By AnnaMaria Andriotis
Big online banks are bucking a trend and raising the rates they pay to savers. The question for consumers is whether it’s worth chasing higher yields from bank to bank.
Last month, Sallie Mae Bank, a subsidiary of Sallie Mae Inc., increased the annual yield on its money market account to 1% — the second increase since July, when the yield was 0.85%. Ally Bank raised its savings and money market account yields twice over the same period, from 0.84% to 0.95%. In August, American Express Bank’s savings account yield rose to 0.90%; in May, it was 0.75%.
Prior to the recession, changes this modest would have been seen as small potatoes. But this is the first time since 2008 that several large online banks have raised rates in the same small time window, says Ken Tumin, cofounder of DepositAccounts.com, which tracks bank account rates. With the average savings account now paying just 0.1%, according to Bankrate.com, some analysts see relief for consumers in the trend.
“It looks like a good old-fashioned price war, and that may be the first break that depositors have gotten in a long time,” says Richard Barrington, senior financial analyst at MoneyRates.com.
The changes arrive amid signs that savers are souring on today’s paltry rates. New deposits at banks insured by the Federal Deposit Insurance Corp. slowed to $136 billion during the first half of this year, compared with $343 billion during the same period in 2011, according to research firm Market Rates Insight. Greg McBride, senior financial analyst at Bankrate.com, notes that bumping up savings and money market rates can be a low-risk marketing tool for banks, since they’re free to slash them again whenever they like.
Another factor in play: Competition from newcomers to the U.S. online-banking market. In February and May, respectively, financial services firms TIAA-CREF and Barclays introduced online deposit accounts yielding 1% or more. (TIAA-CREF’s offer closed to new customers in July.) A spokeswoman for American Express says that the competing offers were one factor in its decision to raise rates. Sallie Mae says competing offers weren’t a motivator, but attributes its hike to an effort to bring in more deposits and additional customers.
For account holders at the low end of the yield scale, the newer offers present an opportunity to earn up to 10 times as much interest. The math gets more complicated, however, when the gap between rates is smaller.
Changing accounts to tap into a 20-basis-point increase, for example, would result in an extra $200 per year in earnings for a customer with $100,000 in savings. But consumer advocates note that customers often encounter unexpected fees and other glitches when moving accounts, as a result of the logistics of direct deposit arrangements, fund transfers and automatic bill payments.
Banking analysts say that a switch only makes sense if a consumer is moving enough money — and making a big enough jump in rates — that the extra interest outweighs such hassles. “Otherwise, the gains you might get from it could be hard to justify,” says Tumin.