Banks Dangle High Teaser Rates
Jane J. Kim
Feb 1, 2006
With the Federal Reserve expected soon to end its string of interest-rate increases, banks are aggressively courting new deposits with introductory rates that could be among the highest that consumers will see for some time.
Many of the banks' new teaser rates are being offered by online banks, which are able to offer higher rates because they don't have the fixed expenses of maintaining networks of branches. ING Direct, owned by ING Groep NV, is offering 4.75% on new deposits for its savings accounts until April 15, up from 3.8%.
Traditional brick-and-mortar banks also are introducing special deals. For customers who bring in new deposits and open up a checking account, Citigroup Inc.'s Citibank is promoting a 4.25% rate on a six-month certificate of deposit, exceeding even the bank's long-term rates on one-year and three-year CDs. And M&T Bank Corp. of Buffalo, N.Y., last month launched a three-month promotional rate of 4% for customers who open a money-market account with at least $10,000.
The Federal Reserve raised short-term rates for the 14th straight time yesterday, bringing the federal-funds rate to 4.5%. But the Fed also gave its strongest hint yet that the end of rate increases is in sight, and analysts say this likely means short-term market rates are at or near a plateau. In a statement accompanying its decision, the Fed said further rate hikes "may be needed." Previously when the Fed boosted interest rates it has said further increases are "likely to be needed," and the change in wording signaled that another rate increase, while on the table, is not assured.
Tantalizing rate offers have long been one of the most reliable asset-gathering mechanisms for financial institutions and some banks are now raising their rates to combat a slowdown in deposit growth. Bank deposits at federally insured institutions grew 7.8% on an annualized basis to $6.06 trillion through the third quarter of last year, compared with 10.6% growth for all of 2004, according to SNL Financial. In the current year, deposit growth is expected to slow to a mid-single-digit pace, analysts say.
The reasons: A slowdown in the nation's housing markets has left consumers with less cash than they previously had available through mortgage refinancings and home-equity loans. What's more, higher-yielding alternatives such as money-market mutual funds, which aren't federally insured, are taking a bigger share of consumers' cash. Two of these funds, Fidelity Cash Reserves and Vanguard's Prime Money Market, have yields that recently surpassed 4%, catching up with top-yielding savings accounts.
While the heightened competition is creating attractive short-term deals, consumers need to pay close attention to what rate they end up with, and what kind of account their money goes to, after the promotional period ends. Some promotions have low or no minimum deposits. But when the introductory period ends, the size of the balance can have a dramatic effect on the new yield. This is the case at E*Trade Financial Corp., for example, where new customers who open a money-market account earn 4.1% for 90 days. After that time, if rates remain at today's levels, a customer with more than $50,000 in the account would see that rate drop to 3.4%, while someone with a smaller balance might get just 2.6%.
Banking online has limitations for many consumers. Check deposits typically need to be sent in by mail. Also, online banks mostly don't offer checking accounts, so customers need to maintain a separate checking account in a traditional bank. What's more, withdrawing cash through an automated-teller machine can result in service charges. Many customers also relish the feeling of security that having a neighborhood branch provides.
Still, heavy promotions and higher rates by Internet banks, including ING Direct and EmigrantDirect.com, a unit of New York's Emigrant Savings Bank, have been putting pressure on traditional banks to raise their own rates by creating for consumers the "appearance" of a high-rate environment, says Dave Kaytes, managing director of Novantas LLC, a management-consulting company. HSBCDirect, an online operation of HSBC Holdings PLC, this week rolled out a promotional rate paying 4.8% on its savings accounts until April 30, after which the yield drops to the regular rate, currently 4.25%. Mr. Kaytes expects more banks this year will begin offering introductory rates that are roughly 1% to 2% above market rates.
Restrictions abound on the recent offers. At some banks, the promotional rate may only be offered on amounts above a certain threshold. The promotional rate of 5% on the Money Market Maximizer offered by AmboyDirect, the online division of Amboy National Bank of Old Bridge, N.J., is only paid on balances between $30,000 and $100,000 for three months. Balances between $5,000 and $29,999 earn 1.01%, while balances below $5,000 earn no interest.
The fine print behind some promotional rates may require that consumers bring over a sizable amount of cash or open up other accounts at the bank in order to qualify for the teaser rate, or to maintain a higher rate once the promotional period ends. Citibank is currently offering a money-market account paying 3.8% for consumers who have at least $50,000 in assets or loans throughout the bank. Customers at National City Corp., which is offering 4.5% on its money-market account for 180 days, will need to open up a checking account and bring at least $35,000 in total balances in order to qualify for the bank's "relationship" money-market account, which pays higher rates than its standard money-market account, once the introductory period expires.
To be sure, watchful consumers can always move their cash into better-paying accounts once the introductory period expires, since many of the promotional rates are being offered on accounts that are liquid, or easily moved. And some investors may want to invest in shorter-term CDs so they don't lose out on higher rates that may become available if the Fed boosts the target short-term rate at its next meeting, in March. However, "banks are banking on the customer opening up the account and forgetting that it will expire," says Randy Rosen, manager of deposit research for Informa Research Services Inc.
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