This week, several banks raised interest rates for diligent savers taking advantage of so-called high-yield savings accounts. American Express Bank, a cousin of a credit card company you’ve probably heard of that reorganized as a bank holding company to better position itself for government protection and balance sheet building, raised its interest rate. Ally Bank, the result of GMAC’s well-funded rebranding campaign, following government intervention in the bank’s parent company, also raised its interest rates.
Banks have a balancing act today. Many banks, particularly those that are subsidiaries or corporate cousins of credit card companies, want to carry more cash on hand to meet newer federal regulations and to have something positive to show on their quarterly financial reports. The real business of a bank is to lend money, though, and when banks can borrow from the Federal Reserve at an extremely low cost, there’s no incentive to seek deposits from customers other than expanding customer base.
Capital One, the fifth largest credit card issuer in the world, purchased ING Direct to strengthen the acquirer’s balance sheet. It was a match made in plastic heaven; ING Direct’s parent company was forced to divest its American branches in exchange for a European bailout. Since the acquisition, customers haven’t seen much difference yet, but ING Direct employees have more to say on the quality of the transition. Layoffs loom throughout the former ING Direct throughout the United States. This isn’t just conjecture. 235 employees are affected in Los Angeles alone.
Cosmetic changes are underway. The bank will lose its classic orange logo and color scheme (inspired by ING Direct’s former headquarters on South Orange Street in Wilmington, Delaware), and the ING Direct name will cease to exist sometime next year. It still remains to be seen how customers will take to the rebranding. It’s safe to say that among savers and credit card users alike, the ING Direct brand has a more positive connotation than Capital One, but keeping the ING Direct branding did not seem to be an option.
ING Direct did not, alongside American Express Bank and Ally Bank, its direct competitors, raise interest rates, even by just a few basis points. ING Direct has fallen far behind in the race to the top of the interest rate chart, and has been relying on inertia and reputation to maintain its deposit base. That might not last long in a new branding environment.
Although a few banks raising rates may seem like a good sign, the Federal Reserve, as somewhat expected, announced it would keep the Federal Funds rate low for several years. Savings account interest rates aren’t tied directly to federal interest rates, but when banks can get much a better deal by borrowing from the Federal Reserve, consumers wishing to save won’t have many opportunities to earn interest.
In many communities throughout the country, consumers are unbanked or underbanked. These would-be customers may not have enough money, living paycheck-to-paycheck or worse, to justify opening a bank account, or they might not trust the financial industry. As much as Wall Street does its best to take advantage of the public, banking, whether with a national bank, community bank, or credit union, is still better than the alternative: storefront check cashing and payday loans. If banks are not making a lot of effort to court even the middle-class consumer, you can be sure the issue of serving the unbanked will not be addressed for a long time.
Savers can forget about the days they were earning 5 percent or more by depositing money into savings accounts. Interest rates will stay low for as long as banks don’t need to attract new customers in great numbers. As long as the Federal Reserve continues to keep federal rates low, savers will be punished. If the continuous monetary stimulus gives way to hyperinflation, rates will eventually increase, but it won’t matter in terms of real earnings. Savings accounts are just not designed to earn income, they’re designed to protect what you do have, with help from the FDIC. The cost consumers pay for this protection is an interest rate below the rate of inflation.
It could be worse. You could be holding your money in a savings account paying 0.01% APY interest, like the Wells Fargo “Way2Save” Savings Account. With this account, you’d need a balance of $10,000 to earn one dollar of interest a year. One dollar. If that’s the type of account you keep, do yourself a favor: Turn that dollar into about a hundred.
Published or updated September 14, 2012.