Differences in return rates on cash accounts across banks

Question

I noticed a massive difference (35x) in the return rate of savings accounts between Bank of America and a Cash account at Wealthfront.

This confuses me, how can a Robo advisor offer such a high return rate relative to a big retail bank on a cash account?

Are these types of differences normal between banks? If so, what explains them? I know that there could be a different business model behind them (maybe traditional retail Banks need to pay for real state, etc), but I thought the interest rates of savings accounts across banks are mostly determined by federal interest rates.

Bank of America

Wealthfront

Answer 1

The interest rates between bank have typically small differences, and the main trigger is the relative need of the bank for more cash. If a bank would like to have more cash, they raise the interest rate; if they have too much, they lower it.

Usually, those differences are small in absolute amounts; just because they currently are all near zero makes the relative difference look huge. But that's not a useful way to look at them - basically, you can chose between getting 'no interest' or 'nearly no interest'.

Answer 2

Banks are free to offer whatever rate they choose, although most choose to tie theirs to something relative to government rates. Naturally banks will offer as little as they can, since they make the difference between what they pay the account holder and the interest they receive on loans made with the account holder's deposit.

Some banks and other financial institutions are more aggressive than others in the rate they pay on savings accounts to attract deposits, especially when it comes to large accounts. That appears to be the case with WealthFront.