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

Updated: Aug 9

Summary: The Stoic’s Arbitrage wake-up alert - 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.

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


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 is 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. 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.

Recently, people have increased their bank deposits that 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 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 our notes, we present an example of when lower deposit rates may make sense for some people.

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 no where to deploy deposits. They cannot provide loans past the cap. Bottom line, 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.

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 a metaphor, 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 metaphor, 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 make significant improvements in 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.


Afterword: 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 and smartphone apps for:

  • Citizens Access

  • Popular Direct

  • Wealthfront

  • Ally

I recently moved deposits to a Citizen’s account yielding 1.75%. Given the Fed is still in a rate raising posture (as of July 2022), I suspect I may need to move our segment 1 deposits again. It will depend on whether my current account deposit rates keep up with the market. My recent experience of opening an account at Citizens was very positive. The account opening process took less than 5 minutes.

By the way, here is a pro tip: 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.

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

  1. These 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 work, one can get a better rate and full insurance. 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.

This is the Stoic’s Arbitrage in action!

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.



When might a low rate deposit interest rate trade 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.

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 accounts. But most of her community members likely will not. My guess is this bank has made a good bet on a low-cost deposit channel.

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