Keeping cash under your mattress has never been a safe or profitable way to secure personal savings. Yet, with the majority of banks offering APYs close to zero and financial institutions under constant attack from online threats, consumers might find this old-school notion appealing. Or they could look elsewhere—at online banks, which are putting pressure on traditional brick and mortar banks with considerably higher APYs. There is a lot that goes into choosing a bank, so it’s unclear if these competitors will lure consumers away from the incumbents with the promise of higher interest rates alone. Yet, in this era of depressed APYs, their proposition is certainly tough to ignore.
In a recent NerdWallet survey conducted by The Harris Poll, the average checking account balance among Americans was $2,900. Looking at offerings for balances under $10,000, 61% of the 18 leading banks that CI tracks offer interest-earning checking account APYs of just 0.01%. The yearly interest this APY will earn on a balance of $2,900, with monthly compounding, is a measly twenty-nine cents. Schwab has been the only firm in our coverage set to sweeten its offerings in the past five years, raising the APY of its High Yield Investor Checking Account from 0.10% to 0.40%. Other banks’ checking account interest rates have remained largely unchanged.
Exhibit 1 | 61% of banks offer primary checking account APYs of 0.01%
Sources: 2015-2019 Corporate Insight Bank Product Matrix
Exhibit 2 | With the exception of Charles Schwab, there has been little movement in checking account APYs over the past five years
By their nature, savings accounts offer higher APYs than checking accounts. Yet, even those have seen little increase in the past five years among most major banks that CI tracks. The exceptions here are Ally Bank, Discover, Capital One and Charles Schwab. As Exhibit 3 shows, Ally and Discover engaged in a ferocious competition as of Q2 2017. Ally Bank ultimately became the leader with the highest APY of 2.20%, closely followed by Discover (2.10%). The only other players whose APY trajectory is not flat are Capital One, whose 360 savings account saw a 33% rate jump in Q1 2018, and Charles Schwab, whose savings account APY has been rising steadily since Q1 2017. Today, just four out of the 18 savings accounts CI tracks (22%) have APYs over 0.01%. With savings interest rates so low, there is a clear opportunity for outside players to carve out a slice of the market.
Exhibit 3 | Ally, Discover, Capital One and Schwab have boosted savings rates over the last five years
Exhibit 4 | Just four out of 18 firms offer savings account APYs over 0.10%
One thing that unites the banks that offer some of the highest APYs today—Ally, Discover, Capital One 360 and Charles Schwab—is that they all render their services online. In lieu of a higher-touch service made possible by a physical presence, these banks are trying to draw customers with attractive APY rates. These banks have paved the way for fintech firms like Wealthfront, which launched a cash account this February boasting an APY of 2.51%. A customer with a balance of $16,420—the savings account value of the average American household—invested in a Wealthfront savings account versus one of the standard 0.01% accounts would earn an additional $415.28 per year.
Are high rates enough to convince consumers to move cash from established banks with physical branches to online players? Admittedly, there are a lot of factors that can influence a prospective client’s choice of a bank: branch availability and proximity, digital capabilities, reputation, fees, account APYs, availability of financial advice and the ability to hold different bank accounts under the same umbrella. A recent CI survey of 1,117 New York and Boston MSA consumers shows that branches continue to be an important touchpoint, with 55% of respondents indicating that they interact with their banks through the branch. Yet, younger respondents (Millennials and Gen Z) were less likely than their older counterparts to pick branches as a channel they use—at 49% versus 66%. We could be seeing an increased comfort with online-only banking services providers. A May 2019 study by USA Today corroborates this. The data showed that 21% of Americans have transferred their money to an online bank that pays at least 2% interest in the last 24 months, compared to just 6% of Americans last July. This number could increase as more Americans catch on to the online-only bank proposition. In a 2018 survey conducted by WalletHub, 61% of respondents were unaware that online banks tend to offer preferable rates and fees. If awareness figures were to shift, would more customers be investing in online account offerings? While traditional banks firmly stand behind the benefits and attractiveness of a physical presence, the increased savings offered by alternative providers may be too hard to pass up for younger banking customers.