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The sleeping bank deposit customer - It is time to wake-up

Updated: Feb 2

Summary: The Stoic’s Arbitrage wake-up alert - For much of 2022 and continuing in 2023, deposit rates have been increasing. Has your bank been increasing deposit rates with the market? Have you checked? If your bank's deposit rates are not in line with those at the top of the market, this means they are hoping you are asleep. A sleeping customer profits the bank at the customer’s expense.

This article provides an easy-to-implement deposit account management approach. The goal is to help you be a good steward of your resources.

Table of Contents

  1. How NOT to be a "Sleeping Bank Customer"

  2. Are you ready to act?!

  3. Tips and Q&A

  4. Notes


1. How NOT to be a "Sleeping Bank Customer"

In Our Investment Barbell Strategy, we suggest around 5% of our investable equity should be in cash or highly liquid accounts. This is our green “Well diversified and not volatile” segment 1.

Segment 1 is important for liquidity, a cushion in the event of an unexpected cash need and investment opportunities.

We also suggest this cash should be put to work. A small portion of it, generally enough to cover monthly bills should be in a checking account. The rest should be in interest-bearing accounts, such as high-yield savings, a CD laddering strategy, or a Money Market mutual fund.

When was the last time you checked your deposit account interest rate?

If the answer is - "I can't remember!" - then your current deposit interest rate is likely very low and under market. Even if you did check recently, the best practice is to regularly confirm your bank is providing the best rates.

Until recently, bank deposit account interest rates had been low for a long time. Now they are trending much higher. Many bank deposit customers have been lulled to sleep, assuming low rates mean it is not worth rate shopping. Understandably, many deposit customers developed the habit of not bothering to check deposit rates because they have been so low for so long. It does not help that many bank websites bury account interest rates with other "compliancy" details. [i]

Recently, people have increased their bank deposits which would benefit from higher interest rates. Especially in the post-pandemic fiscal policy-impacted world, bank deposits have increased. In fact, the FDIC reports domestic deposits have increased from $13.2 Trillion before the pandemic to $18.3 Trillion in the most recent report. That is a whopping 39% bank deposit increase in under 3 years.

Given the combination of higher rates and higher deposit balances…. IT IS TIME TO CHANGE THE HABIT! MUCH HAS CHANGED IN THE LAST FEW MONTHS.

Lending rates and short-term market rates have rocketed up in the last few months. This is because actual inflation and inflation expectations have all increased. A key Federal Reserve mandate is to manage inflation. As such, they reacted to inflation pressure by pushing up short-term interest rate benchmarks and target Fed Funds rates. Banks have reacted by raising lending rates so that they “match fund” to similar-length deposits. Typical shorter-funded loans are Home Equity, Credit Card, Auto loans, and some Commercial loans. Pretty much any loan that is of shorter duration, index-based (like prime), or has regular repricing covenants is shorter funded.

Here is the dilemma: While banks “could” increase deposit interest rates to match higher loan interest rates, they often will considerably delay deposit rate increases. Banks will lag the deposit interest rate market based on deposit interest rate competitive pressure. They rely on depositor inertia (the “lulled to sleep” depositor) to help keep their deposit costs down. As a result, the bank’s profitability will increase dramatically in this environment. This is because the banks' Gross Interest Margin, or the spread between loan rates and the interest cost of deposits, will increase substantially. By the way, do not blame the banks, their behavior is quite rational. It is up to deposit customers to drive higher rates via their behavior. The banks will not increase deposit rates unless their customers give them a good reason. Banks are more likely to respond with deposit rate increases after their customers vote with their feet. In the following Q&A section, we present an example of when lower deposit rates may make sense for some people. See Q&A 5.

In some cases, banks literally do not want your deposit. Some consider excess deposits as a burden and price them accordingly. Wells Fargo, one of the largest U.S. banks, is a great example of not wanting your deposit. This occurred because of federal regulatory action that caps Wells Fargo at $1.93 Trillion in assets. This occurred because of the fake account sales scandal that occurred before the 2018 regulatory action. The asset cap means they literally have nowhere to deploy deposits. They cannot provide loans past the cap. The bottom line is Wells Fargo deposit customers may receive well below market deposit rates until the cap is lifted.

How much money are bank deposit customers leaving on the table? In aggregate, the answer is PLENTY. It will ultimately depend on each person's savings level. In the aggregate example case where:

  • 75% of all U.S. deposits are available for a higher-yielding account and

  • A 1.00% higher rate could be earned as compared to the current "do nothing" strategy of leaving the deposit account in a lower-interest deposit account.

Then it is estimated the deposit system would generate $137.25 billion in annual income for all U.S. domestic depositors or $531 for every adult in the U.S.

We make simplifying assumptions about the percentage of deposits beyond the typically no-interest rate demand checking accounts and an estimate of deposit account rate increases. This will happen if bank customers actively shop their bank deposit accounts. See our notes for the analysis. Admittedly, deposit balances change over time. This example provides a relative "Bigger than a bread basket" perspective as to the significance of aggregate U.S. deposits when it comes to consumers optimizing their interest yields.

Also, some banks will break with the deposit rate inertia herd. That is, some banks have a higher need for loan funding in the short term. Thus, some banks will more quickly move up their deposit rates to attract funding for their higher-rate loans.

So what is the good Stoic’s Arbitrageur to do? Learn and act! The Stoic’s Arbitrage trade is using your stoic-informed knowledge and moving your savings to a high market rate bank deposit account.

Bank deposit accounts, by definition, should be FDIC-insured. By federal law, all bank deposits are insured for up to $250,000 in the event the bank fails. Thus, all deposit accounts are the same from a safety standpoint.


A gas station example:

As an analogy, think of it this way… if two local gas stations are comparable because:

  1. They sell the same kind of gas your car needs,

  2. You are confident the gas is of the same quality, and

  3. The gas stations are equally convenient….

Then, wouldn’t you buy your gas at the better-priced gas station? In our bank deposit analogy, it is assumed 1) cash is fungible (same), 2) all bank deposits are FDIC insured (quality), and 3) all banks with online account opening are equally convenient.


A good stoic will actively shop banks for the highest interest rates. They will maintain multiple deposit accounts across banks. They will regularly compare and move their money to the highest-interest bank account. Rational bank customers will regularly “vote with their feet.”

Setting up bank deposit accounts is relatively straightforward. The internet and smartphone apps have helped banks significantly improve the deposit user experience over the last few years. Especially in the banks that are trying to attract deposits.

In summary, deposit rates are increasing. If your bank is not increasing deposit rates in line with those at the top of the market, this means they are hoping you are asleep. A sleeping customer profits the bank at the customer’s expense.

Be a good steward of your resources and actively manage your deposit accounts.

2. Are you ready to act?!

Do you believe your deposit rates are below market? Acting is as easy as 1-2-3-4:

  1. Go to your favorite search engine and search: “High Yield Savings Accounts”

  2. Check out competitive rates on sites like Bankrate Monitor, Nerd Wallet, Investopedia, or others.

  3. Confirm the bank is FDIC insured and set up accounts at multiple banks offering competitive rates.

  4. Move your lower-rate deposits to the higher-rate account.

Are you time-crunched? That’s ok, set up one competitive rate account and increase your bank deposit account alternatives over time. A stoic believes in “process, not perfection.” Over time, you can easily add accounts and move money to maximize your return.

At this time, I have High Yield Savings accounts ("HYS") and smartphone apps for:

  • CIT Bank

  • Brio Direct (Affiliated with Webster Bank)

  • Citizens Access

  • Popular Direct (Affiliated with Banco Popular)

  • Wealthfront

  • Ally Bank

I recently moved deposits to a CIT account yielding 4.05%. Given the Fed is still in a rate-raising posture (as of February 2023), I suspect I may need to move our segment 1 deposit again. It will depend on whether my current account deposit rates keep up with the market. My recent experience of opening an account was positive. The account opening process took less than 5 minutes.

In certain rate environments, CDs may make more sense than high-yield savings. In the following Q&A 2, we address the steps to add CDs to your deposit management strategy.

3. Tips and Q&A

Pro tips:

  1. When transferring between accounts, you will get faster funds availability by “pushing” the transfer from the originating bank. It is generally slower to “pull” the transfer from the receiving bank. Your first account funding deposit will likely need to be a "pull" deposit transfer. For ongoing deposit transfers, consider using the "push" method.

  2. You will need to fund your new deposit account and move money. I suggest setting up two external transfer accounts. One from your core checking account bank and one from the bank where you have the majority of your segment 1 cash. When setting up a transfer, it is good to have a few pieces of information handy:

  3. Name of the bank

  4. The bank's routing number (This is how the deposit system identifies the bank)

  5. Your deposit account number (This is how the bank identifies you)

There are two common transfer setup methods:

  1. Using Plaid or similar technology, the new bank will have you log in to the originating transfer bank. This will establish the transfer link. This can be done immediately. If available, this is the preferred method.

  2. Using the "2 small deposit method," the new bank will send two small deposits to the originating banks. Once those deposits are recorded by the originating bank, you will enter them into your new bank. Once the match is validated, the transfer link is established. This can take a couple of days.

Questions and Answers:

Q&A 1: Sometimes I get asked, “why don’t you put your deposit in a money market mutual fund?” Great question!

The short answer is that I generally find the top-of-the-market HYS accounts to be a better deal.

The more in-depth answer has two considerations:

  1. Money market mutual fund accounts are not FDIC-insured.

  2. The market for the underlying securities, like treasury bills and commercial paper, is very deep, broad, and homogenous. In the current environment, this means the most competitive and heterogenous bank deposit rates will often be higher.

As such, with a little shopping, one can get a better rate and full insurance. As of the writing of this article, money market mutual fund yields (return net of fund costs) are averaging around .7% below the high-yield savings accounts listed earlier. Thus, currently, it is possible to get a higher yield and full insurance by shopping rates at commercial banks.

Certainly, if money market mutual fund rates go higher than bank deposits, I would consider them. This would then be a risk/return tradeoff. In general, money market mutual funds have VERY low credit risk.

Q&A 2: What if rates start to go down? Should I change my deposit strategy?

The short answer is maybe - but stick to the high-yield shopping strategy as a core behavior.

The latest inflation numbers came out in early 2023. They suggested inflation is starting to retreat. Inflation and inflation expectations are significant market deposit rate drivers. As such, rates may start to retreat over the next quarter or so. What does this mean? Longer-term CDs may make more sense for your next stoic-informed deposit move. Consider a CD laddering strategy that places your segment 1 deposit into multiple-maturity HYS and CD products, such as:

  • HYS - 25% of segment 1 deposits

  • 6-month CD - 25%

  • 12-month CD - 25%

  • 2-year CD - 25%

The idea of laddering is a means to maintain some liquidity of shorter maturity money and get a higher rate associated with longer CDs. If for some reason the longer rate CDs are about the same as the shorter deposits, keep the deposits in the shorter duration accounts.

Now, let's take a step back.

Let's face it, rates go up and down all the time. It is difficult to predict the interest rate direction. The most important behavior is the habit of regularly pricing and moving to better HYS accounts. The "next level" strategy is to implement a CD laddering strategy. If you are happy with the rate of a longer-term CD, it is fine to move some of your money to a CD laddering strategy to lock in a longer rate.

This is the Stoic’s Arbitrage in action!

Q&A 3: Sometimes I get asked, “How do you feel about 'rent-a-bank-charter' arrangements, where a non-bank passes through a deposit to a partner FDIC-insured bank?"

The short answer is - I'm NOT ok with it. At this point, I think the uncertainty regarding individual depositor liquidity risk is NOT offset by the higher non-bank deposit rates.

I have mixed feelings about this. Non-banks like Affirm and Upgrade advertise VERY competitive deposit rates AND FDIC insurance. But there is a catch! My biggest worry is - if the non-bank goes out of business and their website goes down, how challenging is it to recover my deposit with the partner bank? There is a reason the non-bank is not FDIC-insured! I have contacted partner "rent-a-bank-charter" banks, such as Cross River Bank. I have also contacted the FDIC to confirm how this works. I have not received a satisfactory answer. In fact, Cross River referred me back to its partner non-bank and refused to discuss the "what happens in the event your client goes out of business?" question. Even though, it is a question only Cross River can answer. NOT a vote of confidence!

By the way, narrowly defined, the non-bank partner offering a deposit through a bank is not even in the scope of the FDIC. Only the bank is. In the event of a "rent-a-bank-charter" failure situation, the most likely scenario is the non-bank fails and the partner bank does not. In this situation, the FDIC will be like... "whatever... we only insure banks. The bank did not fail!" The point is this - if the non-bank fails and I need to retrieve my deposit from Cross River, I have no guarantee the bank will quickly and efficiently hand over my deposit.

We love the FDIC! They have managed thousands of bank failures since their founding in 1933. They are really good at it and VERY QUIET. A seemingly normal bank closes on Friday. But the FDIC, behind the scenes, has been diligently working with the bank to resolve its problems for months. Unfortunately, there is no longer a solution. As such, as soon as the doors close, the FDIC declares the bank a failure. As soon as the customers have cleared out, a SQUADRON of FDIC officials descends on the bank. Over the weekend, they sort it all out. Down to the penny! On Monday, the bank re-opens with a new name and I can get my money. Other than the new name, it is like nothing happened. Even the branch employees are probably the same! The FDIC is AMAZING. They are the hidden beating heart of our economy. Cross River is no FDIC. Not to blame Cross River or any other "rent-a-bank-charter" bank. They are in the business of growing a bank, NOT managing a non-bank failure.

Since the FDIC is broadly charged with maintaining the confidence of the banking system, they may get dragged into a "rent-a-bank-charter" failure situation. The problem is.... none of these scenarios have been fully tested! I will wait for the test of time and experience. There are too many competitive rates from banks directly insured by the FDIC. Affirm and Upgrade are non-bank "rent-a-bank-charter" examples. While they have attractive rates and tout "FDIC insurance," I have not yet been able to get comfortable with deposit safety.

At this point, I am avoiding placing deposits with "rent-a-bank-charter" arrangements until I can get more comfortable with the process of making a claim on my deposit.

Q&A 4: How do you feel about banks that play the "hide the best rate from their customers" game with alternative bank brands?

The short answer is - I'm ok with it. It may be mildly annoying for existing customers, but the benefits outweigh the costs.

This does take the "sleeping bank customer" strategy to the next level! Let's take Webster Bank as an example. Webster is a growing bank located in the northeast U.S. According to their website in 2022, they have over $67B in assets. This makes them a "mid-size" bank. They also have over 200 branches. Per the Webster Bank website as of November 2022, their best savings rate is .02%. Webster also launched an affiliated brand called "Brio Direct." Brio Direct offers a High Yield Savings account with a 3.70% yield. Same bank - dramatically different savings rates!

Like many banks, Webster struggles with balancing channels and products. Older customers traditionally like branches. Younger customers want smartphone convenience. Branches cost a bunch of money and require lower-rate deposits. Smartphone apps and digital channels are more cost-effective. Digital channels can both extend the bank's deposit reach outside its traditional branch footprint and justify a higher deposit rate. So Webster's strategy is to create distinct brands for these distinct customer segments that carry very different channel cost requirements. The Webster branch is available for those customers that want "place and people" and are willing to accept a lower deposit rate for that privilege. The Brio app is available for those willing to use lower-cost digital channels for their banking needs. They are rewarded with a higher deposit rate. Webster's marketing department will likely justify the 2 brand strategy as a customer-friendly means to prevent "channel confusion." The more genuine view is that Webster wants to prevent a profit-reducing cannibalization from a low deposit rate channel to a high deposit rate channel. That is - Webster wants their low-cost deposit bank customers to KEEP SLEEPING!

If you are a Webster customer, this could be mildly annoying. Until you realize you truly value the branch feel and connect with the people at the branch. If it turns out you do not really need the "high touch, high cost" banking experience - do not get mad! - get even. Go online and open a Brio Direct High Yield Savings account and move your deposits! Vote with your feet!

Q&A 5: When may it be justified to accept a low-rate deposit interest rate?

The short answer is that it has to do with "what is important to you." If you value a high-touch, high-service in-person experience, then a lower rate may be worth it.

Behavioral economics teaches us that people derive utility differently. That is, we all may have different motivations for how we receive value. In fact, utility likely changes for the same person over time. Utility is based on framing and a person’s local situation. Bank deposit utility is no different. Some deposit customers may optimize utility by trading lower rates for higher service. Also, some people may value a local bank and accept lower deposit rates because of the bank's local community support.

By the way, people often confuse the economic concept known as"self-interest" of maximizing utility across many weighted preferences, with the "selfish" behavior of looking out for #1! One's self-interested utility may include both selfish and selfless behaviors. There is a difference!

For example, my mom is about 80. She lives in a nice retirement community in the west end of Richmond, Virginia. A new community bank just opened a branch in her building. They have a very nice office space convenient for my mom. She is getting to know her banker and feels comfortable that they can manage her savings. She feels more confident that if bank service issues arise, her banker will take care of them. This is a high-touch, high-service banking channel.

Naturally, the bank is not doing this for free. They are betting that a more expensive, high-touch channel will allow them to collect lower-cost deposits. This enables the bank to lend those funds at market interest rates and receive an expanded gross interest margin. They are betting the majority of their retirement community customers are “deposit rate sleepers.” I did check their deposit rates, they are quite low.

My mom is pretty savvy with the internet and has very good business sense. While she does appreciate her local banker, she does “trade up” some of her savings into a higher rate, FDIC-insured internet bank account. But most of her community members likely will not. My guess is this bank has made a good bet on a channel that will provide lower-rate deposits.

For more information on the Stoic’s Arbitrage, please see our article The Stoic’s Arbitrage - A Personal Finance Journey. This provides an overview and access to our personal finance curriculum.


4. Notes

[i] Burying relevant economic information like the deposit interest rate is known as "sludge." The definition of sludge is:

Sludge is what behavioral economists call anything in a process that hinders people. It prevents people from doing the things they want to do and eventually reduces the consumer’s welfare.

Please see section 4 "Sludge & Expense Management" in the following article for more information:

Hulett, Budgeting like a stoic, The Curiosity Vine, 2022

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