Why Banks Are Paying Savers So Little, and What to Do About It

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The Federal Reserve has raised interest rates four times this year to cool inflation, bringing its benchmark rate from near zero to a range of 2.25% to 2.5%. The average savings account at a large bank meanwhile offers 0.13%. Don’t expect the disparity to close soon—particularly if you stick with your brick-and-mortar branch.

“Deposit rates are more than anything a reflection of banks’ efforts to attract new deposits” or at least retain existing ones, said Greg McBride, chief financial analyst for Bankrate.com. And banks “are sitting on a mountain of deposits” after the pandemic swelled account balances, he added.  

But there are some safe, federally insured options to squeeze a little more interest out of your idle cash, and even the big banks may eventually raise rates, at least a bit. It all depends on your willingness to go digital or lock up your money for a period. 

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First, it’s important to understand the dynamics that sway banks’ deposit rates. The benchmark fed funds rate is only loosely correlated with the yields that banks offer their depositors. Simply put, banks make money by making loans, said Chris Kotowski, managing director and financial analyst at

Oppenheimer
,
and banks’ net interest income rose an estimated 16.5% from 2021 to 2022, according to Oppenheimer’s analysis, after falling 3.2% from 2020 to 2021. 

Large banks are now benefiting from a bigger difference between the rate they charge borrowers and the rate they pay their depositors. And with deposits high, legacy big banks don’t feel much pressure to raise depository rates right now. 

That’s not to say that big banks’ depository rates won’t budge, analysts say. They could edge higher as the year progresses, and you may already be able to score marginally higher rates with higher deposit levels at many banks. Once the central bank stops raising rates, which some think could be sooner rather than later, then bank depository rates generally continue to rise for the next two or three quarters, said David Konrad, managing director of equity research at Keefe, Bruyette & Woods. “The banks get the benefit of the lag early on, but the consumer kind of catches up at the back end,” he said.

Online-only banks, by contrast, have yields of 1.5% and even 2% right now. Their low overhead means they can offer higher yields than brick-and-mortar banks in any interest rate environment, so they began raising off a higher base. And given the competition online-only banks face, they’ve raised their rates more in recent months. 

Many customers maintain two accounts, one at a big bank where they receive their paychecks and pay their bills, and another at an online-only bank where their savings earn much higher interest. About 27% of consumers have an online-only banking relationship, according to J.D. Power, and of those 79% still maintain a checking account somewhere else. Financial pros say it’s important to research the ease with which you can transfer and access your money, since some banks have more restrictions than others. 

“The core banking relationship tends to be very sticky,” McBride said, but consumers increasingly realize they don’t need to divorce their original bank in order to move some of their money elsewhere and earn higher rates. 

Online-only banks include established names that have their own federal banking charter, such as Ally and

Goldman Sachs

‘ Marcus, and “neobanks” like Chime, which are run by fintech companies and provide banking services through another entity. Either way, your money is insured by the Federal Deposit Insurance Corp. 

Generally speaking, the traditional online-only banks offer higher savings interest rates than neobanks. Traditional online-only customers tend to be older and more savings- and interest rate-oriented, whereas neobank customers tend to be younger and more likely to select their bank on the basis of free services and low fees, said Paul McAdam, senior director, banking, J.D. Power.

There are some further distinctions between the neobanks and the more established online banks. The neobanks tend to focus more on the kind of no-fee checking accounts that are popular among younger consumers. Legacy online banks tend to get higher marks for customer support than the neobanks, according to J.D. Power. 

Another option to score higher rates, if you can tolerate tying your money up: certificates of deposit. While liquidity is paramount for your emergency fund, CDs are offering competitive rates these days for cash you’re able to lock up for anywhere from a few months to five years or more. Here, too, you’ll score higher rates online versus brick and mortar. Marcus, for example, is offering 2.30% APY for a one-year online CD and 3.20% for a five-year online CD. 

Given the rate disparity between brick-and-mortar banks and online-only banks, “savings account” might be a misnomer for big bank offerings. Big banks might give preferential treatment, including better rates, to customers with high balances or multiple accounts, but for the most part they’ve ceded the interest rate-sensitive part of the market to the online-only banks, said McAdam said. 

Big bank accounts are mainly a place to keep “transactional balances” like your paycheck and the money to pay your bills, Kotowski said. He recently bought a car and needed a cashier’s check. “There are still some things you need your bank branch for,” he said.

Write to Elizabeth O’Brien at [email protected]