Bank Interest Rate Advertising Question

[Drake3287]

Okay here's an interesting one. In our local newspaper there are always two, quarter page ad's from two different banks on the same page advertising the current 15 month CD rates. For the last couple of weeks one bank has been offering 2.65% while the other bank offers 2.25%, and yes virtually the same account. Knowing these quarter page ad's cost thousands of dollars each why does the bank offering such a lower rate bother paying for such an ad? With both banks being FDIC insured why would anyone pick the bank with the lower rate? Do these banks not look at the ad's they pay for?

[disneysteve]

Around the corner from our house, there are 2 gas stations directly across the street from each other - a small suburban street, not a major roadway. The entrances to each are probably no more than 50 yards apart. One station routinely charges 35-40 cents/gallon more than the other. Inexplicably, the super expensive station seems to have no shortage of customers. I don't have a clue why anyone willingly goes there given the price difference, but lots of people do.

Amazon is cheaper on thousands of items but people continue to shop in physical stores even though shopping online is both cheaper and more convenient.

The situation with the banks is a bit more understandable. One may have a branch more conveniently located than the other. Or maybe someone is already a customer of the one bank and prefers to keep everything in one place. For a $5,000 CD, a difference of 0.4% is about $20/year. A lot of people just aren't going to go out of their way to make an extra $20.

[Drake3287]

Good point! Never ceases to amaze me about what people will do with money. I'm guessing most people with CD's have much larger balances though, a typical $100,000 account will get you $400. more a year, $50,000. $200.

[msomnipotent]

There could be a lot of reasons why someone wouldn't go with the higher rate. Some people just do not like a certain bank and will refuse to be a customer no matter what. (Kind of like how Amazon managed to get on my **** list once again and I decided yesterday that I will not be buying Christmas presents from them even if it means having to walk to Walmart in 3 feet of snow on Christmas Eve.) A lot of people just won't switch banks because they think it is too hard, or they are too lazy. Or some might assume there is some fine print that will disqualify them, or there actually is fine print like a minimum balance that they can't afford or fees. Or even one stop shopping if they also need a car loan or mortgage that beats the competitor's savings rate.

I'm sure the bank with the lower rate didn't ask to be placed on the same page as the other bank. I would be ticked off if I was the bank manager of the lower rate after seeing that. And while they are aware that some competitors have higher rates I'm sure they don't call and ask them what their rate will be in next week's ad. I'm assuming there has to be laws about collusion.

[disneysteve]

I'm guessing most people with CD's have much larger balances though, a typical $100,000 account

I'm curious why you think that. I doubt 100K is a "typical" CD amount. Maybe a retiree would do that and get the monthly interest check for income but I would think most people with CDs are using it as part of their EF and the cash portion of their portfolio. Since most Americans don't even have 100K saved overall, I'd bet most CDs are for much lower amounts. Personally, we have over a $1 million portfolio and I think the largest CD we've ever had was $10,000. We don't currently have any though I may change that in the near future.

[Like2Plan]

Another factor might be there are a limited number of CDs at each bank. So, even though bank 1 has a higher rate, they might run out of CDs for folks to invest in at that rate.
I noticed that NASA FCU is offering 3.25 APY for a 15 month CD. https://www.nasafcu.com/rates/ira-certificate-rates/
The fine print says for deposits between 1-30 Sep 2018 and subject to change without notice.

Another factor might be more favorable terms--like no penalty (or smaller interest penalty) for cashing in the CD early.

[Drake3287]

I'm curious why you think that. I doubt 100K is a "typical" CD amount. Maybe a retiree would do that and get the monthly interest check for income but I would think most people with CDs are using it as part of their EF and the cash portion of their portfolio. Since most Americans don't even have 100K saved overall, I'd bet most CDs are for much lower amounts. Personally, we have over a $1 million portfolio and I think the largest CD we've ever had was $10,000. We don't currently have any though I may change that in the near future.

I'm guessing few people go to the trouble of opening a CD account with only $5,000. They may not have $100,000. but I think most people start looking at CD's after reaching a certain figure such as $10,000. or more.

[disneysteve]

I'm guessing few people go to the trouble of opening a CD account with only $5,000. They may not have $100,000. but I think most people start looking at CD's after reaching a certain figure such as $10,000. or more.

I'll see if I can find any data on average CD amounts. I would think they skew to the lower end, like 10K and below but I could be wrong.

[disneysteve]

I found a survey from a few years ago that showed that 70% of people have never put money in a CD.

I also found this: https://www.statista.com/statistics/...y-us-families/
This is 2013 data showing the median value of CDs owned based on age. The highest is $31,000 for the 65-74 age group. So it doesn't appear that the typical person has that much in CDs, and CD ownership definitely skews older, as expected, as retirees use them for income.

[Jluke]

The “low” amounts in CDs could be because people will typically setup a CD ladder.

I opened a 12-month CD (2.1%) back in April with 7k.