I occasionally like to analyze the BestCashCow database to see how rates vary by state, bank size, etc. It's been awhile since I ran a rate analysis by bank size and by bank type (online versus brick-and-mortar) so I decided to update it and see how various sized banks fare against each other and against online banks and credit unions. If you want a competitive rate should you start at the big bank down the street, the credit union, or the small local bank? Or should you open an online account? Here's what I found.
Smaller Banks Offer Higher Rates
For those who prefer brick-and-mortar banking an analysis of over 6,000 banks revealed that you can earn almost half a percentage point more on a CD just by depositing money at a small community banks versus a big mega-bank. Or, put another way, small community banks with less than $1 billion in assets on average pay 0.40 percentage points more on a 3 year CD and 0.44 percentage points more on a 5 year CD.
These results are in-line with what we discovered last year, the findings being published in the Wall Street Journal. The bigger banks don’t want to compete on rate and prefer to compete on convenience and technology. If you are looking for a better rate it would be wise to investigate some of the smaller banks in your neighborhood.
Bigger is Better with Credit Unions
When analyzing credit unions, the finding is reversed: bigger is better, at least when it comes to CD rates. After analyzing 2,242 of the 6,753 NCUA insured credit unions, BestCashCow data shows that on average credit unions with greater than $10 billion in assets pay .30 percentage points more than those with under $1 billion in assets for 3 year CDs. The same finding holds true for 5 year CDs.
Larger credit unions operate fall smaller branch networks than a similar sized bank and in this way their cost structure is closer to online banks. They are able to take the savings from their scale and pay it out in higher rates.
Local Banks & Credit Unions Versus Online Banks
Last year, up to 8% of the banks in our database beat the best online rate in 3 year and 5 year CDs. This year, the number has shrunk to 4% as brick-and-mortar institutions have cut rates while online banks have held relatively firm. If you are looking to open a savings account, an online bank is the place to get the best rate. The same is true for 1-2 year CDs. For 3-5 year CD terms you can still find local banks that offer rates as good as if not better than that offered by an online bank. You can search for local online rates here.
Conclusion
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If you don't mind opening an online account, the online banks offer the best rates on savings and money market savings accounts as well as 1-2 year CDs.
- If you plan to open a 3-5 year CD, then you can choose from an online bank or a competitive local bank. The big banks are not competitive.
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If you quality for membership, a large credit union might offer the best rates, combining the rates of an online bank with the service of a community bank.
To help you begin your search for the best rates:
