Don’t Overlook Small Banks for the Best Savings Rates

Remember when you could get a 4 percent return on your bank savings account?

Neither do we.

The days of getting decent yields on your savings accounts from your bank have been gone for ages. We hardly consider a savings account as a good option for competitive returns anymore. Back in 2015 when the rates dropped to 0 percent on savings accounts, everyone was forced to look elsewhere for the best savings rates for their money.

Times are finally beginning to change.

With the Federal Reserve raising rates again, and more expected increases on the way, banks are offering the highest savings rates in years. But if you want to get the best rates, it pays to shop around. And don’t limit yourself to the big banks–some of the best rates are offered by small players you may have never heard of.

It mostly boils down to the need to attract customers. Large banks simply don’t have to work so hard to bring in deposits. They offer a name-brand reputation and the convenience of multiple branches, which is enough to bring in and retain customers.

Big banks can also offer a longer list of services that are attractive to customers. As long as their customer base is strong, there is no incentive to offer higher rates to compete.

But the large, name-brand banks also know they can count on inertia to help them retain their customers. With rates being low for so long, customers became lulled into thinking that was all they could expect. Until there is a significant shift away from the large institutions, these banks are unlikely to jump into the rate game.

Small banks, on the other hand, know that one of the best ways to stand out is to offer higher rates to attract deposits. Being smaller can also allow them to be more nimble, and thus small banks are quicker to respond to rate hikes by the Fed.

A 2017 study from DepositAccounts.com clearly showed large banks consistently offered the lowest rates to customers. They defined small banks as those with assets of less than $1 billion, and medium-sized banks carrying between $1 billion and $25 billion in assets.

When comparing rates for liquid accounts such as checking and savings, small and medium-sized banks were offering rates twice as high as the larger institutions. While the differences were not quite as dramatic, small and medium-sized banks also offered the best rates on 1 and 5-year CDs.

A more in-depth analysis where banks were divided into 16 more detailed categories by size revealed that the very largest banks, with assets of $100 billion or more, offered by far the lowest rates. In fact, for the most liquid assets, rates dropped for these mega-banks to near zero.

Finally, DepositAccounts.com looked at the 20 highest-yielding checking and savings accounts and then categorized the banks offering them into three size groupings (small, medium and large).

The result? Small banks by far outnumbered medium and large banks for offering the best rates.

The study showed that 65 to 80 percent of the highest rates were offered by small banks, those with assets below $1 billion. Put another way, 13 out of the 20 savings accounts with the highest rates came from small banks.

The best savings rates at the beginning of 2018 are hovering around the 1.0 to 1.6 percent range, according to Consumerism Commentary, which conducts a monthly survey of bank rates.

While these figures will hardly inspire cartwheels of joy, they are notably better than the range of 0.75 to 1.05 percent returns available back in 2015.

The highest rates are usually offered for money market accounts and CDs, while lower rates pertain to savings accounts. According to Consumerism Commentary’s survey, the best rates for five-year term CDs ranged from 2.55 percent to 2.65 percent.

The lowest interest rates generally pertain to checking accounts. To minimize missing out on returns, keep only what you need in your checking account and move the rest into higher yielding accounts.

If you are looking for low-risk options for improving the return on your investments, shopping for a higher rate on your savings accounts is the best strategy. Greg McBride with BankRate.com told CNBC that by not exploring the best savings rates, “you’re leaving money on the table.”

Of course, you should never put your hard-earned money into some risky fly-by-night institution just because they are offering a great return on your deposits.

Small banks do tend to have higher failure rates than larger, established banks. However, according to the Federal Deposit Insurance Corporation, failure rates have dropped significantly since the financial crisis, with only eight failures occurring in 2017.

Other factors can also affect whether a bank with the best savings rates will actually give you the best return on your money. Higher bank fees, for example, can negate any benefits of a higher yield.

Keep in mind that your money is insured up to $250,000 at an FDIC insured bank. However, not all investment products outside the traditional checking and savings accounts are insured.

These include mutual funds, annuities, life insurance policies, and stocks and bonds. It is a good idea to check with the FDIC to determine whether or not your money is protected.

Always keep in mind that what may be true one month could easily change the next. It is easy to get complacent with your bank as long as everything is going smoothly.

But changes in the interest rate by the Fed or any developments that affect the U.S. financial situation could result in an adjustment by your current bank.

Nevertheless, the data currently suggests that paying attention to what smaller banks are offering can result in your finding the best savings rates at this time.

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