Piquing Interest: Financial institutions give piggy banks a run for your money

Jason England: Appealing rates led to personal investment in CDs for the first time.

Derek Fraley: It's better to chase relationships than rates.

Brad Christman: Market likely will remain competitive as banks pursue deposits.

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Some people carry special memories of their first savings account – the embossed leatherette booklet that opened staple-side up and recorded a best-handwriting record of deposits, with the colorful flourish of a teller’s initials at the end of every row.

Arvest Bank Springfield President and CEO Jason England remembers.

“When I was a kid, I had a savings account, and it earned more than a quarter of 1%,” he said. “Things had gotten to the point where it was a quarter of a percent on most savings accounts, and that didn’t exactly incent savings.”

Recently, the seasoned bank president tried something new: certificates of deposit.

“I have a couple of CDs myself, and I hadn’t had a CD in my life,” he said. “I got them here because those rates were appealing.”

When it comes to savings instruments, England’s not alone in rediscovering the classics. Arvest is currently offering a 7-month no-penalty CD with an annual percentage yield of 5%, as well as a 14-month rate boost CD, at 5.25% APY. It also offers a money market account at 4.5% on balances $50,000 and above.

Look up in almost any corner of town and there’s a chance of spying an offer for a high-yield account. Billboards demand double-takes – as with BluCurrent Credit Union’s Prosper Checking account, offering an APY of 7.5% on accounts with balances of up to $7,500.

Brad Christman, BluCurrent’s senior vice president and CFO, said traditional savings accounts are dwindling a bit, but people who have wealth are moving their funds into CDs and more high-yielding items.

“I’ve seen a lot of activity and movement into money markets,” he said. “The biggest transition is into term deposits. There’s been a lot of promotions by the industry in general as a lot of those funds that were once liquid are put into term deposits. It’s been highly competitive.”

BluCurrent’s CDs range from a 6-month term with an annual percentage yield of 4.6% to a 60-month term at 3.05%.

Although banks and credit unions try to make savings attractive, American banking customers have a ways to go before they become dedicated savers.

GoBankingRates, an online publication covering personal finance, surveyed 1,000 American adults in 2023 and found 32.9% have no more than $100 in their savings account. That’s up nearly 12 percentage points from the year before.

Similarly, the Federal Reserve Economic Database reported the personal savings rate – a measure of how much people save as a percentage of their disposable income – was 3.9% in August, compared to a decadeslong average of 8.9% in previous years.

Finance 101
Derek Fraley, president and CEO of the century-old Systematic Savings Bank, said the explanation for rising interest rates is simple.

“Short-term interest rates are up. Since March 2022, overnight borrowings are up via the Fed’s efforts to curb inflation,” he said. “The Fed funds rate – the rate at which banks lend to one another on an overnight basis – went from 0.25% to 5.5%. That’s an absolute movement of 2,100%.

“Think of an industry where your cost of goods sold – which is what deposits are for us – increase 2,100%.”

The federal funds rate is a proxy for deposit products, Fraley said, so as this rate rises, so do deposit rates, as consumers can find alternative uses for their funds in a rising rate environment.

The situation is exaggerated in Springfield, Fraley said, because the city has a lot of banks. The Federal Deposit Insurance Corp. counted 27 banking institutions in 2022, not including nine credit unions.

“You have an inordinate number of institutions competing for a finite amount of savings,” he said. “And not just with one another, but with alternative depositories, such as online banks or brokerages.”

England said the current moment is unusual.

“Really since 2008, we have been in a historically unique rate environment,” he said. “Fifteen years is a long run to be in an extremely low-rate market.”

To curb inflation, England said, the Fed has a couple of tools. For one, it can make money more expensive by raising interest rates. The current rate of 5.5% follows 11 rate increases by the Fed over 18 months.

“They have raised interest rates at a pace that we have not seen in forever,” he said. “It’s been so impactful to go from basically zero to where we are today in 12-16 months.”

Lending rates and deposit rates move pretty much in tandem, England said.

“One lags a little on the way up and the other lags on the way down,” he said, noting deposit rates rise more quickly than loan rates.

Another tool the Fed has is the supply of money, he said.

“When they started putting in, as they did with COVID, a couple trillion dollars, we were awash in deposits with really nowhere to spend it,” he said. “They drove down rates through supply and demand, and proportionately our interest rates were close to zero as well.”

As money becomes scarcer, banks have to have money to lend customers, he said.

“If we start making loans with less deposits, we have to entice customers,” he said. “There’s a battle for deposits from all banks because there’s a shrinking supply.”

Legacy Bank & Trust Co. is in the game, offering a 6-month high-yield CD with a 5.65% APY and an opening deposit of $1,000 with no stated balance cap.

Dustin Royster, Springfield market president, said he has been in banking for 22 years.

“It’s been a really long time since we’ve seen deposit and loan rates where they’re at right now,” he said.

“It would’ve been early in my career that I would have seen rates in this range.”

Not all banks
Fraley said some banks, like his, choose not to participate in the trend of offering high interest rates.

“For one, if you don’t have the highest rate in the market, you are competing against yourself, if you advertise your rates,” he said. “This is why you see so many one-off specials.”

Additionally, he said, it’s not worth it to try to out-advertise banks with seemingly bottomless ad budgets.

“If you are a small bank, the soft costs of opening a couple hundred new, expensive accounts who are going to leave as soon as they see a new deposit product at 0.005% more than yours just isn’t feasible,” he said. “The thought is to pay up on deposits to get new customers. But this rarely works. ‘Hot money’ deposits are seldom interested in a relationship.”

He added that the marginally higher rates may not be worth switching institutions.

He said Systematic offers what he calls pocket products – those that are not advertised but may be made available to customers the bank has a relationship with or who bring relationships to the bank.

“Everything we do is relationship based,” he said.

Not going away
Christman said he doesn’t anticipate lower rates going away any time soon.

“The market is going to still be competitive because everyone still needs these deposits,” he said. “We can’t afford to lose them.”

When customers are lost to competitors, institutions have a chance to win them back with new promotions, he said.

Consumers’ savings have fallen sharply from what they were a couple of years ago, Christman said.

“(Financial institutions) had already absorbed that growth and put it to work for them,” he said. “Now, it’s about trying to maintain and grow, if possible, what our deposits are.”

Christman said the rates that are offered give glimpses into the strategies by different institutions.

“Looking at what terms are available right now with a CD gives an idea of what institutions are thinking,” he said. “If they’re offering 6-, 9-, 12-month promotion, they’re hoping that when that renews, they’ll be able to re-price that deposit into a lower rate.”

He added that new money is the goal.

“For us, part of our success and how we determine whether a promotion is successful is if we’re able to bring in new money,” he said. “It’s not just opening a CD with funds they had in a savings account, but it’s bringing in a check from somewhere else they had an investment in.”

Nationally, consumers seem slow to discover the high-yield savings instruments that may be available right down the street from where they live or work, even as banks work so assiduously to woo them.

A Fed survey of consumer finances from 2019-22, released this month, found the percentage of U.S. consumers who have a CD is 6.5%, down from 7.7% in 2019, though 99% hold some type of financial asset.

Transaction accounts, such as checking, savings and money market accounts, are the most common financial assets in 2022, with an ownership rate of 98.6%. The conditional median value of transaction accounts rose 30% to $8,000 between 2019 and 2022, the Fed study states.