Why would banks offer low rates on savings accounts now?
October 20, 2022 11:52 AM Subscribe
My bank of many years, where I've had a savings account along with a checking account, offers me a 0.04% rate on said savings account as a "relationship APY" due to my making X number of purchases per month using their card. By contrast, Goldman Sachs' Marcus product offers 2.35%. How can a bank offer such an uncompetitive rate? I asked, and a banker there said something about being "well capitalized." Does this mean they have so much money under management that they don't gaf about consumer accounts?
Have you moved your money to Marcus yet? Sounds like no. That's how they get away with it.
posted by mskyle at 12:03 PM on October 20, 2022 [7 favorites]
posted by mskyle at 12:03 PM on October 20, 2022 [7 favorites]
Response by poster: I have, in fact. But my original bank's business practices seemed so odd given how competitive the consumer banking sector seems to be, with everyone gobbling up storefronts.
posted by the sobsister at 12:58 PM on October 20, 2022
posted by the sobsister at 12:58 PM on October 20, 2022
Mainly because retail customer banking is kind of a hassle for modern banks. While banks make some money from providing checking accounts, it’s not much. Mostly they run it for the good will it generates and the chance to sell you other services and loans where they will make money. And the person who shops around for the best deal on a checking account is the kind of person who is going to shop around for a loan.
The model that a bank needs deposits to make loans isn’t a thing. So the interest rate on deposits doesn’t dictate rates on loans or vice versa.
posted by DoveBrown at 1:18 PM on October 20, 2022 [4 favorites]
The model that a bank needs deposits to make loans isn’t a thing. So the interest rate on deposits doesn’t dictate rates on loans or vice versa.
posted by DoveBrown at 1:18 PM on October 20, 2022 [4 favorites]
Yes, banks have a lot of cash right now, and they haven't been loaning enough of it out. They really don't want your money, though they might want your transaction history and your eyeballs.
I'd bet the majority of banking customers never think about savings account interest rates, because it's been near 0% for the last 15 years. They're likely more concerned about ATM fees, branch locations, etc.
Marcus has no bank locations and no debit cards, so they compete on the promise of growing your money, easy loans, auto-investing with their snazzy app, etc.
A more savvy investor might pick a Schwab/Etrade/Vanguard/Fidelity/etc investment bank that allows them to buy brokered CDs at 4%+, stocks, bonds, funds, etc.
(this is not financial advice, etc)
posted by credulous at 1:34 PM on October 20, 2022 [2 favorites]
I'd bet the majority of banking customers never think about savings account interest rates, because it's been near 0% for the last 15 years. They're likely more concerned about ATM fees, branch locations, etc.
Marcus has no bank locations and no debit cards, so they compete on the promise of growing your money, easy loans, auto-investing with their snazzy app, etc.
A more savvy investor might pick a Schwab/Etrade/Vanguard/Fidelity/etc investment bank that allows them to buy brokered CDs at 4%+, stocks, bonds, funds, etc.
(this is not financial advice, etc)
posted by credulous at 1:34 PM on October 20, 2022 [2 favorites]
Best answer: A lot of banks have been holding WAY more money in savings deposits since the stimulus checks came in, and they haven't been able to make as many loans because of the pandemic and general economic conditions. This is a bad thing for them -- it costs them money when they have a lot of money sitting around not being loaned. To put it (perhaps over-)simply...
- For you, when you have money in your savings account, that's a revenue source-- you're making money on the interest the bank pays you.
- For a bank, when they're holding your money in a savings account, that's an expense -- they have to pay you interest.
- Banks make much of their money by using their capital (aka the money that you and everyone else puts in their accounts) and loaning it out at a higher interest rate than they're paying you.
So if they have more loans than their deposits can sustain, they're "undercapitalized." If they have more deposits than their loans can sustain, they're "overcapitalized." What your banker is saying is that, at the moment, they have more money sitting around than they can easily loan out. They don't want more money in savings accounts right now; they want to make more loans. Until they can get this back in balance, they won't be trying to attract new savings dollars by paying higher interest rates.
posted by ourobouros at 1:38 PM on October 20, 2022 [14 favorites]
- For you, when you have money in your savings account, that's a revenue source-- you're making money on the interest the bank pays you.
- For a bank, when they're holding your money in a savings account, that's an expense -- they have to pay you interest.
- Banks make much of their money by using their capital (aka the money that you and everyone else puts in their accounts) and loaning it out at a higher interest rate than they're paying you.
So if they have more loans than their deposits can sustain, they're "undercapitalized." If they have more deposits than their loans can sustain, they're "overcapitalized." What your banker is saying is that, at the moment, they have more money sitting around than they can easily loan out. They don't want more money in savings accounts right now; they want to make more loans. Until they can get this back in balance, they won't be trying to attract new savings dollars by paying higher interest rates.
posted by ourobouros at 1:38 PM on October 20, 2022 [14 favorites]
Response by poster: Thank you ouroboros and the others who've shared their knowledge on this question. Much clearer and makes way more sense.
posted by the sobsister at 3:40 PM on October 20, 2022
posted by the sobsister at 3:40 PM on October 20, 2022
Is your bank a publicly traded company? Then it's not in the buisness of holding money or helping you grow your money, their core buisness is increasing shareholder revenue and every extra point of interest given to you is a penny that could have gone to the real customers.
Exactly as ouroboros said, servicing account holders is an expense.
posted by kzin602 at 3:40 PM on October 20, 2022
Exactly as ouroboros said, servicing account holders is an expense.
posted by kzin602 at 3:40 PM on October 20, 2022
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posted by sandmanwv at 11:55 AM on October 20, 2022 [7 favorites]