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Small banks often pay the best rates
Rural and urban rates
Customers in rural areas care more about deposit rates because deposits represent a sizable share of their total wealth, so those few extra dollars add up. A bank with one uniform rate can't offer them a high, competitive one without also sacrificing revenue in urban areas.
In cities, customers don't care whether they're earning 0.03 or 0.3%. A giant like Wells Fargo therefore can't raise its rate for rural customers without giving up money in the city, while a small local bank can set rates for its own region.
Big banks sell convenience
Big banks optimize for what their clientele care most about: convenience. They invest in better websites, apps, and mobile check deposits, and in cities they put a branch on every corner. A quarter-mile radius of Midtown Manhattan holds fifty banks, including five different Chase branches, and Chase has more locations across the five boroughs than Starbucks does.
How do banks decide what deposits pay?
Deposit rates follow the Federal Reserve's policy rate loosely, and banks pass along only part of any change. Economists call the share that reaches depositors a deposit beta. In a 2017 paper in the Quarterly Journal of Economics, Itamar Drechsler, Alexi Savov, and Philipp Schnabl found that banks in less competitive markets raised deposit rates by less when the Fed raised rates. Banks with that pricing power kept a wider gap between the policy rate and what they paid depositors.
Why can online banks pay more?
An online bank has no branch network to staff, rent, or heat, which lowers its fixed costs. Those savings can be shared with depositors through higher rates on savings accounts. The first internet-only bank in the United States, Security First Network Bank, opened in 1995.
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