Why Banks Pay Different Rates on Similar Accounts

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Earning a competitive interest rate can add an additional source of revenue for businesses that maintain significant cash reserves. However, many business leaders will notice that interest rates on business deposit accounts can differ wildly between financial institutions.

When analyzing the variation between rates of return on various bank accounts, a couple questions come to mind: How do banks determine the rate that they offer for business cash reserves, and how can business leaders ensure that they are maximizing returns on their reserve cash?

Federal Policy Impact on Deposit Rates

The Federal Reserve and other federal agencies impact interest rates in multiple ways. Two of the most common are changing the fed funds rate and raising or lowering reserve requirements for banks.

The federal funds rate, commonly shortened to ‘fed funds rate,’ is the most obvious tool that the Federal Reserve uses to impact monetary policy. When the Fed increases the federal funds rate, often national interest rates follow for both loans and investments.

Another tool that the Fed uses to enact monetary policy is the reserve requirement. When the Fed wants to constrict the money supply, they increase the amount of cash that banks are required to keep as a cushion. On the other hand, when the Fed wants to expand the supply of money, they lower the reserve requirement.

In March 2020, for example, the Federal Reserve lowered the required reserves amount to 0%. Prior to that, most banks had to maintain 10% in reserve. When reserve requirements are lowered, banks tend to increase loan activity and require more deposits to support the loans they are issuing. When banks need additional deposits, they will  often increase the deposit interest rates they offer to attract more customers.

Federal policy tends to affect the national average for deposit and loan rates. Inside of a community, however, rates differ based on more localized factors like bank structure and competition.

How Bank Structure Affects Deposit Rates

Banks use the funds that their customers deposit to issue loans. These loans are generally issued at a higher interest rate than the rate banks pay on deposits and the difference between the two rates is the bank’s profit. When a bank has increased loan demand, they will often raise the rate they pay on deposits to attract more depositors.

Not all banks have the same strategies for maintaining profitability. Some banks may focus on residential mortgage loans, while others favor construction or personal loans. The interest rates and profit margins on different types of loans will impact how much the bank needs in deposits to maintain or grow their loan strategy.

Banks’ target customers also differ with the institution’s structure and strategy. Some banks will target a few large depositors while others will seek many, smaller customers. Some will choose to target a particular demographic while others will target the general population. The interest rates that banks offer can depend on their structure and the needs of their target customers.

With the advent of fintech, local banks have been able to increase their deposits outside of their target market in recent years. This benefits banks who are now able to grow deposits without changing their local strategy and can benefit businesses that are seeking a competitive return for their cash reserves.

Geographical Impact on Deposit Rates

For many small banks and credit unions, their target market is determined by their location. Inside a geographical area, banks compete for the deposits of local residents. The habits and preferences of the residents in their area can impact how banks target their customers and the interest rates that they offer for deposits.

In some areas, residents are eager to consider national banks or online institutions to achieve a better deposit rate. In that case, local banks will often raise their rates to compete with the larger institutions. When the residents of an area are particularly loyal to their institution, it can either cause rates to stagnate or cause competing banks to drastically raise rates to tempt those customers away from their current bank.

The density of banks and credit unions in a given area also has an important impact on competition and therefore rates. In a particular area, there may be many or few banks competing for deposits. These situations are where supply and demand dynamics can be the main driver for rates.

How Businesses can Get Nationally Competitive Rates for Business Cash

When banks need deposits, our company, the American Deposit Management Co. [ADM] has the answer. Our proprietary fintech helps banks and credit unions access cash from businesses across the nation who are seeking a competitive return for their cash reserves. We call this concept Marketplace Banking™, and it’s only available with our American Money Market Account™ [AMMA™].

Because of this revolutionary fintech, business leaders can access competitive rates from financial institutions across the country all with a single account and a single monthly statement. Funds in an AMMA™ are automatically invested at the highest available rate among ADM’s nationwide network of banks and credit unions, so American businesses can access competitive rates across the country.

AMMA™ also provides access to the highest level of deposit protection available — FDIC / NCUA insurance. Typically, this insurance is limited to $250k per bank per ownership category, but with AMMA™, businesses can receive access to extended FDIC / NCUA insurance for all of their cash reserves without the need for additional banking relationships. We are here to enhance your current bank – not replace it.

To learn more, about AMMA™, contact a member of our team. Our team is our secret sauce, so give us a call today and find out why.