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Banks are slow to increase rates on savings accounts, but quick to reduce them
- save_ferris 6y agoThis seems like pretty typical market behavior to me. Are we really surprised that banks are taking the opportunity to increase their profits by choosing not to pass down all savings to customers? The same exact thing happens with gas stations. The price of gas never falls quite as fast or far for the consumer as it does for the retailer, but gas stations will instantly respond to price increases. I’m sure there are dozens of other examples of this.
- buran77 6y agoMost companies I ever worked for did the same, in particular the ones in the oil&gas sector. Any increase in crude or taxes would immediately be passed down to the consumer. Any decrease and they'd be issuing a press release stating that "the markets don't respond so quickly to price fluctuations". It works best in industries with no real competition because of the high barrier of entry, and with a common interest between the players to keep the practice going, even when there's no explicit collusion or cartel forming.
- podgaj 6y agoI can never seem to find that "Invisible Hand" when I need it....
- leetrout 6y agoI heard this story / explanation before: You own a gas station and you want to fill up your tanks so you call the distributor and pay $1 / gallon. You then sell that for $1.10 / gallon making a 10% profit. Now prices of crude doubles and you have 1000 gallons left to sell. It’s going to cost you $2 / gal to refill so you immediately raise your price to prevent a loss and cover the next fill. I don’t know how accurate that is to the real situation gas stations face but I’d never thought of it in terms of selling higher to afford the next bulk delivery.
- rightbyte 6y agoOh ... interesting take. But how did they order the first tanker? Surely there has to be credit involved in most cases.
- OJFord 6y agoYes, typically bought on credit and then sold for cash with which to buy the next load on credit, etc.
- bryanlarsen 6y agoBut when the price drops back down you don't immediately drop your price because why would you charge $1.10 for something you paid $2 for? But your competitor will lower their prices when they get a refill, so you may end up having to lower your prices before you get your own refill.
- leetrout 6y agoYep, correct.
- Threeve303 6y agoThis is what happened during Katrina and some of the hurricanes of the past decade or two. The situation with the banks is slightly different. The odds that the product, money, will cost more for them in the future does not line up with the recent history of bailouts, regulation changes, etc. During Katrina, for example, it was a safe bet for the gas station owners that the next batch of gasoline could cost significantly more. A reasonable assumption due to the multiple wars in the middle east combined with a bad hurricane season shutting down gulf coast refineries. In other words, the Federal Reserve did not run a discount window to provide cheap oil to gas stations. Even the strategic petroleum reserve, if tapped, would only benefit the refineries. At any rate, one could argue that in both situations the entities involved made the safest and most profitable decision available to them.
- Spooky23 6y agoThe gas station is an agent of the oil company and gets paid commissions. The gas is on consignment, owned by the upstream oil company. The big oil company uses futures and options to manage risk. All aspects of that industry have slowly reconsolidated, so the market forces that push prices down are generally weak.
- learnstats2 6y agoDoesn't this just prove that there is not a competitive market in these industries? If I - and everyone else - could quickly identify which bank/gas station was acting in my interest without colluding, I would immediately switch. The fact that prices are quick to rise but slow to fall is dependent on consumer apathy and monopolistic behaviour/collusion. It might be typical market behaviour, but it's not the perfect market that economists commonly base their models on.
- save_ferris 6y ago> If I - and everyone else - could quickly identify which bank/gas station was acting in my interest without colluding, I would immediately switch. I doubt this would be the case for most people for a couple of reasons. First, gas stations are pretty transactional businesses that don’t rely on recurring customer relationships to stay afloat, it’s really all about the location. When was the last time you researched all the gas stations in your area and looked for the one that you felt served your interests above all the others? Nobody shops for gas this way. Second, when gas stations maintain prices as their upstream costs come down to pad their margins, they’re doing so in cents per gallon, not dollars. A customer may save a dollar or two depending on the size of their tank, which isn’t enough of an incentive to stick it to the greedy gas station because you gotta be sure that the next gas station you’re headed to isn’t doing the same thing or costs even more. The gas station, OTOH, probably sees hundreds if not thousands of dollars in extra revenue per day depending on their volume for doing this.
- phaedrus 6y ago> When was the last time you researched all the gas stations in your area and looked for the one that you felt served your interests above all the others? Nobody shops for gas this way. I do. I own a classic(ish) car that both requires high octane gas and no ethanol. There's one gas station chain around that can be relied on to have it (in addition to every other fuel option imaginable). But I'm a relatively price-insensitive customer; I'd probably still buy from them at $5/gallon when others are at $2.50. Part of that is because of being happy with the chain, and part of it is anger at other chains for dropping non-ethanol options.
- mwexler 6y agoAirline "fuel surcharge" ticket fees come to mind. As high fuel costs plummeted, the fees did not.
- sukilot 6y agoThat's different. It's just marketing BS to artificially suppress the advertised price, which does float competitively.
- mapgrep 6y agoIt may be typical but it is a useful counterpoint to the idea that markets are efficient for consumers. If markets “worked” as so much propaganda insists they do, banks would rush to increase interest rates, and gas stations to cut prices, when market conditions allow in order to better attract customers. In reality market inefficiencies allow predatory behavior (it takes time for consumers to notice interest rate changes; gas stations can practice soft informal forms of collusion). Free market and anti regulation advocates like to deny or avoid discussing this.
- chrisseaton 6y agoBut nobody is expecting to be earning a significant return from a retail bank account, are they? I think if you're disappointed by your checking-account interest rate you probably first need to think about why you're storing your money there.
- cpach 6y agoPersonally I couldn’t care less about the interest rates on my bank accounts. The money I have there is money that I intend to use the coming years, e.g. for reoccurring expenses or for expenses related to my house. Any money that I don’t intend to use the coming ~5 years I place into index funds.
- rjkennedy98 6y agoThere are a lot more people than you think that simply don't invest their money, instead they keep it in savings accounts. My aunt is one of those people. She got a large inheritance and basically kept it in a savings account for 20 years. My mom got the same inheritance and bought investment properties with it and now its worth 10x. I think it comes down to the fact that a lot of people are risk averse or feel that investments are too complicated for them.
- viraptor 6y agoEven if you're risk averse, a limited time, guaranteed rate investment available in most banks will give you more than the checking account rate. (as long as you're happy to lock the money for 6+ months)
- stagger87 6y ago10x? I'm not familiar with real estate. How does one earn 10x in that time frame. Even with a price to rent ratio of 1 to 15 and assuming housing prices double over that period, you still aren't at 10x, and that doesn't include maintenance, taxes, closing fees, etc.
- readams 6y ago
- formercoder 6y agoOnline only banks offer great rates on savings accounts. The Fed has an influence but these rates are market driven. If you want high rates, look for them and put your money there. Many financial products are only available to the wealthy but in this case anyone can do this.
- mfer 6y agoOnline only banks have fewer expenses (no branches or staff in them). This appears to translate into higher rates which is a selling point for them.
- smoe 6y agoI think traditional banks, which apparently used to have much better rates even with all the expenses, have found that people are perfectly willing to give them their money practically for free. The newer online competeritors need something to draw in costumers.
- garmaine 6y agoSavings account rates are terrible compared with alternative investments though, even cash-storage investments.
- zdkl 6y agoCould you give some examples, adjusting for risk?
- Aunche 6y agoNo penalty CDs are strictly better than savings accounts. I was able to lock my emergency savings into a 1.6% CD the day the Fed announced rates cuts.
- formercoder 6y agoWhy are they strictly better? You remove interest rate risk at the expense of yield. They currently pay less than high interest savings.
- tomhoward 6y agopatio11 tweeted about banks and their opaque conduct re. interest on savings accounts in the past couple of months: https://twitter.com/patio11/status/1269919425802559488 https://twitter.com/patio11/status/1269919425802559488
- vinni2 6y agoWhy is it surprising? It applies to housing loans as well. Sometimes unless you threaten the banks that you will switch the bank they won’t reduce it interest rate.
- fendy3002 6y agoThe worse thing is that the opposite applies for floating credit (loan) rate. They're very quick to increase the rates but very very slow to reduce them. So it's like double profit for them.
- ArtWomb 6y agoAm curious how Compound, dX/dY, Nexo services are able to advertise such high interest rates on digital assets. Some as high as 10% APR accrued on a daily basis.
- akeck 6y agoThey're all backed by algorithmic crypto trading, and thus are operating outside the banking system discussed in the article.
- ac29 6y agoFor one, because the underlying asset they are paying interest in can lose value, or even go to zero. Compound, for example, has lost 50% of its value in just a month. The crypto space is also, to say the least, extremely risky, and full of every variety of untrustworthy, unscrupulous character.
- m3kw9 6y agoSame with gas prices
- blantonl 6y agoSame goes for gas prices. I heard an earnings call recently for a public company that runs a ton of gas stations. They indicated that their margins on gasoline have gone far far up and offsetted and losses of sales of drink/snacks etc in their stores, because they are quick to raise gas prices when oil prices go up, but very slow to do so when prices go down. The amount of fascinating economic lessons we've gotten over the past 6 months is amazing. All kinds of cool things I've learned: Pool companies are backed up 1 year right now with people nesting at home Whirlpool blew their analysts earnings estimates out of the water on strong appliance sales due to "nesting at home" Weber grills are on huge back order. and on and on.
- jacquesm 6y ago> losses of sales of drink/snacks etc in their stores As a former gas station owner, let me correct you here. Drinks and snacks, no matter how low the volume have crazy margins, sometimes 100% or more and make up a large fraction of gas station profits. It isn't rare to run the fuel at a loss to sell more ice cream and drinks.
- cm2187 6y agoI am happy to be contradicted by better specialists than me of US banks. But aren’t the vast majority of loans in the US fixed rate with no or little prepayment penalties? If that’s the case the interest rate risk of these banks is not trivial and certainly not a simple pass-through of overnight rates.
- tssva 6y agoThe article isn't about loan interest rates but the interest rate banks offer on deposits.
- deleted 6y ago[deleted]
- ricardo81 6y agoFrom my limited experience, they're good at offering an enticing savings rate but a year or two later will whack it down close to nil. They're playing the same game as utilities and insurance, after a year or two your benefits shrink or your costs go up. Examples, had a 2% interest rate "ISA"-like account and it went down to 0.01%. Home insurance doubles in 10 years through lack of changing it. Switching all our services yearly is a time suck and they know it.
- mabbo 6y agoThe problem is that most people don't want to change banks. If changing your bank to get a better savings rate took 15 minutes and had no other consequences, banks would be updating their rates by the second to beat one another. But it doesn't. If your mortgage, credit cards, car loan, etc, are all with the same bank then switching your bank account only just to get 0.1% higher interest is a huge hassle for little benefit. Especially if you don't have much money sitting in a savings account- even with $5000 in your account, a 0.1% difference is $5/year. So what banks are actually competing over is the people who happen to be shopping around for a new bank- something most people do only a handful of times in their life. Meanwhile, leaving rates low improves the banks bottom line. Short term vs long term tradeoffs. In short: banks have little reason to raise savings account interest rates regardless of what their central bank gives them.
- jacquesm 6y agoAnd your typical mortgage contract will include clauses that stop you from moving your mortgage to some other provider without penalty. You can get badly locked in like that with rates from a decade ago.
- votepaunchy 6y agoAFAIK only PMI can have prepayment penalties. You’ll still have to pay closing costs on and qualify for a new mortgage.
- lotsofpulp 6y agoThis isn’t true in the US. Typically, you can refinance anytime you want, and I’ve never seen a prepayment penalty. Closing costs aren’t a penalty, as it does take some work to get a mortgage. Although in free money times, even that is sometimes waived by lenders.
- frereubu 6y agoIn the UK this has got a lot better with banks being forced to offer an "account switching service", which makes it trivial to change your current (checking) account. Things like salaries, standing orders and direct debits (for utility bills etc.) are automatically transferred across. It doesn't work with savings accounts though as far as I know, so it doesn't help much with managing interest rates other than interest-paying current accounts. As you say though, there are so many complicated conditions around getting paletry interest rates - only available on first £5k, or rates that reset to 0.1% after 12 months - that I'm not sure people would change much anyway.
- jacquesm 6y agoSame with fuel prices. War in the middle East? Gas prices jump up overnight. Slump or excess? Consumer prices drop ridiculously slow. Middle men will always use any excuse to extract more from both sides.
- uxp100 6y agoI guess that’s true in most cases, a lot of people seem to be saying it, but a few months ago we had gas cheaper than $1 per gallon quite suddenly.
- pwg 6y agoThat price drop was more the result of purchase demand drying up overnight with everyone staying home (a car not driven needs no fillups). When the local retailer goes from moving 1,000 gal per day to moving 100 gal per day (numbers made up) that incentivizes the retailer to drop their street prices to try to generate extra demand at the point of sale. The other price increases/reductions being discussed are when the price of crude takes a dramatic swing, one sees the street prices swing asymmetrically. Crude goes up by $40/barrel today, for one day, street prices for gasoline goes up tomorrow and remains up. Crude drops by $50/barrel next week and stays down, it takes weeks before the street price of gas falls to reflect the reduced price of crude. For these scenarios, the local sales demand for gasoline at the local station would have remained relatively flat. The retailer might have seen sales swing from 1,000 gal/day to 950 gal/day after the increase (again, made up numbers), but not enough swing to impact his pricing choices.
- comicjk 6y agoThis makes sense when you think about the inelastic demand for gas and the physical problem of storing it. The availability of storage makes gas prices change slowly most of the time. But, if there's a chance of the tanks running dry, prices go sharply up. And if there's a chance of the tanks running out of space, prices go sharply down.
- wolco 6y agoIn those cases they shouldn't go up immediately only during refilling an order.
- mc32 6y agoReminds me of gas stations, quick to jack up the prices, slow to reduce them. If you hold inventory, it’s hard to resist unless market pressure forces different pricing.
- pjfin123 6y agoAlly bank (an online bank) has very competitive savings rates and great online banking/support.
- LatteLazy 6y agoIf you can borrow from your central bank for nothing, why would pay depositors anything? They're not just competing with free, they're unreliable and expensive to manage.
- hamilyon2 6y agoBiggest assymetry I noticed yet is that mortgage rates are often fixed no matter what happens to current money lending rate. I am no financial expert, but I think unpredictable rates hugely favor consumer. When rates are high and money is in high supply, inflation reduces the actual principal, as nominal amount Stas the same. When rates are low, you can refinance mortgage at current, low rates and reduce interest part of your mortgage.
- lotsofpulp 6y agoThe US government subsidizes the home mortgage market in the US. I don’t known of any other country offers people 30 year fixed rate mortgages. Fixed mortgage rates help consumers because they can always refinance down to a lower rate.
- known 6y agoWish algorithms decide https://banksdaily.com/central-banks/ https://banksdaily.com/central-banks/
- TallGuyShort 6y agoThere's another asymmetry where people like to buy stocks at a low price and sell them at a high price.
- fallingfrog 6y agoI think a lot of the issue is that the model of banking has changed. Once upon a time, the business model was that the customer deposits savings, then the bank loans out that money, and the interest they collect is the profit. But with unlimited free money from the fed, why bother? The fact is that they don’t actually want your money any more. It’s just a hassle to keep track of. They get a lot more money by charging overdraft fees than by loaning your money out anyway. So why should they be eager to compete for savings deposits?
- aronpye 6y agoWhy would you ever have a savings account? They’re pointless as they always earn little interest. Much better to invest in an ETF that tracks something like the S&P500 with an average year on year growth of 10%, or if that is too risky invest in a government bond.
- wolco 6y agoI invest in ETFs this 10% yearly grow doesn't happen over a longer term and some years are negative. Overall expect 5%.
- aronpye 6y agoBut it does though ... https://www.macrotrends.net/2526/sp-500-historical-annual-returns https://www.macrotrends.net/2526/sp-500-historical-annual-re...
- repsilat 6y ago> or if that is too risky invest in a government bond. You can get 1% in a savings account in the US. TBill rates are all less than 0.25%. The latter has tax benefits, but not enough. One good way to "get a higher return" (for some at least) is to pay down debt. If your mortgage is at 3%, whatever you pay off is "earning" 2ish% after tax. If your margin loan is at 1.5%, anything you pay off earns 1.5% (because the interest isn't deductible.)
- danieldisu 6y agointerests are not linear, also most credits and mortgages will have a commission when you pay down a percentage of it, at least in Europe
- hansvm 6y agoMortgages might be a poor example because of prepayment penalties, the ability for a lender to choose to apply an excess payment to future interest payments instead of the current principal, and all sorts of things (each situation is different, you just need to do the math). Something like a credit card or student loan in places where those are common might be better targets. They usually have ordinary compounding interest, and the delta in your net worth (assuming no other effects like taxes) between investing P dollars at an interest rate R for time T is identical to paying off P dollars of a debt at an interest rate R and waiting till time T has elapsed.
- larrydag 6y agoThe banks cost of money isn't closely tied to the Fed rate. It is more tied to long term investments such as government bonds or t-bills. These have been pretty low and very low recently.
- JackFr 6y agoThe ease with which money can be moved in and out of money market funds mean that it’s probably unlikely that anyone has a long term balance of over $2000 or so in a savings account. At those levels the difference in interest rates is dwarfed by fees etc.
- jennyyang 6y agoThis is the same with gasoline prices too. CA gas prices are still well over $3/gallon despite low crude prices.
- lotsofpulp 6y agoThat’s just how much refining fuel costs. There is no monopoly of fuel suppliers holding the gas price up, and gas stations make very little money selling gas itself.
- ac29 6y agoRefining isnt actually all that expensive. At least in California, taxes are a higher percentage of total price (18.4c federal + 35c state, per gallon).
- steffan 6y ago50.5 cents of the gas price in California is the state gas tax
- IncRnd 6y agoFor gasoline there are federal, state, and local taxes. Also, each jurisdiction needs gasoline to be made differently than in other areas. Gasoline is a processed product, and it differs from crude.
- voisin 6y agoTitle sounds like the Fed.
- wdb 6y agoThe problem is that the banks can borrow so cheaply that they actually don't want to pay their clients the interest rates on their accounts. As it expensive for the bank, and increases the bank's liabilities/risks (money in the books) hence they will lower the rates. Which then hopefully will lower the amounts on the books by people either moving it out of the bank or spend it. That's what I understood from the bankers when I was working at a bank :) They a had a simple formula representing but can't find my notes now. I am 'enjoying' interest rates on my bank accounts around the world between -0.5%-1.5%. I really should sort out the negative rent.
- ycombonator 6y agoJust like gas station prices.
- neilwilson 6y agoBanks will pay as little as they can get away with and charge as much as they can get away with. Only competition stops that being nothing and loads. There is no “passing on”. There is only what the market forces on a bank to survive.
- golemotron 6y agoIt's almost like banking is a business.
- dhosek 6y agoMy credit union is really good about tracking rates against the greater market. But I only qualified for membership because I taught community college in Orange County, California for two semesters as an adjunct. I live in Chicago now and I have no intention of giving up my account with that credit union.
- thrwn_frthr_awy 6y agoThis is why the stock market is still going up. There is no where else to put your money. We need better 1-3% returns for savings and 401ks outside of equities. Where are people supposed to put their money these days?
- therealdrag0 6y agoBonds?
- missedthecue 6y agoYou're not supposed to keep your money anyway. That's literally the whole point. Rates are so low because they're trying to get you to spend.
- diogenescynic 6y agoSame with gas prices.
- cjbenedikt 6y agoJust like gas/petrol stations when it comes to oil price changes...
- singhrac 6y agoAs an aside, if someone is fairly risk averse (i.e. doesn't want to lose more then 10-15% in a crisis like what just happened) and wants to park ~200k, is the best option a high-yield savings account? A CD? I would have normally thought treasuries but obviously interest rates are low.
- reducesuffering 6y agoDepends on if you mean 10-15% real purchasing power or nominal. Most people think of cash as safe as possible but heavy inflation could wipe out 50% real purchasing power in a few years. Nominal? Sure, high yield savings account is safest, 1% currently, and won’t lose any nominal. You could even do a bond or muni bond fund, BND or VTEB, to gain extra after-tax yield ~2% without losing more than 10-15%. But you really want to not lose more than 10-15% real, in which you’d need to think of the money as a portfolio including inflation hedges like TIPS (inflation protected bonds), Stocks, and Gold, albeit in small 5-10% allocations because of their greater risk.
- mrep 6y agoI like BND. Only dropped 8.7% from peak to bottom in march (back up now), it pays out a decent dividend, and it is a vanguard etf and vanguard is awesome in my experience.
- throwaheyy 6y agoThe fed lowering interest rates has murdered money market rates (e.g. 0.1% annualised return). Not a financial adviser but I’m currently using a mix of 1% APR HYSA and some bond ETFs (some total bond exposure, then some additional holdings increasing exposure to just US bonds and US municipal bonds).
- ohmybash 6y agoBanks exist to make money. I don't understand how this is surprising to anyone. Downvote me all you want, but it's mind-boggling that a private message board for startups is also full of surprised Pikachu faces any time a company tries to turn a profit.
- PaulDavisThe1st 6y agoAnother (small) dimension to this: my brother-in-law works for an organization that acts as a thinktank for many/most(all?) credit unions in the US. When we moved to Santa Fe last year, I noted that the credit union I wanted to join (yay! credit unions!) offered an insanely low interest rate for their savings account. So I asked my BiL whether I should feel guilty about using an online "high rate" savings account instead. He told me that if a CU is offering a very low rate, it essentially means that they don't have much significant lending going on. He said that if things changed, and they start to see real growth in the demand for capital loans, their savings interest rate will pick up. He said I should not worry about it. Now, this doesn't really address the Fed rate vs. the savings interest rate gap (surely the CU could at least pay something near the Fed rate), but it did expand my understanding of the situation for credit unions, at least.
- missedthecue 6y agoCustomers that jump around for an extra basis point in interest on their $400 account are the worst customers for a bank. There is a sweet point that banks and credit unions try to hit where they aren't competing for those customers but that they're getting enough deposits to operate and grow.
- danielfoster 6y agoInternet is only a small part of the equation here. Banks are constantly giving back to customers in other ways, such as free checks, ATM fee refunds, and sign-up bonuses.
- jdeibele 6y agoBoth my mom and my aunt died a couple of years ago. I had all the paperwork that I needed but it was 2-3 hours for each account that needed to be closed and a new account opened for the estate. I was able to close one of my mom's and that was relatively easy, like 15 minutes. It did seem incredibly expensive to provide a person to interact with. One of the banks involved was Chase and they did have a video interface where you could interact with a banker somewhere else. I guess it works out, since the banks had thousands of dollars sitting in the bank paying no interest. And the amounts surged to hundreds of thousands as their houses were sold and before the money was distributed to the heirs. But dealing with the general public for accounts in the hundreds of dollars has to be a money loser. Except for the overdraft and other fees, of course.