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Retail savers get 0% to 2%
Every other industry has used information technology to collapse the gap between retail and wholesale prices. In this one, the spread survives, even though customers are taking on more risk than a T-bill carries.
Financial services take up somewhere around eight and a half to 9 percent of GDP, a figure last checked a year or two ago. That is a sign of inefficiency. The system exists to intermediate savers and companies as cheaply as possible, and it does not do that cheaply.
Old technology and a closed, intranet-style system mean innovation moves slower than in the rest of the economy. With real competition and delivery that is easy and transparent, a spread like this wouldn't last. Centralization creates enormous amounts of inefficiency and cost.
Why do banks pay savers so little?
Banks use deposits as cheap funding to make loans and buy securities, and they earn the gap between what they receive and what they pay out, called the net interest margin. Many depositors never shop around, so banks face little pressure to raise rates. Online banks, which operate without branches, have often advertised savings rates well above those of large branch banks.
How did money market funds change savings?
In the 1970s, a federal rule called Regulation Q capped the interest that banks could pay on deposits. When market rates rose above the cap, savers needed another place to earn them. The Reserve Fund launched the first money market fund in 1971, pooling cash and investing it in short-term debt such as Treasury bills and commercial paper. Congress phased out Regulation Q's rate limits after the Depository Institutions Deregulation and Monetary Control Act of 1980, and the ban on interest for checking accounts ended in 2011.
How did other industries narrow retail-wholesale gaps?
Stock trading is an example. Until May 1, 1975, the New York Stock Exchange required fixed commissions, and the SEC abolished them that day in what traders call May Day. Discount brokers followed, and by 2019 Charles Schwab and others had cut online stock trade commissions to zero.
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