Although the Federal Reserve has steadily increased interest rates, most savers have not been able to benefit. Traditional bricks-and-mortar banks have largely ignored the rate hikes. Bank of America, for instance, has barely increased its standard savings account rate to 0.03% from 0.01% over the last year, and it is hardly alone among major banks.
There has been intense competition online, however, between internet banks like Marcus by Goldman Sachs, Synchrony Bank, Ally Bank and Barclays, which have been engaged in a pricing war for online savings accounts and 12-month CDs. Last year, Ally Bank was paying 1.00% APY on its online savings account; today that rate is at 1.80%. Meanwhile, the rates on one-year CDs have skyrocketed, and you can now find APYs as high as 2.50%.
But while internet banks have been fighting a fierce pricing battle on the 12-month CD front, the rate on longer term CDs just hasn't budged -- until now. For the first time, savers can now earn more than 3.00% on 3-year CDs. Citizens Access, the online bank of Citizens, is offering 3.00% APY on a three-year CD with a minimum $5,000 deposit. Other internet banks like PurePoint, PopularDirect and SalemFive Direct are also offering 3.00% rates.
Why are rates rising with online banks, but not at branches?
Traditional banks build branches, which cost a lot of money to operate. And banks know that people tend to stick with their branch because it is local and convenient. Traditional banks are betting on inertia: They hope people will stay regardless of the low rates.
Online banks have a different tactic. Rather than invest in branches, internet-only banks (and the internet-only divisions of traditional banks) remove the operating costs of a branch network and pass the savings along in the form of higher rates. Competition is intense because it is easy for consumers to compare, switch and save on relatively simple products like savings accounts and CDs. Account opening typically only takes a few minutes and funds can be transferred electronically. Consumers receive the same FDIC insurance with internet banks. These factors make continued competition online a strong likelihood. It also means that although the 3% milestone is nice to see, even higher rates are expected soon.
Should I lock up my money for three years in a rising rate environment?
The Federal Reserve is expected to continue increasing rates, and competition online is heating up as more new entrants try to build internet-only banks. In a rising rate environment, you don't want to lock up your money for too long unless you are well compensated. One-year CDs remain very attractive, and while 3.00% APY on three-year CDs is an exciting development, rates are expected to increase further as competition intensifies.
My advice: The best three-year CDs don't come from the same folks that give you the best one-year CDs, so make sure your three-year CDs earn at least 3%.
Unfortunately, the four-year and five-year CD market remains tame in comparison. You can find 3.10% APY at three years, but only 3.40% at five years. Thirty basis points to lock up your money for another two years is not particularly meaningful.
Nick Clements is a co-founder of the consumer-finance website MagnifyMoney.com.