Rates On Savings Accounts vs. CDs

I am occasionally asked about rates on savings accounts versus those of CD’s. CD’s should always be higher in a positively sloped yield curve environment:

(a) there is a time value of money,

(b) CDs are less flexible than savings and come with a certain, stable duration, and

(c) CDs require a certain minimum to open.

So why do some banks occasionally offer higher rates on savings than on CD’s, effectively inverting their local deposit interest rate structure? And why would a depositor ever choose a CD in that situation?

Experts believe that there are four main reasons for this.

First, people and organizations don’t pay attention and constantly pay for convenience. In other words, at any given bank, an estimated 5% to 15% of customers blindly roll CDs over without ever researching alternatives. Why should a bank pay a premium for customers that simply want convenience?

Second, investors will pay for the discipline that the CD maturity imposes on them – like a forced savings plan. (My 89-year old Dad falls into this camp.)

Third, some customers desire stable and set interest income that a CD provides, and knowing both a maturity and a rate gives the customer comfort, as does a monthly, quarterly or semi-annual interest payment. Since the savings rate can vary, some customers will pay a premium for certainty. “I don’t want the volatility!”

Fourth is marketing. Yes, whether it is diamond ads on the radio or bank ads for CD’s, apparently we’re all susceptible to it. Banks that offer higher savings rates than CDs tend to spend more marketing and sales resources on their savings accounts, while keeping their CD options relatively quiet. Savings accounts, if done right, can have a longer duration than the bulk of a bank’s CDs and some feel this is the better investment.