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Beware of banks bearing gifts

By Claes Bell, CFA · Bankrate.com
Thursday, February 17, 2011
Posted: 2 pm ET

There was a great article last week in The Wall Street Journal on how big banks are ramping up their incentives to try and bring in new checking and savings customers. Here are some of the examples of incentives being offered by some of the bigger banks:

PNC Bank: $100 coupon for opening a checking account with direct deposit.

HSBC Bank USA: $500 Apple or Amazon gift card for deposit of $100,000 or more.

Chase Bank: $125 coupon for opening a checking and savings account.

Leader Bank: 1.25 percent on a savings account linked to a checking account.

U.S. Bank: $50 Visa gift card for keeping $1,000 in a money-market account for a year.

Citibank: $250 cash reward for depositing $25,000 in a savings account

Banks may be courting customers, but like a ne'er-do-well womanizer romancing a rich widow in a melodrama, they have an ulterior motive, according to the article:

The current low-interest-rate environment is adding to banks' sense of urgency. By bringing in customers now, banks are setting themselves up to profit when interest rates rise, by collecting the difference between the interest paid to depositors and the money they rake in from loans.

"Rates on deposits typically don't move up as quickly as overall interest rates," says Mark Fitzgibbon, director of research at investment bank Sandler O'Neill & Partners LP. "So banks are in a prime position to recruit now and profit later."

You can almost hear the banks twisting their long black mustaches and erupting in gales of sinister laughter as they think of the 0.05 percent return they'll be paying you for your savings even as they're loaning it out at 6 percent or 7 percent to businesses, homebuyers and car buyers as rates rise.

And when I say 0.05 percent, that is not an exaggeration. Here's an exchange I had today about opening a regular savings account with a representative from a major bank over live chat:

Me: What's the current rate on a regular savings account?

Charles: 0.05 percent

Charles: We offer the Regular Savings. If you have a monthly automatic transfer from (Bank) checking account of at least $25 or if you maintain $300 daily there is no monthly maintenance fee.

Me: lol really?

Charles: Would you like to apply?

Charles: Yes really that is the rate

Me: .05 percent?

Charles: Yes

Me: That might be too much ... can I get an account with 0.01 percent?

Charles: Unfortunately you must take all 0.05 percent

I'm going to go out on a limb here and say customers should resist most of these charming advances from the biggest banks. In my experience, most of the really big banks offer crummy savings rates compared to smaller banks, online banks and credit unions, all of which have the exact same $250,000 in deposit insurance from the FDIC or NCUA as the big boys. You can see it in the fact that the one really attractive offer on the list is from Leader Bank, a small community bank in Massachusetts.

In fact, few if any of the banks on the list above are anywhere near the top tier in terms of annual percentage yield on our MMA/Savings rate tables. So it might make more sense to spurn their advances and seek out a decent rate of return on your funds in the long term, rather than give in to the temptation of a $50 gift card and lose out on far more than $50 in interest because you got a bad rate of return on your savings.

What do you think? Am I being unfair to big banks? Are these incentives more generous than I'm giving them credit for? Would any of you turn the tables and take the incentives, then just move the money as soon as you can?

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Want to bank better? Come back to Bankrate's home page on Thursday, Feb. 24 and check out our 2011 Credit Union Checking Study. Find out how to get the most from your checking account.

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2 Comments
Meagan
February 17, 2011 at 5:16 pm

I think that most people don't do the math and see how much MORE money they would earn if they used a bank with a higher yield on savings. The $50 or $100 gift card incentive is easy to understand and even easier to imagine what you would spend it on. It's harder to imagine earning $150 in interest over the course of a year with a different bank. Plus you have to wait a whole year to earn that much in interest, while the gift card is instant gratification.

aybe I am cynical too but I just have a hard time being surprised that banks are trying to give customers a low rate of return so they can make a huge profit lending the money. Isn't that what banks always do?