Rate Trends - Online Savings Account Rates Rise 43% In Last Year

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Rate Trends - Online Savings Account Rates Rise 43% In Last Year

The first Fed meeting of 2018 has started today. The FOMC statement should be released on 2:00pm Wednesday. Even though no rate hike is expected to be announced at this meeting, 2018 should be another year of multiple Fed rate hikes. How will this affect deposit rates? To help answer that question, we did an analysis of our proprietary banking data with a focus on savings account rates.

After three Fed rate hikes in 2017 and after a total of five rate hikes since the Fed started normalizing rates in December 2015, most brick-and-mortar banks are still keeping their deposit rates at the same rock-bottom levels. However, online banks have been responding to the Fed rate hikes with higher deposit rates.

Rates Rising 3x Faster at Online Banks Than at Brick-and-Mortar Banks

Interest rate data collected from savings accounts from 6,548 banks and credit unions shows that savings account rates at online banks have risen 3x more than at brick-and-mortar banks and credit unions since the start of 2017. The average savings account rate at online banks has increased 43%. During that same time, the average savings account rate at brick-and-mortar banks has risen by only 13%.

Online banks have lower overhead, which gives them the ability to pass along their savings to consumers through higher deposit rates. In a previous study, the average savings account rate at online banks was shown to be about 4x the average from brick-and-mortar banks. This current study shows the difference in rates between the two types of banks not only at one point in time, but during a period of time that starts before the Fed began normalizing rates.

From 2015 to the start of 2017, the average savings account rate at online banks remained about 4x the average from brick-and-mortar banks. In 2017, this gap between the two averages widened as rates at online banks increased 3x faster than at brick-and-mortar banks. By the start of 2018, the average online savings account rate at online banks exceeded the average at brick-and-mortar banks by almost 6x.

The following chart details how interest rates have changed at online banks, brick-and-mortar banks and credit unions. The average interest rates at each of the three types of institutions are plotted starting in the second quarter of 2015 and ending in the first quarter of 2018.

savings account rates - online banks vs. brick and mortar banks

In the second quarter of 2015, the average interest rate of savings accounts at online banks was 0.63%, which was 4.2x the average rate at brick-and-mortar banks (0.15%) and 3.7x the average at credit unions (0.17%).

The first two Fed rate hikes in December 2015 and December 2016 had essentially no effects on the savings account rates at brick-and-mortar banks and credit unions. By the first quarter of 2017, the average rates at brick-and-mortar banks was still 0.15% and the average rate at credit unions was still 0.17%. The average savings account rate at online banks increased slightly to 0.67%, a rise of 6%.

Interest rate increases at online banks accelerated in 2017 as the Fed raised the federal funds rate three more times. The average savings account rate at online banks increased from 0.67% at the first quarter of 2017 to 0.96% at the first quarter of 2018, a rise of 43%. During this same time, the average savings account rate at brick-and-mortar banks increased only 13%. At credit unions, the average increased only 6%.

Reasons Online Banks Are Responding Faster

Online banking customers tend to be more rate sensitive than customers at brick-and-mortar banks since that’s the primary reason for opening an account at an online bank. In addition, the electronic funds transfer systems at online banks that allow customers to link to brick-and-mortar bank accounts also make it easy for customers to move their money to other online banks that are offering higher rates. This results in a very competitive environment in which internet banks must increase their rates to maintain deposits.

Online banks also have another competitor. Money market funds at brokerages offer savers another conservative place to earn interest. These money market funds are not FDIC insured, but they are generally considered a safe alternative to savings accounts at banks or credit unions. During the years that the Fed held the federal funds rate near zero, most money market fund yields were 0.01% or 0%. As can be seen in the above chart, the average savings account rate was 0.63% in early 2015. This average was never much lower in previous years. Thus, savings accounts at online banks had a huge rate advantage over money market funds. Money market fund yields have risen with the Fed rate hikes, and now have yields comparable to online savings accounts.

More Reasons to Move Your Money to Online Banks

For higher rates now and for even higher rates as interest rates rise, this study shows the clear advantage online banks have over brick-and-mortar banks. To best take advantage of online banks, rates should be periodically reviewed since not all online banks remain competitive. At the start of 2018, the average savings account rate at online banks as shown in the above chart is 0.96%. Much higher rates are currently available at many online banks. Nine online banks now offer yields of 1.50% and above on no-minimum savings accounts.

Related Pages: banking tools and data

Comments
Cycles
Cycles   |     |   Comment #1
This article is right on. On the third rate increase by the Fed my local CU actually lowered the rate by .10 instead. When the Fed raise the rate for the 4th time they still kept the rates the same. I only stay with them because I pay no fees, and making local deposits is a cinch. I then move money out to the online banks. Their MM account is unusual in that you can write checks and transfer money out without any limits unlike other institutions.
slovokia
slovokia   |     |   Comment #2
Another competitor for investable short term funds is the humble treasury bill. Currently 3 month US government treasury bills yield (APR) 1.46%. The interest on T-bills is exempt from state income taxes. For folks in high tax states like California this means that they would have to invest in a 3 month CD with an interest rate (APR) higher than 1.63% to get the same after tax income assuming that they are in the 22% / 8% Fed / State marginal income tax brackets and that they are unable to deduct their state income taxes because they take the standard deduction. The same math applies to money market funds that invest in US treasury bills. Some brokers allow folks to buy Tbills at auction with no commission or fee. Alternatively one can use the treasurydirect.gov website to do so.
Bozo
Bozo   |     |   Comment #3
Slovakia, amen. The least-known-best-free-lunch out there these days is the 3-month T-bill. The taxable equivalent yield, as you note, is easily north of 1.6% for folks in CA. I mean, seriously. I can remember when my Mom (before she died) had a six-month which paid slightly north of nothing.
deplorable 1
deplorable 1   |     |   Comment #5
T-bills were great back in the 80's. I actually had a bank account that guaranteed the rate to be at least whatever the 3 month T-bill rate was.
DCGuy
DCGuy   |     |   Comment #8
The 30 year T-bond from the 1980s trumps them all! They did not mature until this decade. T-bills with a year or less maturity date does not cut it.
#11 - This comment has been removed for violating our comment policy.
deplorable 1
deplorable 1   |     |   Comment #4
Well not to be mean or anything but the real reason that brick and mortar banks don't raise rates as fast as online banks is because many of their customers are old people who are set in their ways and don't know how or have no inclination to use a computer. Most of them probably have no idea that you can get 1.7% in a FDIC insured account right now. These folks still use cash over a 5% cashback credit card. I can't even get my mom to use a tablet, she has a hard enough time figuring out a tv remote. B&M banks take advantage of their lack of knowledge and/or fear of the unknown(technology/online banking).
DCGuy
DCGuy   |     |   Comment #7
There are still plenty of people without computers and smart phones and not into "complicated" financial investments. There are people suspicious of the banks and markets too (which they may be deserving of such suspicions). Most of the bank branch locations are located in downtown areas of my city (where you do not often see senior citizens). I think some people favor the B&M banks to do a "one stop" location for all their financial needs. They do not want to have to access multiple businesses to maintain their finances. Too much of a hassle (in spite of better returns). Having to be hassled is too annoying. Life is too short.
klink
klink   |     |   Comment #9
Amen to that deplorable 1. I have an elderly who I have explained to about how much more she would have with her fixed income if she would just change her banking habits. Minor changes mind you but alas to no avail. She has had a $21K CD with WF that she has no idea just keeps rolling over to their paltry rates, and therefore is not making anything for her. Still pays bills by mail when she has bill pay available. No computer or tablet and her kids won't help her at my suggestion.
deplorable 1
deplorable 1   |     |   Comment #6
I know this isn't FDIC insured but check out GM right notes:
https://www.rightnotes.com
1.5%-1.75% on liquid cash with rates set weekly.(No 6 withdrawal per month limit or debit card hoops either since it's not FDIC insured)
This should also adjust and move up quickly with FED rate hikes like the old GMAC Demand notes used to. Now I know why ALLY demand notes was dragging their feet on raising rates for so long they are probably going to end their demand note program like GE did a while back with their interest plus account.
Att
Att   |     |   Comment #10
I had a GE Intrest Plus account until GE stopped it. Great rates and unlimited checks with minimum of $250.
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