Savers should finally be getting a break.
After a decade of being near zero, short-term interest rates have risen sharply in recent months. Typically, these rates — three-month T-bills, Libor, commercial paper — move together because they reflect the same basic economic reality.
Slow but solid growth in the United States since the Great Recession has finally altered the balance between borrowers and lenders. Higher rates mean those with cash to spare now have the upper hand and can demand a higher price to part with it.
That’s how it’s supposed to work. But as any saver can tell you, some short-term rates have barely budged. Those are the ones banks offer to savers on plain-vanilla accounts for checking, savings and CDs.
Banks are almost always slow to lift deposit rates when interest rates start to rise. They make a lot of their money on the spread between the interest they pay to borrow — for banks, deposits are a form of borrowing — and the interest they charge to lend. So keeping those rates as far apart as possible, for as long as possible, helps their bottom line. But during this current rate-raising cycle, banks are being even slower than usual.
One reason is that they don’t really need the money. Loan growth has been relatively sluggish, and banks have ample deposits on hand already.
Another is that after a decade of low interest rates, many banking customers seem almost to have forgotten that they’re supposed to get something in exchange for their money.
“Clients have become a little numb,” said Glenn Schorr, a banking analyst for Evercore ISI, in an email.
Maybe savers should snap out of it. Over the last decade, a new industry has emerged with the potential to alter the balance of power between banks and their customers: internet-only banking.
“The last time there was an upward rate move, really online banks didn’t exist,” said Michael Taiano, a financial analyst at Fitch Ratings. “There are more options.”
Unburdened by the expense of operating retail branches, these institutions are able to offer better interest rates to savers. And they are.
In recent months, deposit rates at online accounts have moved up and now average more than 1.4 percent, according to Fitch data. By comparison, average savings and money market account rates — for accounts less than $100,000 at banks — averaged 0.06 percent and 0.10 percent.
Some people are noticing. Since the end of 2015, deposits at online banks as a whole have risen by 24.5 percent, compared with a 9.3 percent growth rate for American bank deposits over all, according to Fitch. That growth is from a much smaller base, but online banks now control roughly 8 percent of U.S. deposits, up from 5.5 percent in the middle of 2010, according to Ally Financial, an online lender.
Traditional banks may also be starting to notice. Many analysts expect that banks will discuss plans to raise their deposit rates this week: Giant American banks like Citigroup, JP Morgan Chase and Wells Fargo are set to hold conference calls Friday to discuss first-quarter earnings results and their outlook for the rest of the year.
But there are likely to be limits on how fast brick-and-mortar banks are willing to move. Shareholders could hammer their stock prices if they think higher deposit rates could threaten to eat deeply into banks’ profits.
Another thing to consider: The deposits at traditional banks contain a much larger percentage of checking accounts, rather than savings accounts, Fitch analysts say. This is a big advantage for banks, for the simple reason that checking accounts are — in less technical terms — a pain in the neck to change.
Besides having paychecks automatically dropped into accounts, many consumers have A.T.M. cards and automated bill payments tied to their checking account. The idea of dealing with all those details — risking late fees and penalties for missed payments — in order to earn an extra percentage point of interest is not very appealing to most people.
Economists refer to such psychic barriers to consumer change as “switching costs.” And since the switching costs are much higher for checking accounts, they provide something of a protective moat for banks. It helps explain why deposit rates on checking accounts can languish near zero without banks fearing a mass migration of client money to online accounts with higher rates.
But it seems banks would be foolish to let too much money — and too many clients — move online without a fight. Younger consumers, particularly the millennials who are soon to become the largest cohort in the United States, are more likely to move their cash online. They also happen to have more time — and important financial events like getting mortgages and car loans — ahead of them as potential customers.
By 2025, Citibank analysts recently estimated, traditional banks will lose roughly a third of the revenue from their traditional businesses to digital competitors — revenue that comes from services like lending for mortgages, personal loans and small businesses. If banks let the customers of the future walk out the door with a significant chunk of their money at this crucial moment, that might mean the online transformation takes place that much faster.