Savers Rejoice: Your Interest Rate Is About to Climb

(Bloomberg) -- Hold your horses, savers.

The Federal Reserve raised its benchmark lending rate a few weeks ago, the sixth such increase since 2015. So far, banks have been quick to pass on those hikes to borrowers—though without offering anything extra to long-suffering depositors. Watchful consumers might see headlines about the Fed raising rates, then look at their bank statement and wonder, “What about me?”

There is indeed a disconnect between the Fed's rate hikes and the interest on your savings. Years of stubbornly low rates have made U.S. banks reluctant when it comes to boosting offers on deposit accounts. First, they want to benefit from a fatter margin between what they charge for loans and what they pay to you, the consumer, who provides the funds.

But before you start shopping around for a better rate, you should know that there are signs traditional banks are changing their ways. Some of these have already come to pass—Chase is offering up to $500 to customers who move their savings into the bank's checking and savings accounts, for example. And that's just the beginning. Banks are likely to double the share of Fed rate hikes they pass along to depositors by the end of the year, according to a report by S&P Global Market Intelligence.

“We're right at the point where it's going to start moving up now,” said Marty Mosby, an analyst at Vining Sparks. “Banks have reached the position where profitability has reached a level they're comfortable with, so now they're more interested in defending the profitability they have.”

And with good reason. RBC Capital Market's Gerard Cassidy wrote Monday that U.S. banks face a “battle for deposits” as interest rates move higher and the Fed continues to normalize its balance sheet. What that means is less cash to go around, and thus “an increasingly competitive” environment for banks looking to gather and keep funds.

Until now, banks have been able to keep a lid on deposit offers because so few customers were demanding higher rates. Indeed, just 7 percent of deposit customers pay close attention to rates on their accounts and would move their money if they found a better offer, according to a recent study by the financial advisory firm Raddon.

But Bill Handel, Raddon's director of research, said he is reminding banking clients that 15 percent of their customers typically control as much as 90 percent of their deposits. And they are very much aware of the interest they're getting.

“The percentage of people who do pay attention to these things control an outsize percentage of actual deposit balances,” Handel said. Banks “are going to have to start paying attention to this more than they have.”

This time around, banks are also facing unprecedented pressure from online-only banks such as Goldman Sachs Group Inc.'s Marcus and Ally Financial Inc., which are able to offer some of the highest rates in the industry without the fixed costs of branches holding them back. That means patient depositors could also find themselves the beneficiary of other special offers as banks come up with creative ways to compete with these new entrants.

“In addition to rates, you're going to see other features; for example, companies might be saying ‘Hey, we'll give you more reward points on your credit card purchases if you have a credit card and a certain size deposit with us,”' Tom Michaud, chief executive of Keefe Bruyette & Woods, said in a telephone interview. “They may use rewards points, they may waive other fees.”

To contact the author of this story: Jennifer Surane in New York at jsurane4@bloomberg.net.

To contact the editor responsible for this story: David Rovella at drovella@bloomberg.net.

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