Why Do Different Banks Offer Different Interest Rates?

Graphic of percentage signs on the side of cubes

istock_000005407438xsmallEver notice that different banks offer different interest rates? Look at your statement and find out what the interest rate is on your savings account. It’s a good bet that some other bank down the street offers a rate higher than yours. Sometimes, the rate difference could be quite large – 1% or more. You may be wondering why this happens. After all, don’t all banks compete for the same customers? And don’t all banks have access to the same financial markets? Why would one bank offer 3% interest rate, while another just 1%?

There are actually several reasons why this happens.

Why Do Different Banks Have Different Interest Rates?

Each bank may pursue its own business approach.

Just as in any other industry, some businesses go for low volume but high profits, while others prefer high volume and low profits. In other words, one bank could target people who don’t care too much about interest rates. That bank may have fewer depositors but a better profit margin. Another bank might cut deep into its profit margins to offer you a highly competitive rate. They hope to offset the low margins with a larger number of customers.

A bank must choose where to focus its resources: go for the highest interest rates it can afford, or invest in other areas. A bank with a low interest rate may have many ATM machines and branches in convenient locations; it may have better phone customer service; and its online banking system may have many powerful features.

A bank with an unusually high interest rate might have it only as a promotion. They want you to open the account based on the advertised rate, only to reduce it slowly over the next several months. This is legal, although not terribly nice. You should understand the position the bank is in: if competitors do that, it has no choice but to follow.

A Better Way to Bank

Each bank has slightly different ways to invest its funds. One bank might focus on residential mortgages; another on credit card debt; yet another on business loans. Different loans are offered at different interest rates. And depending on the bank’s expertise and luck, even similar loans can be offered at quite different rates. As you can imagine, the bank that lends money at higher rates can afford to pay you, the depositor, higher rates.

Some very well-known banks have cheap sources of funds, and are not interested in your deposit as much as some of the smaller banks. Large successful banks can raise money from other banks or by issuing bonds, and are less likely to pay you a huge interest on the account. Different rates of interest are one of the things that makes banking and deposit accounts interesting as you will always want to stay informed to truly get the best deals.

What are your thoughts on the different rates being offered by banks? Where are you finding the best bank rates? Please feel free to share with the rest of the Go Banking Rates community.


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