This isn’t going to be pin point accurate, but it has to do with yield curves. The scenario you describe is an inverted yield curve. Why does the bank offer more now than later? – Part of it is because they believe they can make more now than later. Higher interest rates now means they can pay you and still make money, while lower interest rates later mean they don’t believe they can still make their money and pay you the same or higher interest rate. Its all about what the market is predicting about the future.
I think, perhaps wrongly, that a good comparison would be the price of some commodity, say oranges. The price you pay for an orange now may not be the price you pay for an orange 1 year from now; depending on the predicted future scarcity, that future price could either be really high or really low, but the current price could be in between. A predicted wind-fall of a harvest next year will cause future prices of oranges to drop to 10 cents an orange if you lock it in now, but if you wanted to eat an orange today, it’ll still cost you a dollar right now. Same thing with the checking and CD accounts. You are being offered 0.75% savings but the bank is unwilling to commit to anything higher for the CD because it might be predicting a vastly worse future economy, in which case they won’t offer you higher, but lower.
That makes sense. So presumably, if I stay away from the CD, I’m implicitly being more optimistic than the bank: I believe they will keep the on-demand rate higher than 0.40% for at least a year.
There’s some further information that seems to contradict the hypothesis, however: If you look only at CDs, the yield curve is not inverted. The rate for a one-month CD is lower than that for a one-year CD, just as you’d predict. In fact if you go all the way up to a five-year CD you can get 0.90%, higher than the demand rate; presumably this indicates that the bank is more optimistic for this much longer term? But anyway, it seems strange that you’d have a regular yield curve down to one month, and then suddenly it inverts at demand deposits. I wonder if these rates are so low that fixed costs become significant for the bank? Perhaps there’s more paperwork with the CDs, or something.
I do note that the rates have been like this for quite some time now—every so often I wonder to myself “Hmm, what are the CD rates now?”, check them out, and get a bit annoyed. This is the first time I’ve been sufficiently annoyed to ask about it, though. So, it does seem to me that I have some reason to be more optimistic than the bank: To wit, they’ve been implicitly predicting falls in the interest rate for quite some time now, and it hasn’t happened yet.
The problem with that argument is that the Treasury yield curve isn’t currently inverted, and that actually matters in things like this, unless this bank is in a different country. Fixed rates are also typically higher than variable rates at any given point in time because they carry greater interest-rate risk, so that would tend to make this situation more unusual.
Most likely, the bank sees value from customer acquisition in the savings account case, which could be more effective at up-selling/cross-selling. If you want to see this in action, look at the marketing pages at Capital 360 for savings account vs. CD. Capital 360 has a .75% savings rate and a .40% 1-year CD rate. With the savings rate they can connect with checking (overdraft and other fee possibilities) and set up direct deposit (customer retention, low acquisition cost asset growth). The savings account isn’t actually completely fee-free, by the way, they charge $40 for wire transfers, but you have to find the fine print.
This isn’t going to be pin point accurate, but it has to do with yield curves. The scenario you describe is an inverted yield curve. Why does the bank offer more now than later? – Part of it is because they believe they can make more now than later. Higher interest rates now means they can pay you and still make money, while lower interest rates later mean they don’t believe they can still make their money and pay you the same or higher interest rate. Its all about what the market is predicting about the future.
I think, perhaps wrongly, that a good comparison would be the price of some commodity, say oranges. The price you pay for an orange now may not be the price you pay for an orange 1 year from now; depending on the predicted future scarcity, that future price could either be really high or really low, but the current price could be in between. A predicted wind-fall of a harvest next year will cause future prices of oranges to drop to 10 cents an orange if you lock it in now, but if you wanted to eat an orange today, it’ll still cost you a dollar right now. Same thing with the checking and CD accounts. You are being offered 0.75% savings but the bank is unwilling to commit to anything higher for the CD because it might be predicting a vastly worse future economy, in which case they won’t offer you higher, but lower.
That makes sense. So presumably, if I stay away from the CD, I’m implicitly being more optimistic than the bank: I believe they will keep the on-demand rate higher than 0.40% for at least a year.
There’s some further information that seems to contradict the hypothesis, however: If you look only at CDs, the yield curve is not inverted. The rate for a one-month CD is lower than that for a one-year CD, just as you’d predict. In fact if you go all the way up to a five-year CD you can get 0.90%, higher than the demand rate; presumably this indicates that the bank is more optimistic for this much longer term? But anyway, it seems strange that you’d have a regular yield curve down to one month, and then suddenly it inverts at demand deposits. I wonder if these rates are so low that fixed costs become significant for the bank? Perhaps there’s more paperwork with the CDs, or something.
I do note that the rates have been like this for quite some time now—every so often I wonder to myself “Hmm, what are the CD rates now?”, check them out, and get a bit annoyed. This is the first time I’ve been sufficiently annoyed to ask about it, though. So, it does seem to me that I have some reason to be more optimistic than the bank: To wit, they’ve been implicitly predicting falls in the interest rate for quite some time now, and it hasn’t happened yet.
The problem with that argument is that the Treasury yield curve isn’t currently inverted, and that actually matters in things like this, unless this bank is in a different country. Fixed rates are also typically higher than variable rates at any given point in time because they carry greater interest-rate risk, so that would tend to make this situation more unusual.
Most likely, the bank sees value from customer acquisition in the savings account case, which could be more effective at up-selling/cross-selling. If you want to see this in action, look at the marketing pages at Capital 360 for savings account vs. CD. Capital 360 has a .75% savings rate and a .40% 1-year CD rate. With the savings rate they can connect with checking (overdraft and other fee possibilities) and set up direct deposit (customer retention, low acquisition cost asset growth). The savings account isn’t actually completely fee-free, by the way, they charge $40 for wire transfers, but you have to find the fine print.