savings account rate become so low that it does not motivate people to open the account?
For those without large savings, the value of online banks diminishes in this type of zero-rate environment. For example, two years ago. The average online savings account yield was 1.89% (based on our Online Savings Account Index). In October, that average fell to only 0.62%. The average bank savings account rate two years ago was only 0.08% (based on FDIC data). Today, it’s 0.05%. The rate advantage of online savings accounts has fallen from 23x to 12x.
The current 12x rate advantage of online banks over brick-and-mortar banks is less than it sounds when you look at dollar amounts. For a $10,000 balance, a 0.62% yield results in only about $62 of interest over an entire year. That’s just a little over $5 a month. A dime may be 10x the value of a penny, but a dime is still not much. I think online savings accounts and CDs have that same issue. Their interest rate may still be 12x that of brick-and-mortar equivalents, but the online rates still don’t offer much.
Other online bank advantages besides rates?
Besides interest rates, online banks offer lower fees than many of the brick-and-mortar banks. However, for savers, that’s not a major issue. For many of the brick-and-mortar banks, it can often be fairly easy to avoid fees when you maintain a balance of at least a few thousand.
The ATM fee is a common fee for banks. Large banks often have a large branch and ATM network where you can withdraw cash without a fee. Most credit unions don’t have a large ATM network, but many are part of ATM networks that allow you to use ATMs without fees.
The major online banks can sometimes have an advantage over brick-and-mortar banks and credit unions in their online and mobile banking features. However, I’m not sure how much advantage exists if you’re looking at the large brick-and-mortar banks like Chase and Bank of America. These large banks also benefit from a close integration of their credit cards with their online and mobile banking. Most online banks lack that type of integration.
In summary, I don’t think low fees or better online/mobile banking features are enough reasons for savers to move to online banks. Interest rates are more important.
Will online-only banks have an advantage?
When I spoke with Ally officials two years ago about how they plan to compete with other banks (many with large branch networks) that were introducing online savings accounts, Ally said that they were skeptical about those banks being able to sustain competitive savings account rates since those banks had to maintain an expensive branch network.
Signs that these banks with large branch networks won’t be able to compete may already be starting to show in this new zero-rate environment. PurePoint Financial and Capital One are two examples of banks with branch networks that have recently cut rates below their online-only competitors. I thought it would be interesting to compare these banks and their current rates to the rates of an online-only bank like Ally.
Ally Bank
| APY | MIN | MAX | INSTITUTION | PRODUCT | DETAILS |
|---|---|---|---|---|---|
| 5.10% | - | - | Ally Bank | 12 Month High Yield CD | |
| 4.25% | - | - | Ally Bank | Savings Account | |
| 4.10% | - | - | Ally Bank | 5 Year High Yield CD |
Like most other online banks, many of Ally’s rates have fallen to all-time lows. However, Ally has generally avoided any giant rate cuts. Its current online savings account rate is now just a little below the online savings account average of 0.62%. Its online CD rates may be low, but at least they’re higher than online averages (0.55% for online 1-year CDs and 0.79% for online 5-year CDs). Also, most of the CD rates are higher than the online savings account rate.
PurePoint Financial
PurePoint Financial was launched in early 2017 by Union Bank, a large regional bank in the West that has almost 350 branches. Before this year PurePoint Financial was a strong competitor to the online-only banks. However, that has recently changed. Its online savings account rate is now only 0.40% (far below the online savings account average of 0.62%). Its online CD rates are even worse. PurePoint’s highest CD rate is only 0.25%. All of their CD terms from one to five years have this disappointingly low rate.
Capital One
| APY | MIN | MAX | INSTITUTION | PRODUCT | DETAILS |
|---|---|---|---|---|---|
| 5.00% | - | $1m | Capital One | 12 Month 360 CD | |
| 4.30% | - | - | Capital One | 360 Performance Savings | |
| 4.10% | - | $1m | Capital One | 60 Month 360 CD |
Capital One acquired the online-only bank ING DIRECT in 2012. Since that time, Capital One has slowly made the online accounts the primary deposit accounts of the bank. In the last few years, they’ve been heavily advertising their Capital One cafes as a kind of hybrid model between online-only banks and brick-and-mortar banks. The cafes aren’t branches, but they offer free ATMs, free WiFi and access to bank “ambassadors” who can assist customers in handling account questions. However, Capital One hasn’t given up on its branches. It continues to maintain a sizable branch network with almost 450 branches in several states.
Before this year Capital One had been fairly competitive with its online accounts. Just like ING DIRECT, it was rarely near the leaders, but the rates were often close to what the major online-only banks were offering. That has started to change. The rate of its online savings account, the 360 Performance Savings, has fallen to only 0.50% (below the online savings account average of 0.62%). Like PurePoint, Capital One's online CD rates have fallen even more than its savings account rate. Currently, the 360 CD rates range from 0.20% (for the 6-, 9- and 12-month terms) to 0.40% (for the 5-year term).
Vio Bank
| APY | MIN | MAX | INSTITUTION | PRODUCT | DETAILS |
|---|---|---|---|---|---|
| 5.25% | $500 | $2.5m | Vio Bank | 12 Month High Yield Online CD | |
| 2.75% | $500 | $2.5m | Vio Bank | 60 Month High Yield Online CD | |
| 1.10% | $100 | $2.5m | Vio Bank | High Yield Online Savings Account |
Not all of the online banks that are divisions of banks with large branch networks have become uncompetitive on rates. Vio Bank, the online division of the 78-branch MidFirst Bank, continues to offer an above-average online savings account rate (currently 0.76%). Vio Bank’s online savings account rate has just over two years of history with rates above the online averages. However, the same can’t be said of its online CD rates which haven’t held up as well as its online savings account. Currently, its 1-year CD rate is only 0.15%, and its 5-year rate is only 0.50%. These low CD rates don’t bode well for Vio Bank’s online savings account rate.
Future of Online Banks and Deposit Rates
As this new zero-rate environment drags on, online banks may find out that rates can’t be lowered too much. At some point, the rates fall too low and their value over brick-and-mortar banks disappear. Competition among the online banks should also help prevent rates from falling too close to zero. Online-only banks without expensive branch networks may be in the best position to compete.
The pandemic has caused many people to live without bank branches, and that may encourage people to switch to online banks. But online banks will have to prove that they offer more value than the brick-and-mortar banks and credit unions. In this current zero-rate environment, it's going to be difficult to make that value case based on interest rates.
This new zero-rate environment has already proved to be worse than the last one as deposit rates at many banks and credit unions have fallen to all-time lows in the last few months. The surge of deposits this year has been one important factor that has been different than the previous zero-rate period. As deposit levels return to more normal levels, online banks may find it necessary to raise deposit rates at least a little even if the Fed continues its zero-rate policy. We did see small rate increases many times during the last zero-rate period. So it’s quite possible that 2021 won’t be worse than 2020 for deposit rates.
Paper currency provides a useful way for good guys, law abiding citizens, to engage in private transactions amongst each other that neither banks nor the government have a right to track. Take away the paper currency and take away that measure of privacy and liberty.
I'm becoming more interested in the idea of abolishing the official federal currency in favor of letting private industry create its own currencies. Let the public make decisions about which forms of currency have the most utility and value to them without government manipulation.
You characterization of it as a "pay cut" is a much better description as it's your income stream that is being cut.
There's no guarantees when you play the market (risk is always a factor). Even if the market is "kept afloat" you could choose poorly and lose a bundle, even in the most down market you could have chosen well and still come out a head. That said, over time, a well diversified portfolio in the market is as close to guaranteed to do well as it gets.
Got it
Oh my goodness, Choice, I never knew this and wonder what the credit card companies may think of my "intentions" when I insist on getting paper statements so I can remember to pay on time... :(
Good luck with all of that. Which is a better chance a slim chance or a fat chance?
My gosh I just read a story earlier of a postal carrier who had two trash bags of mail he failed to deliver sitting out for the trash collector. If one of your bills was in that trash bag let us all know how your argument turns out.
By the way I've been doing this I think since at least the mid 90s. I never once had a problem or missed a payment. I don't have time to pay individual bills.
DTE energy story:
I had a electric meter go bad and always paid my bill in full and on time. They sent me a large estimated bill while I was on vacation not even using power. I called them and initiated a investigation of why my bill was so high. They sent out a repair man who replaced the meter. They concluded that I should have known the meter was bad because my electric bills were so small. I told them I wasn't even home using power but to no avail. They forced me to pay 3x my normal bill and told me they would shut off the power if I didn't pay it. Well I just paid it as I'm not going to court over a couple hundred bucks and meanwhile lose power. These companies with monopolies can and do extort you and unless you want to fight it in court there is basically nothing you can do.