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business newsDeposit Interest Rates Continue Steady Disappearance
By
Stephanie Taylor Christensen
Apr 15, 2011 3:05 pm
Deposit rates have been steadily creeping out of sight since the financial crisis began and the Federal Reserve started cutting interest rates to stimulate the economy.
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Deposit rates have been steadily creeping out of sight since the financial crisis began and the Federal Reserve started cutting interest rates to stimulate the economy. Before the economy turned on its ear, not knowing what to do with your money wasn’t such a costly conundrum. In 2006, a one-year Certificate of Deposit (CD) paid an average of 3.81% annual percentage yield (APY). In 2008, that same CD offered an average of 2.17% APY. Today, a one year CD APY ranges from 0.50% to - 1.30%, according to Bankrate.
In 2006, when deposit interest rates were appealing, Money recognized the top-yielding savings accounts offered online. Back then, HSBC Direct paid 4.80% with just a $1 minimum investment. ING Direct offered an introductory rate of 4.75%. Emigrant Direct offered a 4.24 % savings interest rate. Today, HSBC (HBC) (whose accounts are now called HSBC Advance) offers .90% for its Online Savings Account. The Orange Savings Account by ING (ING) pays a 1.00% interest rate. Emigrant’s American Dream Savings Account is far less dreamy than it was in days gone by, offering .90%.
Online savings accounts used to be synonymous with higher rates. The business model was essentially founded on “quid pro quo” logic. The accounts involved stipulations around how and where customers could bank, thus reducing overhead. The bank would in turn, reward customers with a higher interest rate. However, long-term analysis of customer banking behavior when it comes to online-only accounts have turned the axiom on its ear, and financial institutions are viewing the customer-value model differently. Where customers who used fewer physical or face-to-face services were once perceived as more appealing, many institutions are now aiming to attract the customers it once paid to banish into cyberspace, back into the branch.
The move is likely due to evidence that online customers use fewer “sticky services” like direct deposit, automatic savings plans and bill pay services. Because these services deepen a person’s relationship to their bank, the presence of them in a customer portfolio generally leads to a lowered likelihood that the customer will attrite and take their business elsewhere. In March, PNC Bank (PNC) announced that its “Virtual Wallet” service, once reserved for online customers only, was being integrated into accounts generally serviced at a brick-and-mortar branch. The move is likely part of a strategy aimed at deepening relationships and share of customer household wallet.
Citigroup (C) has taken a more obvious approach to its profitable customer acquisition strategy. Its “Ultimate Savings Account” which can be opened only by phone or online, caps the annual percentage yield (APY) one can earn on a deposit balance at .40%. Yet, the similar Citibank Savings Plus account, which can be opened in a banking office, by phone or online, pays an APY up to .45% on deposit balances.
However, banks may soon have no choice but to become more competitive in deposit acquisition once again, partly due to newly introduced government banking regulations. In late March, Market Rates Insight released an analysis predicting that “competition for deposits is going to intensify due to the enactment of the Dodd-Frank Act because institutions with a relatively large amount of non-deposits liabilities will see a significant increase in their insurance fees. To offset the fees, they’ll seek more “to acquire more liquidity through retail deposits.”
Market Rates Insight Executive Vice President Dan Geller, Ph.D., expects that competition for retail deposits will heat up among all institutions, including credit unions. In addition to a potential way for financial institutions to offset insurance fees, he explained that “retail deposits have unique profitability characteristics that wholesale deposits and non-deposit liabilities do not have.”
Does this mean that deposit rates will begin to climb back up? Not likely, according to Geller, who says that that “current net interest margins don't leave much room for banks to increase rates” (without slicing into profitability). Further, he explains that institutions aren’t interested in acquiring the fickle rate shoppers who move from one institution to the next based on a few additional basis points. They are seeking long-term customers that they can build and deepen relationships with.
Geller predicts that institutions will focus more on relationship incentives, both to existing and new customers. Such promotions will likely come in the form of a higher interest rate with the addition of sticky services, particularly when it comes to checking accounts. With checking accounts comes the opportunity for fee services like ATM usage and overdraft services. “Currently, non-interest income (mostly fees on services) makes up 30% of total income for institutions -- up from 24% three years ago,” according to Geller.
Geller also pinpoints long-term CDs as a hot product for banks because inflation is growing -- and will likely continue to do so until the Fed increases the Funds rate. “This is the ideal time to lock in money for the long term since it is almost certain that rates will go up once the Fed moves to increase the Funds rate,” explains Geller.
No positions in stocks mentioned.
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