Rate Wars: How Digital Banks Keep Pushing CDs Higher

It's not the same old rate battle anymore. As interest rates continue to climb, your depositors could be crossing the street for a better deal or, just as likely, sending their money to digital banks from all over the place. Some fintechs-turned-banks are also in a diverse mix of competitors.

When people can go online to order just about anything on Earth from nearly anyplace on Earth, feeling that a bank or credit union is assured of attracting deposits in its area because of geography or superior local service seems almost quaint. Maybe even a bit “retro.”

A new wrinkle for financial marketers on the quest for deposits this time around is the scope of the competition. Once it was just other local banks and credit unions, but now there is a wide assortment of online-only banks, which can afford to offer higher rates than traditional banks. The group includes not only neobanks, but also digital-bank brands created by traditional banks and credit unions nationwide.

These branchless competitors rely, to varying degrees, on digital advertising and affiliate marketing sites like Bankrate.com and NerdWallet to promote their deposit offerings.

Many of the newer players have hiked their rates quickly, often following every increase from the Federal Reserve with a bump of their own.

This is the third of three related articles concerning deposit-gathering in the wake of renewed rate competition. The first installment is “Deposit Competition Is On, But Should CDs Still Be the Go-To?” and the second one is “8 Deposit-Raising Tactics You Might Not Be Trying.”

Gravity May Be Off for a While, as CD Rates Top 5%

Some of these online-only competitors are also among the rate leaders that have been vying for the same CD dollars as traditional banks and credit unions. Several have cracked the 5% APY threshold for CDs during the February-early March 2023 period, and many others were paying in the high 4%s.

They don’t have a monopoly on paying up for deposits — Frontwave Credit Union, which has branches in southern California, for example, was offering 6% on an 18-month CD special during that period.

Nonetheless, they are helping fuel the heated deposit competition nationally.

Clearly each institution has a particular sweet spot on the CD maturity curve. At least five online banks were paying a 5% rate for CDs, but each one offered that rate for a different duration: Capital One for 11 months, Barclays for 12 months, Synchrony Bank for 14 months, and Ally Bank and Salem Five Direct for 18 months. (Yes, Capital One has branches, but it does not have the same profile as a traditional bank. It is as much a credit card business as anything else and, in many ways, particularly with its digital marketing, it behaves like an online bank.)

Salem Five Direct CD and high yield savings

Synchrony Bank 5 percent 14-month cd

Barclays Bank 5 percent interest rate webpage

Capital One 5 percent 11-month cd web page

Meanwhile, the branchless Modern Bank, which targets business customers in New York City, was paying 5% for 12-month CDs. So was Umbrella Bank, a digital-only offshoot of Beal Bank in Plano, Texas, that focuses entirely on attracting deposits nationwide with attractive CD offers. (“Unlike walk-in banks, our rates are available 24/7,” Umbrella proclaims.)

Crescent Bank, a subprime auto loan specialist, was close behind, paying 4.75% on 12-month CDs.

But rates are fickle. As March progressed, the 12-month rate has since gone down at Umbrella (4.2%), and up at Modern (5.15%) and Crescent (4.95%). Barclays held its 12-month CD at 5%. Salem Five dropped its 18-month rate to 4.5%. Synchrony held its 14-month CD to 5%, and Ally held its 18-month CD to 5% as well.

Umbrella Bank division of Beal Bank 5 percent cd webpage

Modern Bank 5 percent CD webpage

Crescent Bank 475 percent 12 month CD webpage

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Higher CD Rates Sometimes Have Strings Attached

Some of these digital players were requiring higher minimum deposits to qualify for the higher rates.

Merrick Bank, a credit card specialist, and TotalDirectBank, a division of City National Bank of Florida, were advertising similar rates in the February-early March period on 12-month CDs of at least $25,000. Merrick was paying 4.85% and TotalDirectBank, 4.8%.

By comparison, Popular Direct, part of Puerto Rico’s Banco Popular, wanted just $10,000 in exchange for a rate of 4.8% on its 12-month CD.

Popular Direct CD and savings rates

Total Direct Bank 480 percent cd webpage

The rise of Treasury yields is impacting CD rates. We first saw higher rates on brokered CDs, and then we saw higher rates on online/direct CDs,” says Ken Tumin, founder and editor at DepositAccounts.com, which is part of LendingTree. Tumin noted in a blog post at that time that higher rates were being paid towards the shorter end — but not for the shortest-term CDs.

Much depends on a financial institution’s appetite for deposits. Some online-only and direct bank subsidiaries of traditional institutions are paying very low rates for CDs, when compared to others mentioned in this report. For example: Axos Bank was offering just 0.2% on its CDs — that’s not a typo — and Northern Bank Direct was offering no more than 0.6% on any duration, with the exception of 17-month CDs (3.75%).

Read More: Can Banks Hang On to Low-Cost Deposits as Rates Rise?

No-Penalty and Bump-Up CD Offerings Also Emerge

Some of the online-only players are not only paying up for CDs, but also offering variations on the typical features.

One is the no-penalty CD. Goldman Sachs’ Marcus was offering a 13-month CD, which gave depositors the option to cash in early without penalty. In addition, Marcus was touting a 20-month CD with a potential rate bump: “Lock in a competitive rate today and you could score an upgrade if rates go up.”

Regarding the no-penalty option, Marisa Frys, digital marketing analyst at Comperemedia, says Marcus appeared to be courting younger consumers with its digital marketing. These consumers are not as familiar with the traditional concept of locking up funds in CDs, she says. A no-penalty offer makes more sense to them.

CIT Bank was offering a no-penalty 11-month CD for 4.10%, compared with 4.65% on a 13-month regular CD. A variety of what CIT calls “RampUp” options were also available, but to existing customers only.

Marcus high yield CDs webpage

CIT Bank no penalty CD webpage

Ally Bank was promoting the “Raise Your Rate CD,” a choice of bump-up CDs in two- and four-year terms, both at 3.3%: “Give yourself a raise. Great rates and simple online CD management. It’s a match made in heaven.” The bank also was offering a no-penalty choice at 4% for 11 months.

Ally Bank compare CD interest rates webpage

Synchrony was offering both no-penalty and bump-up options. As is typical of these choices, the rates were lower than the rates on ordinary CDs. Synchrony was paying 3.7% on a 24-month CD with the option to request one bump. Its rate on a 14-month CD was 5% and on an 11-month one, 3.7%.

Fintechs, Neobanks and Fintechs-Turned-Banks Are a Mixed Bag

Interestingly some of the neobanks that are household names have not been promoting CDs.

Take Varo, which became a chartered bank after a long regulatory road. It was offering a savings product that starts at 3% but which the customer can bring up to as much as 5% on balances of up to $5,000. To obtain that higher rate, customers must have at least $1,000 a month direct deposited and finish the month with a positive balance in both their checking and savings accounts.

The fintech H.M. Bradley was paying 4.2% on its savings account. It uses banking-as-a-service provider Flagstar Bank, which is part of New York Community Bank.

By contrast, NYCB’s own digital-only bank, called MyBankingDirect, was paying 4.38% on its high-yield savings account. It also was paying just 3.5% on 12-month CDs and 3.7% on 24-month CDs.

In the February- early March period studied, LendingClub Bank was actually paying more for CDs at the long end of the curve — 4.1% for five-year CDs. But it also offered 4% on its high-yield savings account. (Originally a fintech peer-to-peer lender, LendingClub bought Radius Bank in 2021.)

But others, including Chime, Dave and SoFi (also a chartered bank), don’t currently offer CDs. SoFi has continually expanded offerings in other areas but has a short menu for deposits. It does offer an online banking account that was paying 3.75% in early March.

Jiko: Now for Something Completely Different

One unusual entity out there is Jiko, which was created on the chassis of Mid-Central National Bank. Jiko operates through Jiko Bank, which is structured as a subsidiary of Mid-Central. Jiko — which bills itself as “the future of money storage” — promotes accounts for both consumers and businesses that are designed to be invested in Treasury bills in a way that permits accountholders to spend their money as if it was in a typical banking account. Jiko does this through an on-demand sweep arrangement.

JIKO 529 percent t-bills business account webpage

The accounts pay rates based on the underlying Treasury securities. While Jiko uses powers as both a bank and a broker-dealer, the T-bill based accounts are not covered by the Federal Deposit Insurance Corp., according to its website. Customers can choose to put funds in any or all of four “pockets,” corresponding to 4-, 13-, 26-, and 52-week T-bills. Additional services include the Jiko Solid Debit Card.

In early March Jiko’s homepage was displaying a rate of 5.29%, based on the rate at the time of the 26-week T-bill.

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