Why Banks Pay Different Rates on Similar Accounts

Image of a bank

Earning a competitive interest rate can add an additional source of revenue for businesses that maintain significant cash reserves. However, interest rates for business deposit accounts can vary dramatically between financial institutions.

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

Federal Policy Impacts Deposit Rates

The Federal Reserve influences interest rates in multiple ways. Two of the most common are changing the Fed Funds Rate and adjusting reserve requirements for banks.

The Fed Funds Rate is the most obvious tool that the Federal Reserve uses to influence the availability of credit. When the Fed increases the Federal Funds Rate, national interest rates often follow for both loans and investments – thereby tightening credit conditions.

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.

When reserve requirements are lowered, banks tend to put newly accessible money to work by increasing loan activity. On the other hand, raising reserve requirements means some banks might need more cash to meet them, and that leads to fewer loans. Banks can also increase the deposit interest rates they offer to attract more deposits that can help meet requirements.

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 strategy and competition.

Bank Strategy Affects Deposit Rates

Banks use customer deposits to fund loans and drive profitability. Therefore, when a bank has increased loan demand, they often need to attract new deposits to fund additional loans. To entice new depositors, banks tend to raise the rates they pay for deposits.

Not all banks have the same strategies for maintaining profitability. For example, some banks focus on residential mortgage loans, while others favor construction or personal loans. The interest rates on these different loan types impact the level of deposits a bank needs to fund their loan strategy.

Bank strategy also determines the types of customers the bank targets. Some banks target a few large depositors while others seek many smaller customers. Further, some banks target a particular demographic while others target the general population. The interest rates that banks offer are impacted by the competition for their target customers.

Geographical Impact on Deposit Rates

Many small banks and credit unions mainly serve residents of their immediate area. The habits and preferences of these residents impact how banks target customers and the interest rates they offer.

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. On the other hand, when the residents of an area are particularly loyal to their institution, rates can stagnate unless competing banks offer drastically higher rates.

The density of banks and credit unions in a given area also has an important impact on competition and, therefore, rates. A large number of depository institutions in a particular area will drive competition for the same customers, and that dynamic often pushes rates higher. On the other hand, customers tend to receive lower-than-average interest rates when they have few alternatives in their area.

Businesses Can Take Advantage of Competition to Find Above-Average Rates

While Fed policy tends to impact deposit rates across the banking industry, competition between banks has a more individualized influence. Motivated businesses can take advantage of this competition fueled by bank geography and structure to capture above-average returns.

There are thousands of banks in the U.S. and deposit rates change frequently – making monitoring on this scale a nearly impossible task. Fortunately, the right deposit management partner makes capturing competitive return as simple as opening a single account.

Get Nationally Competitive Returns for Business Cash With ADM

Our company, the American Deposit Management Co. [ADM], offers deposit management services that can help your company earn nationally competitive returns. We do this by spreading business cash across our nationwide network of banks and credit unions that compete for deposits.

In addition to competitive returns, you can receive access to extended FDIC / NCUA insurance for all your cash reserves. We provide all of this with one account and one consolidated monthly statement. Best of all, you get to keep your bank. We are here to enhance your current banking relationship – not replace it.

To learn more about our deposit management services, contact a member of our team.


*American Deposit Management Co. is not an FDIC/NCUA-insured institution. FDIC/NCUA deposit coverage only protects against the failure of an FDIC/NCUA-insured depository institution.

Tags: ,