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Banks Raise Interest Rates, Savers Give Up Hope

This week, several banks raised interest rates for diligent savers taking advantage of so-called high-yield savings accounts. American Express Bank, a cousin of a credit card company you’ve probably heard of that reorganized as a bank holding company to better position itself for government protection and balance sheet building, raised its interest rate. Ally Bank, the result of GMAC’s well-funded rebranding campaign, following government intervention in the bank’s parent company, also raised its interest rates.

Banks have a balancing act today. Many banks, particularly those that are subsidiaries or corporate cousins of credit card companies, want to carry more cash on hand to meet newer federal regulations and to have something positive to show on their quarterly financial reports. The real business of a bank is to lend money, though, and when banks can borrow from the Federal Reserve at an extremely low cost, there’s no incentive to seek deposits from customers other than expanding customer base.

Capital One, the fifth largest credit card issuer in the world, purchased ING Direct to strengthen the acquirer’s balance sheet. It was a match made in plastic heaven; ING Direct’s parent company was forced to divest its American branches in exchange for a European bailout. Since the acquisition, customers haven’t seen much difference yet, but ING Direct employees have more to say on the quality of the transition. Layoffs loom throughout the former ING Direct throughout the United States. This isn’t just conjecture. 235 employees are affected in Los Angeles alone.

Cosmetic changes are underway. The bank will lose its classic orange logo and color scheme (inspired by ING Direct’s former headquarters on South Orange Street in Wilmington, Delaware), and the ING Direct name will cease to exist sometime next year. It still remains to be seen how customers will take to the rebranding. It’s safe to say that among savers and credit card users alike, the ING Direct brand has a more positive connotation than Capital One, but keeping the ING Direct branding did not seem to be an option.

ING Direct did not, alongside American Express Bank and Ally Bank, its direct competitors, raise interest rates, even by just a few basis points. ING Direct has fallen far behind in the race to the top of the interest rate chart, and has been relying on inertia and reputation to maintain its deposit base. That might not last long in a new branding environment.

Although a few banks raising rates may seem like a good sign, the Federal Reserve, as somewhat expected, announced it would keep the Federal Funds rate low for several years. Savings account interest rates aren’t tied directly to federal interest rates, but when banks can get much a better deal by borrowing from the Federal Reserve, consumers wishing to save won’t have many opportunities to earn interest.

In many communities throughout the country, consumers are unbanked or underbanked. These would-be customers may not have enough money, living paycheck-to-paycheck or worse, to justify opening a bank account, or they might not trust the financial industry. As much as Wall Street does its best to take advantage of the public, banking, whether with a national bank, community bank, or credit union, is still better than the alternative: storefront check cashing and payday loans. If banks are not making a lot of effort to court even the middle-class consumer, you can be sure the issue of serving the unbanked will not be addressed for a long time.

Savers can forget about the days they were earning 5 percent or more by depositing money into savings accounts. Interest rates will stay low for as long as banks don’t need to attract new customers in great numbers. As long as the Federal Reserve continues to keep federal rates low, savers will be punished. If the continuous monetary stimulus gives way to hyperinflation, rates will eventually increase, but it won’t matter in terms of real earnings. Savings accounts are just not designed to earn income, they’re designed to protect what you do have, with help from the FDIC. The cost consumers pay for this protection is an interest rate below the rate of inflation.

It could be worse. You could be holding your money in a savings account paying 0.01% APY interest, like the Wells Fargo “Way2Save” Savings Account. With this account, you’d need a balance of $10,000 to earn one dollar of interest a year. One dollar. If that’s the type of account you keep, do yourself a favor: Turn that dollar into about a hundred.

Photo: Images_of_Money

Published or updated September 14, 2012.

About the author

Luke Landes is the founder of shizennougyou. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 12 comments… read them below or add one }

avatar 1 Anonymous

Interest rates.. what’s that? I heard it was some relic of the twenth century where banks actually gave you money for putting it into CDs or savings accounts.

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avatar 2 Anonymous

The fed is keeping rates low FOR SEVERAL MORE YEARS?
Hello, Mr. Romney! You’ll have my vote in November.

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avatar 3 Anonymous

Savings account aren’t really for saving anyways unless by saving you mean the slow dwindling of your cash. They’re about FDIC insurance (or national equivalent). The rate has always been less than inflation, and always will be.

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avatar 4 Anonymous

Hi W,

There have been times where CDs/savings rate have been higher than the rate of inflation. Obviously right now no.

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avatar 5 Anonymous

Oh, and by the way, Flexo, seems some of the warning signs of hyperinflation
seem to be popping up. Have you checked the weights on boxes at the grocery store
lately? Prices aren’t “up” 10%, seems like contents are going DOWN 10%, or \whatever….

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avatar 6 Anonymous

My girlfriend used to have a Way2Save account when it was Wachovia. It paid decent interest rates the first year or so then tanked and she moved to ING Direct. I’ll be sad if Capital One ruins it but I know there are other good options out there that I may have to investigate soon.

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avatar 7 Anonymous

We belong to a credit union to bypass the big banks, but even there the interest rate is dismal. I was planning to open an ING account this November when they do their Thanksgiving bonus drive. I guess I will be looking for another alternative.

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avatar 8 Ceecee

ING used to be the best in terms of interest rates. Not anymore. I’m one of those laggards who still has an account with them, and you have inspired me to look around. I’ve spoken to a rep at Ally Bank before and they are very helpful. May be time to move on.

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avatar 9 qixx

I too have an ING account. I’m still in that wait and see mode. Let’s see what effect Capital One will have on my accounts. I’m not opposed to moving my money again. It was not that hard last time.

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avatar 10 Anonymous

And as all ING customers have no doubt noticed, but most bloggers have
been silent about (for all I can see) is that ING has cut THEIR rates to .75%
I’ve already started moving my money out, to Ally and Discover…..

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avatar 11 Anonymous

i say if you have money, buy properties without mortgage and rent. keep a bare minimum in the bank. a 1 bedroom apt in nyc will easily net you over $40,000 a year, vs. the nickels you make at these chitty banks.

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avatar 12 Anonymous

At this point, there is no reason to keep money in ING Direct/Capital One. Two years ago I moved to Barclays and their online savings account, currently earning 1.00%. Yes, setting up other online savings accounts is not as easy as ING Direct was, but do your wallet a favor and move to another bank. I use ING as a test – whatever their interest rate is, I add .15% to it
and look for banks with that rate or higher. So right now, it’s any bank giving 0.90% or higher,
and trust me there are lots. The move will make you happy! Free yourself!

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