Our Customers and the Interest Rate
In case you missed it, the Federal Reserve recently cut interest rates for the second time since 2008. You might have noticed that a lot of traditional banks quickly reduced the interest rate they pay to their customers, but today Simple is choosing to keep our Protected Goals Account deposit rates at a high 2.02% Annual Percentage Yield (APY) for balances below $10,000 and to increase deposit rates to 2.15% APY for balances of $10,000 or more (rates are effective as of October 1, 2019; for current rates, click here).
We don’t have a crystal ball, and can’t predict when rates will change again, but we wanted to clearly communicate what’s happening today. We believe that maintaining our high Protected Goals Account rates—and rewarding the choice to save—will help our customers continue to feel confident with their money.
That’s the TL;DR. If you want to learn more about interest rates, read on.
- We’ve written about interest rate on our blog before, mostly to help our readers understand the lingo that banks use—sometimes confusingly—when talking about interest rates.
- There’s another article we wrote about how banks make money. It gives you some important information about something called “Net Interest Margin”. It’s a boring-sounding term, but it explains how banks balance how much money they make with how much they pay their customers to deposit money.
Interest Rate Refresher
Just as a reminder, “Interest Rate” usually means one of two things
- Money paid to you for depositing money in a financial institution (Annual Percentage Yield)
- Money you pay when a lender or financial institution loans you money (Annual Percentage Rate)
Today we’re talking about number one—Annual Percentage Yield (APY). That’s the annual rate of return, expressed as a percentage (2.02% and 2.15% APY in our case), that a financial institution pays you for keeping your money with them. The bank or credit union doesn’t just lock your money in a vault, they will actually invest your money, loan it to other people, or use it for other sorts of transactions. To say “thank you” for letting them use your money, banks will pay you for keeping your money with them.
Where Banks Have A Choice
Banks set the amount of money they pay you (the APY) based on what they expect to make in return by investing your deposits. This is one way that banks make money, and it’s called “Net Interest Margin”. Net Interest Margin is the profit that banks make on your money, minus what they pay you in interest. How big or small the profit depends largely on your bank. For example, here at Simple we currently offer a starting rate of 2.02% APY because we make a little more than that in Net Interest Margin. That margin (or profit) helps us pay our bills. We need to feel confident about our money in the same way we want for every one of our customers.
The Federal Reserve and Interest Rates
If you’ve been following the news in the last couple of weeks, you may have heard that a governing body called the Federal Reserve (“the Fed”) announced an interest rate decrease. Who is the Fed, you ask? The Fed is the country’s central banking system. Its primary purpose is to make sure the economy of the United States operates effectively, and works in the interest of the public (read more here). When banks store excess reserves (money) in one of the Federal Reserve Banks, they are paid interest in the same way that banks pay you for depositing money. Any increase or decrease in the federal funds rate by the Fed typically signals a change in economic climate to the rest of the banking community. Whether that change signals something positive or negative, is typically represented by the amount increased or decreased.
Here’s an example.
Bank A may offer a 1.00% APY on all balances on Tuesday. They make 1.00% Net Interest Margin (profit) from those balances. On Wednesday the Fed lowers interest rates by 0.25%, so the bank has a choice. Do they lower the amount of money they pay to customers, or do they decide to pay customers the same rate they have been knowing that they may lose money (or not make as much) by doing so?
Again, this decision is up to the bank, and depends on many factors like the local, regional, or global economic conditions.
For now, we’re paying close attention to the Federal Reserve and considering their decisions and keeping our customers’ confidence in their money in mind. In order to continue playing that part in our customers’ financial lives, we also need to be smart about where we spend and save. We commit to continuing this dialog as we learn more from the Fed.
Rates are effective as of October 1, 2019, are variable, and subject to change after the account is opened. Accounts subject to approval. For your Protected Goals Account, balances between $0.01-$9,999.99 earn 2.02% APY and balances $10,000 and above earn 2.15% APY.