Why banks don't want your money: 5 ways banks discourage savings
June 14, 2011
Considering that banks offer savings accounts, you'd think they'd be in the business of encouraging savings. However, you could make the argument that in the current environment, banks are actively discouraging customers from building their savings.
Under these circumstances, bank customers who are interested in improving their savings rates should look for banks that are exceptions to this trend.
Before discussing those exceptions, here are five examples of ways that banks discourage savings:
- Offering savings account interest rates less than inflation. Average savings account rates are now more than two percent below the prevailing inflation rate. When savings account rates lag behind inflation, it creates a disincentive to save - you'd get more for your money by spending before you lose purchasing power.
- Raising lending rates, but not rates on savings accounts. Mortgage rates have risen since late last year, while savings account rates have continued to slip. Mortgage rates have been more in step with bond market rates, meaning that banks have ignored the market trend when it comes to savings account rates because they are not enthusiastic about attracting new deposits.
- Offering less reward for large deposits. In fact, based on national averages, there is no extra reward for jumbo ($100,000 or greater) deposits in savings accounts. The extra rates on jumbo CDs are anemic, and the additional rate for jumbo money market accounts has declined over the past year.
- Offering less reward for long-term deposits. A year ago 5-year CD rates were 1.9 percent higher than rates on savings accounts. Now they are just 1.49 percent higher. This decline means less encouragement for long-term savings.
- Service at banks is in decline. Research has shown that customers tend to accumulate more savings at banks where they have had positive service experiences. Despite this, banks have cut back on personal service over the years, and these cuts became even more severe in the wake of the financial crisis. It's tough for banks to attract deposits when, in the case of some banks, it seems as though they don't care about your business.
Finding exceptional banking
The saving grace for the banking industry is that it is extremely diverse, so there are often exceptions to prevailing industry trends.
When it comes to finding banks that encourage higher savings rates, part of this search is subjective. Whether it is due to the convenience of their online tools or the quality of their in-person service, some banks are just easier to deal with than others, and therefore will attract more deposits.
Unfortunately, there is some trial-and-error involved in assessing the quality of any given bank's customer service. However, when it comes to savings account interest rates, the assessment can be much more objective. This goes beyond just looking for which banks have the highest rates on savings accounts on the day you happen to check. Find banks which consistently offer the best rates, since that will matter more to you over the course of a long-term relationship, and zero in on banks that offer the best rates for the product types and account sizes you need.
In short, look for the exceptional banks, and you should find it easier to build your savings.