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2006: A look back - A look ahead  
  The landscape was schizophrenic in 2006 but a slow economy could fuel a rates war in 2007.
 Checking & savings
 Personal finance calendar  Personal finance calendar 

Negative savings marked 2006

"People are saying 'I'll give up the liquidity for a 4.7 percent return," says Steven Rick, senior economist for the organization.

Internet savings accounts, many of which offered rates comparable to CDs, really caught on with the public. "There was a much stronger move toward them," says Mark Oleson, director of the Office for Financial Success at the University of Missouri. "For whatever reason, people started feeling more comfortable with them.

One example, 156-year-old Emigrant Bank has $4.5 billion in branch deposits, while its two-year-old Internet division holds $8 billion in deposits, says John Hart, vice chairman of Emigrant 

"It now pays consumers to be much more savvy about how to use the latest consumer products, which are Internet products," he says.

On the other end of the spectrum, intense competition fueled by mergers and Internet banks also helped those who still want a more personal touch. "While there was this push for online banks, there was also a push where people are interested in more local services," says Oleson. For some it's a case of, "I would rather have somebody locally who knows me and who I can talk to," he says.

Typically, savings account rates are slower to increase along with market rates. But this year, consumers saw brick-and-mortar institutions "offering more competitive rates on their accounts," Oleson says.

CDs turned upside down
Institutions saw more consumers putting money into CDs, which tend to reflect higher interest rates more quickly than traditional savings accounts. Through the first half of 2006, CD savings went up 11.3 percent for people with balances of more than $100,000, and up 8.8 percent for people who were saving less than $100,000, according to figures from the Federal Deposit Insurance Corp. During the same period, growth in interest-bearing checking accounts was up just 0.4 percent.

With CDs, short-term investments were paying better rates than long-term; a situation that economists refer to as an "inverted yield curve." "People who wanted to get good rates on CDs had to go shorter and shorter," says Fuschino. At the beginning of the year, this meant buying a 14- to 16-month CD. Now consumers are likely seeing the best rates at three to four months, he says.

At the same time, banks are hurting for deposit money. "Banks have been in a very competitive market for a long time for deposits," says Fuschino. As a result, they are doing "innovative new things in the industry to attract more customers and attract more balances," he says. What you saw this year: a proliferation of "free" checking products, savings accounts requiring lower balances, gift giveaways and crediting customers a certain amount for opening accounts.

-- Posted: Nov. 1, 2006
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