Banks Offering Paltry Interest Rates Lose Rich Customers

Big banks are still paying low interest rates on checking and savings accounts, even though the Federal Reserve has raised rates significantly in recent years. Wealthy customers who have been waiting for higher rates are now moving their money into investment products that have kept pace with the Fed's increases.

January 24, 2023

6 minutes

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Wealthy savers are starting to move their money out of bank accounts and into investments that offer higher returns. This shift could have a big impact on the banking industry.

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Big banks are still paying low interest rates on checking and savings accounts, even though the Federal Reserve has raised rates significantly in recent years. Wealthy customers who have been waiting for higher rates are now moving their money into investment products that have kept pace with the Fed's increases.
The average savings account pays a 0.33% interest rate, according to the Federal Deposit Insurance Corp. Treasury notes, money-market funds and brokered certificates of deposit, meanwhile, all pay between 4% and 5%.

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According to Jason Goldberg, an analyst at Barclays PLC, every time the Federal Reserve raises interest rates, the opportunity cost of leaving cash in low-yielding accounts increases. As a result, consumers with extra cash are becoming more proactive with it. Banks typically have different business units for managing different types of deposits. For example, large banks' wealth management businesses may hold billions of dollars in deposits for customers whose investments they manage. This can help ensure that customer funds are properly segregated and managed according to their specific needs.

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Banking customers have accumulated extra savings during the pandemic, though they are now spending some of it. Despite higher yields available elsewhere, they have so far largely opted to keep what's left in their bank accounts.

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The difference was clear to see in Bank of America Corp.'s BAC 1.39% Bank of America's fourth-quarter earnings showed a decline in deposits at the bank's wealth unit, which includes Merrill Lynch Wealth Management. Deposits fell 17% in 2022 to $324 billion. Deposits in the consumer unit fell 0.6% to $1 trillion.

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Affluent customers moved money into money-market funds and Treasurys, while the typical consumer-banking customer simply had less extra money to make such investments, Brian Moynihan said on a call with analysts.

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The bank's interest rate on consumer deposits was just 0.06% in the fourth quarter, while the rate on U.S. interest-bearing deposits across all businesses was 0.88%. However, customers of Merrill Lynch can now earn a 3.98% rate on an account with a minimum $100,000 opening deposit. The flight of wealth deposits poses a big business issue for firms such as Charles Schwab Corp., which relies on the extra cash that investors leave in their accounts for a large part of its revenue. The biggest U.S. banks have a wider range of businesses, so they're not as reliant on deposits. They also accumulated so many extra deposits at the start of the pandemic that losing some isn’t a huge problem. Still, they are starting to try to stem outflows by offering higher interest rates to their wealthy clientele.

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As interest rates rose above 1%, people started to consult with their financial advisers about what to do with their money. Now that rates are above 4%, there is a frenzy, according to Gary Zimmerman, CEO of MaxMyInterest. This service helps clients of financial advisers move their extra cash into high-yielding savings accounts at smaller banks. Zimmerman reports that clients are coming to him with million-dollar checking accounts at Wells Fargo.

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Wells Fargo is a leading financial institution with a long history of success. They offer a wide range of products and services, and have a strong commitment to customer service. They are a great choice for anyone looking for a reliable and trustworthy financial partner. JPMorgan Chase is one of the largest banks in the United States. It offers a wide range of financial services, including investment banking, commercial banking, asset management, and private equity.

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JPMorgan has raised rates on certificates of deposit (CDs) across the board, but the best rates are typically reserved for wealthier customers. For example, a customer depositing less than $10,000 in a one-year CD can earn 3%, while the rate goes up to 3.75% for those depositing $100,000 or more. However, people buying a similar CD from the bank through brokerage Fidelity Investments can earn 4.75%.