Why is there so much variability on interest rate accounts

Question

I'm looking for a safe way to get some interest on about $100k. I'm on a student visa in the USA (MA), so many types of account are not available to me. I'm thinking of going with a regular savings account.

There seems to be a huge variability across banks, though:

• Citizen's bank offers 0.02%
• Bank of America offers 0.05% (conditional on balance > 100k)
• TD Bank offers 0.30% (0.5% with "rate boost")
• Capital one offers 0.75% (no conditions) or 1.00% (MMA)

All of these accounts seem to be FDIC insured. What's the catch? More precisely:

• Are there differences between money-market accounts and regular saving accounts?
• Are there significant downsides to choosing one of the higher-interest banks? What should I be wary of? Concretely, if I put these $100k in a BofA savings account they'll get me $20 in interest, while putting them with Capital One would get me $750. Am I miscalculating something?

Answer 1

In answering your question as it's written: I don't think you're really "missing" something. Different banks offer different rates. Online banks, or eBanking solutions, such as CapitalOne, Ally, Barclays, etc., typically offer higher interest rates on basic savings accounts.

There are differences between Money Market accounts and Standard Savings accounts, but primarily it comes down to how you can access your cash. This may vary based on bank, but Ally has a decent blurb about it:

Regular savings accounts are easy to open and, when you choose an online bank like Ally Bank, you tend to get interest rates that are more competitive than brick-and-mortar counterparts, according to Bankrate.com. Additionally, as a member of the FDIC, Ally Bank gives you peace of mind knowing that the money in your Ally Bank Online Savings Account is insured to the maximum allowed by the law.

Money market accounts are easy to open, too. And again, online banks may offer better rates than traditional banks. Generally, you have a bit more flexibility of access with a money market account than you do with a savings account. You can access funds in your Ally Bank Money Market Account through electronic fund transfers, checks, debit cards and ATM withdrawals. With savings accounts, your access is limited to electronic funds transfers or telephone withdrawals (and in-person withdrawals at traditional banks). Both types of accounts are subject to federal transaction limits.

Here's a bit more information about a Money Market Account and why the rate might be a little bit higher (from thesimpledollar.com):

A money market deposit account is a bit different. The restrictions on what a bank can do with that money are somewhat looser – they can often invest that money in things such as treasury notes, certificates of deposit, municipal bonds, and so on in addition to the tight restrictions of a normal savings accounts. In other words, the bank can take your money and invest it in other investments that are very safe.

Now outside of your question, if you have $100K that you want to earn interest on, I'd suggest looking at options with higher rates of return rather than a basic savings account which will top out around 1% or so. What you do with that money is dependent on how quickly you need access to it, and there are a lot of Q&A's on this site that cover suggestions.

Answer 2

Generally, if you watch for the detail in the fine print, and stay away from non-FDIC insured investments, there is little difference, so yes, pick the highest you can get.

The offered interest rate is influenced by what the banks are trying to accomplish, and how their current and desired customer base thinks.

Some banks have customer bases with very conservative behavior, which will stick with them because they trust them no matter what, so a low interest rate is good enough. The disadvantage for the bank is that such customers prefer brick-and-mortar contact, which is expensive for the bank. Or maybe the bank has already more cash than they need, and has no good way to invest it.
Other banks might need more cash flow to be able to get stronger in the mortgage market, and their way of getting that is to offer higher interest rates, so new customers come and invest new money (which the bank in turn can then mortgage out). They also may offer higher rates for online handling only.

Overall, there are many different ways to make money as a bank, and they diversify into different niches with other focuses, and that comes with offering quite different interest rates.

Answer 3

Pay attention to nickel-and-dime charges (atm fees, low balance fees, limit on atm transactions per month, charge for human teller transaction, charge for paper statements or tax records). Consider that a financial company will spend on the order of $100-500 to sign up a good customer. Are you getting this in a cash bonus, competitive high interest rate, reasonable other gift, or advertising directed at your eyeballs? A variation in rates less than 1% easily fits into a marketing cost and there doesn't have to be any other magic to it.

Answer 4

I spent some time comparing banks' interest rates until I realized that it didn't actually matter (to me). The only money I keep in checking and savings accounts is money that I'm going to spend shortly or is part of an emergency fund, and in both those cases convenience of liquidity is far more important than small differences in interest (I want to be able to go to a nearby branch, even if traveling, and pull out large sums of money). The majority of our money goes into investment accounts, where it's earning much more than even the best savings account.

Most of your 100k would be much better served in a stock/bonds mix. Are standard taxable investment accounts one of those things you can't open? What about if you opened one in your home country?