It all started when SmartyPig raised its rate on savings
accounts to 1.00 percent. Then
American Express Bank
raised its rate to 0.90 percent. Next, Ally Bank upped its rate to
If this is a rate war, it might be the best news for bank
depositors since before the financial crisis.
Swimming against the tide
These rate moves are remarkable for two reasons. Firstly, they
go against the prevailing tide of interest rate changes over the
past four years. With lending and investment opportunities limited,
banks have little desire to attract deposits these days -- and
rates on savings accounts certainly aren't very attractive.
Add in the efforts of the Federal Reserve to drive down interest
rates in an attempt to revive the economy, and the result has been
a sustained falling interest rate trend that has driven CD, savings
and money market rates down to extraordinarily low levels.
Those low rate levels are the second reason that the small batch
of rates around 1 percent stands out so much. According to
, the average interest rate on savings accounts these days is 0.08
percent. Thus, those few high-end rates offer a chance to earn 11
or 12 times the national average. All things considered, that's a
great opportunity for depositors.
Assessing the opportunity
Of course, another way to earn around 1 percent on deposits
would be to
choose a long-term CD
. According to the FDIC, five-year CD rates now average 0.98
percent, or right around the high end for savings account rates.
There are advantages and disadvantages to either approach.
The advantage of a CD is that it would lock in the rate. In
contrast, banks are free to lower savings account rates any time
they want, so if you sign up for a high savings account rate, there
is no guarantee you'll still be earning as much in a few
However, that locked-in rate is also a potential disadvantage of
choosing a long-term CD. If interest rates generally start to rise,
savings account rates will typically follow them upward before
long, while in a long-term CD you'd be locked into your rate for a
few years -- unless you pay a penalty for early withdrawal.
Online banks lead the way
It's no surprise to see online savings accounts leading the way
toward higher rates. Online banks are not burdened with the
extensive overhead of a traditional branch system, which gives them
cost advantages they can often pass along to customers in the form
of higher rates and lower fees. In addition, many online banks are
actively seeking business growth, which means they will do things
like offer higher rates to attract customers.
The phrase "rising interest rates" has barely been heard in the
last four years. If the rate war among these banks heats up, we may
be hearing more of it in the months ahead, and that should be music
to the ears of depositors.