Certificates of deposit and money market fund options are becoming front and center in banks’ marketing strategies as they begin raising their accelerating interest rates to attract depositors.
Net withdrawals have reached $278 billion nationally, according to the Federal Deposit Insurance Corporation, and to stem the outflow, banks are raising their own interest rates they pay from historically low levels to more than 5% in some cases for certificates of deposit, Bloomberg reported.
“With the stimulus we’ve seen in the last few years, there was a lot of liquidity flooding the banking system,” said JC de Ona, Southeast Florida branch director for Centennial Bank, “and with what we’re seeing today in the economy with inflation, we’re starting to see banks that were once flush with deposits dry up a little bit today.”
The focus on deposits is gaining traction again, he said. “You’re going to see banks concentrate on deposit marketing, relationship banking and treasury services.”
Capital One and Forbright offer a 5% return on certificates of deposit; Marcus by Goldman Sachs’ one-year certificate of deposit has an annual percentage rate of return of 4.5%; US Bank’s seven-month deposit yields 4.4% and its 19-month deposit reaches 4.7%; The American Express National Bank Certificate of Deposit’s annual percentage rate of return is 4.5%; and Wells Fargo & Co.’s 11-month certificate of deposit yields 4%.
Additionally, the Marcus by Goldman Sachs Savings Account APY’s are 3.75%; Synchrony Bank’s savings account is at 4%; Betterment also has a 4% APY; The Western Alliance Bank Savings Account has an APY of 4.5%.
“Money markets have become much more of a tool than what we used to see as traditional savings accounts, just because the returns are typically greater than what happens in savings,” said Mr. they Ona.
Savings account openings have fallen sharply, he said. “Most of the accounts we open today are money market accounts.”
The average interest rate before the Federal Reserve raised rates last year was 1.25%. The current average interest rate is around 1.5%, still well below inflation. Nevertheless, this rate hike – the highest since November 2007 – is slowing the growth of banks’ net interest income by 11% compared to last year, Bloomberg reported.
That growth in deposits, however, added $1.7 trillion to the U.S. banking sector during last year’s fourth quarter, according to S&P Global, and about $632.9 billion to the banking system’s total net interest income for the year, as reported by the Federal Deposit Insurance Corp.
According to Arnold Kakuda, a bank credit strategist at Bloomberg Intelligence, community and smaller regional banks will be hit hardest by rising funding costs if they raise their interest rates to match larger banks.
“There is a lot more competition in the market today on deposits,” said Mr. they Ona. “It will continue and it is going to be top of mind now for banks, for customers; for banks to continue to retain and attract new customers.”