Banks VS Interest: The Battle We Can Help Win
Why do all the major banks seem to agree on giving out such tiny, negligible interest rates?
Interest rates on checking and savings accounts in the developed world are ridiculously low, and there’s no sign of that changing any time soon. But why do all the major banks seem to agree on giving out such tiny, negligible interest rates? It wasn’t like that in the recent past. As recently as 2006, author Trent Hamm of The Simple Dollar notes that interest rates of 4–6% were “pretty easy to find.” So what has changed since then? In this article, we’re going to look at a few reasons why most major banks are only offering a mere pittance in interest, and why you may need to look elsewhere for steady, reliable returns on your savings.
Why do banks offer interest at all?
Let’s go over some of the fundamentals first. Most of us rely on banks for our financial needs. They keep our cash secure and provide us with the infrastructure to make the electronic payments that are the most widely accepted today — namely debit cards, credit cards, and ACH or similar electronic transfers. Whether they give us interest or not, the average person relies on banking services regardless.
Today, the only reason banks offer interest is to be competitive with other banks in hopes of holding on to your deposits. That means banks aren’t making money by simply holding onto your deposits or providing you with a debit card. Instead, they make the majority of their money by lending your funds out to others for mortgages, auto loans, and credit cards among other things.
In order to offer loans, banks need to have some amount of money in their vaults (more on that later). If they don’t have enough deposits in their ledgers, they could miss out on earning high-interest returns on mortgages and other loan products.
In an ideal world, banks would offer a reasonable rate of return on checking and savings deposits so that they can have enough cash in reserve to make profitable loans. The consumer wins since they get a fair rate, and the bank wins because they have the reserves they need to provide loans. However, things are unfortunately not that simple.
Tilting the scales in their favor
Thanks to a concept known as fractional reserve banking, banks are allowed to loan out far more money than they actually have on deposit. This means that your typical bank has little need for checking and savings deposits since they only require a small amount of funds on hand in order to make much bigger loans (and have a bigger payday). As a result, banks are not incentivized to offer competitive interest rates to attract deposits. Simply put — they don’t need your money. At least, they don’t need any more money than you are probably already keeping with them.
Your typical credit card in the developed world has an interest rate somewhere between 10% and 29% per year. Mortgage interest rates are hovering between 4% and 6%, and auto loans are typically between 8% and 15%. And yet for some reason, your typical bank offers far below 1% interest on checking and savings even though their profit margins are typically around 90%. For banks that offer higher-than-average interest rates, there are often many requirements one must meet to be eligible for better rates. For example, they may need to reach a minimum deposit threshold, or that interest rate only applies to a small amount of their total deposits.
If you ask us, a bank that can pull in 20% interest on a loan while giving out less than 1% on the deposits funding that same loan to happen is nothing short of exploitative. Banks could easily offer 3% APR or more and still be raking in hefty profits year after year, but we give them our money for returns at a fraction of that rate, so why would they offer more?
That’s because your typical major bank is a listed company that is owned in part by the stock market. Generally speaking, companies that are listed on a stock market must act in a way that maximizes profits or else they risk a drop in share prices. If a bank offers 3% interest when they otherwise do not need to (meaning they are able to secure enough capital to make profitable loans), then they are essentially just giving money away. We highly doubt the stockholders would tolerate that.
Changing the equation
Change is inevitable, but how much things will change and how quickly is up for debate. There are other outside factors that can affect interest rates such as in the case of the United States, various rates that are controlled by the US Federal Reserve. However, the largest deciding factor when talking about private companies such as banks is simply what the customers will tolerate. As your average member of the public is completely reliant on banks just for basic financial services, it seems that the decision to raise rates would lie entirely in the hands of the banking elite and not the general public.
Thankfully, the current private financial system powered by banking elites now has some competition. While their centralized system is controlled by an endless desire for maximized profits and ever greater returns, new ideas are emerging in finance that present unparalleled opportunities for the average customer.
At Celsius, we’re focused on decentralizing financial services with the goal of changing the equation from shareholders and leadership holding all the power to putting the power back in the hands of the people. Celsius users can earn up to 10.5% annually on crypto deposits with interest payments funded from 80% of Celsius’ total revenue and paid out to our community of depositors each week. Our platform has no minimums or caps for deposits, no fees or penalties, and no lockups so users can access their funds freely and easily at any time.
We’re on a mission to disrupt the unfair banking practices traditional institutions have implemented for hundreds of years by bringing the next 100 million people into cryptocurrency. Banks are only as powerful as the number of depositors they have funding their balance sheets. When cryptocurrency becomes mainstream and customers learn to only expect transparent, honest, and fair financial services that exist on the blockchain, big banks are going to be in for a wake-up call.
This doesn’t help just us or the cryptocurrency community in general, but it helps to put a leash on the greed of the banking elite. If banks aren’t forced to raise interest rates on savings accounts, they never will. And even if they raise their rates to 3%, we plan to make it more attractive to save with companies like ours that put the interests of our community first and don’t answer to stockholders demanding maximized profits.
In a word, what we want is beneficial to everyone. Well, everyone except the banking elite who caused this problem in the first place.
What’s your take? Will banks ever raise the rates? Let us know in the comments below.
About Celsius Network
Celsius Network is a democratized interest income and lending platform accessible via a mobile app. Built on the belief that financial services should only do what is in the best interests of the community, Celsius is a modern platform where membership provides access to curated financial services that are not available through traditional financial institutions. Crypto holders can earn interest by transferring their coins to their Celsius Wallet and borrow USD against their crypto collateral at interest rates as low as 4.95% APR.
Download the Celsius Network app and start earning interest on your crypto today ➡️ celsiusnetwork.app.link