After two years when banks paid somewhat paltry rates on certificates of deposit, competition has started to heat up in certain corners of the industry.
Several online banks, community banks and credit unions have raised their CD rates relatively aggressively in recent weeks in the wake of Federal Reserve interest rate hikes.
By paying a little more today to offer higher-yielding CDs, these depositories seemingly hope to save money over time, since offering CDs figures to become more expensive later as the Fed continues hiking rates.
“Banks and credit unions have a window of opportunity now to grow term deposits at bargain prices,” said Dan Geller, a behavioral economist and founder of Analyticom LLC.
CDs come in a wide range of term lengths — a few months, a year, three years or longer — and involve a customer locking up their money in exchange for an interest payment.
Those payments have traditionally been low at the largest banks, which have wide sources of funding and feel little competitive pressure to pay higher CD rates. Their vast deposit bases, which got even bigger during the pandemic, make it unlikely that large banks will soon play catch-up in the CD battle that is brewing elsewhere in the industry.
“The big banks are sitting on a mountain of deposits, and with their vast branch and ATM networks, all of that serves as a magnet,” said Greg McBride, chief financial analyst at Bankrate.com. Large banks don’t pay up for deposits “because they don’t have to,” he added.
But those banks and credit unions that do rely more on CDs to fund their loans are seeing more intense competition, thanks to the Fed’s rate hikes.
The Fed raised its benchmark federal funds rate to between 0.75% and 1% this month, and analysts expect further hikes this year as officials seek to rein in inflation. A more aggressive Fed may lead to faster increases in banks’ deposit costs than was once expected, according to analysts.
The recent rate hikes have prompted online banks to act quickly on their CD rates.
Today, customers who lock up their money in a five-year CD will receive an average yield of nearly 1.7% at online banks, according to the tracker DepositAccounts.com. That figure compares with a 0.86% average at the start of the year and a 2.16% yield in February 2020, before the COVID-19 pandemic threw markets into turmoil.
Online banks that raised their CD rates over the past month include: Goldman Sachs’ Marcus, which increased its five-year yield from 2.15% to 2.55%; the credit card issuer Synchrony Financial, which hiked rates from 2.25% to 2.6%; American Express, which raised its five-year rate from 1.25% to 2.4%; and Capital One, where five-year yields rose from 2.15% to 2.25%.
Another online bank, Ally Bank, is paying a somewhat lower yield of 2% on a five-year CD, but that number is up from 1.5%.
Those same online banks also offer high-yield savings accounts — which allow depositors to earn a higher rate on their savings than they might get at a traditional bank, which needs to spend more money to maintain its branch network.
But so far, online banks have been raising their CD rates far faster than they’ve raised their high-yield savings rates, said Ken Tumin, the founder of DepositAccounts.com.
“If rates do go up a lot this time, it makes sense for them to be aggressive now with their CD rates,” Tumin said. Paying top-of-market rates may look expensive today, but it will look like a better bet if the Fed presses on with rate hikes, since it will allow banks to lock in relatively cheap funding for their loans, he noted.
“If it works out, they might be able to pull in a lot of deposits at a fairly low rate,” Tumin said.