Online banks are once again racing for savers’ cash.
Over the course of the Federal Reserve’s seven-month campaign of rate hikes, a common complaint from lawmakers and consumers alike is that rates are going up for borrowing — mortgages, credit cards, personal loans — but not savings accounts. That has changed quickly in the second half of this year, mostly at online banks.
The typical annual percentage yield on high-yield online savings accounts cracked 2% this month for the first time since 2019, according to an index kept by DepositAccounts.com. Rates have quadrupled since May.
The increases stand in contrast to standard savings accounts at brick-and-mortar banks. The average rate on all savings accounts has barely budged, at 0.16%, according to Bankrate. Some of the largest banks are offering only 0.01%.
At Ally Bank there is an offer for a 2.35% APY for a high-yield online savings account, plus a 1% cash bonus up to $500 for new accounts. Just five months ago, that same account paid 0.75% APY on deposits.
Ally, a 20th-century General Motors lender turned 21st-century online bank, explained last week to analysts that it needs to keep up.
“It’s been interesting to see some of the behaviors we’ve observed in the fourth quarter, in the direct banks and a couple of folks now paying in excess of 3%,” CEO Jeff Brown said on an Oct. 19 analyst call. “Frankly, that surprised us a little bit, just in terms of how aggressive some rate payers are being right there.”
It is not unusual for online accounts to offer better rates, noted Ken Tumin, founder of DepositAccounts.com and a senior analyst at LendingTree, which owns the site. The online banks that offer high-yield accounts mostly don’t have the expensive branch networks to maintain and need a way to win customers from incumbents.
But even online accounts shifted to offering comparatively slim rates during the pandemic when the Fed lowered interest rates. The DepositAccounts index fell to 0.45% APY in May 2021.
“For most of 2021, and even for online banks, the savings rates were at lower levels than the last time the Fed held rates near zero,” Tumin said.
Most banks don’t want deposits they can’t productively lend. And both online banks and traditional banks alike were awash with deposits during the pandemic, as spending slowed and government stimulus padded bank accounts. Those same factors caused lending to decrease, leaving banks with excess deposits.
It starts becoming easier to justify moving your money to an online bank versus brick-and-mortar.”
But that trend has changed course in the second half of this year, with loan demand growing and deposits decreasing. That has caused analysts to keep a close eye on rising deposit costs for banks. It is a balancing act. Increases in interest paid for deposits could cut into a bank’s net interest margin, the difference between its costs of deposits and interest earned on lending.
Online-only players are moving more quickly than traditional banks. Goldman's Marcus savings account is at 2.35% and LendingClub is at 2.85%. Apple is getting in the game, too, teaming up with Goldman to enter the market, promising a high-yield savings account for its Apple Card members, though the company has yet to advertise an APY.
But some big bank leaders told analysts in earnings calls earlier this month that the rate they pay on deposits tends to lag Fed hikes and could increase soon. “As rates continue to rise, we would expect deposit betas to continue to increase [and] customer migration from lower yielding to higher yielding deposit products to also increase,” Wells Fargo CFO Mike Santomassimo said on the bank’s Oct. 14 earnings call. Beta is the percent of interest increases that banks pass onto customers.
In the meantime, online banks could try to lure consumers through better rates. Banks are offering an average 0.21% APY on savings, according to FDIC data. Tumin noted that a 2.1% APY savings account could net a $200 annual difference for someone with $10,000 in their account — a much bigger gap than when rates were low last year.
“It starts becoming easier to justify moving your money to an online bank versus brick-and-mortar,” Tumin said.
Is it enough?
Banking customers and their deposits tend to be pretty sticky, however. A January survey by Bankrate found the average American has held onto the same savings account for nearly 17 years, with convenience among the top reasons why.
“For the big banks, or even just banks in general, they are not raising the rates for a very simple reason: They don’t have to,” said Ron Shevlin, chief research officer for Cornerstone Advisors, a banking research firm.
Shevlin said there is a group of customers who actively manage their savings account and are willing to move the funds — what he called hot deposits. But a larger group of U.S. banking customers don’t look to maximize returns on their deposits.
For the big banks, or even just banks in general, they are not raising the rates for a very simple reason: They don’t have to.”
People most often need some sort of trigger to leave their bank, he added — something like a bad customer service experience or an account-opening deal too good to pass up. “For some people, a higher rate can be a trigger,” Shevlin said. “But for a larger group, it just isn’t enough.”
But even a small group of customers shifting to an online bank can make a difference for that company, Shevlin added. Time will tell if the current gap in rates between online banks and brick-and-mortar is enough to convince customers to make the switch.
That will be worth watching as LendingClub and SoFi — both fintech lenders turned chartered online banks — report earnings in the next two weeks.
Ally grew its customer base by 6% year-over-year, according to its earnings report, and said it is pacing for total annual deposit growth. But the firm’s leaders acknowledged to analysts that it expects the interest environment to stay competitive.
But gains in online savings account rates are still trailing the Fed’s overall increase, according to DepositAccounts data. So rates could keep growing.
“Back when the Fed was at 5.25% in 2006, 2007, we had online savings account rates as high as 5% to 6%,” Tumin said. “Online banking account rates often come close to the federal funds rate — and that will likely occur again over the next year.”