Online savings account yield hits record low as 'banks are flush with deposits'

Americans socked away an unprecedented amount in bank accounts last year, but what they have actually earned on those funds is hitting all-time lows.

The average online savings account yield in February hit a new low of 0.49%, down from 0.51% in January, according to an index from DepositAccounts.com, owned by LendingTree, which has tracked yields for 12 years. When the pandemic began last year, the average yield for online savings accounts was 1.711%.

The average savings account rate among all banks is 0.04%, the lowest level since at least 2009, according to the Federal Reserve Bank of St. Louis.

Read more: Deposit accounts: Advantages and disadvantages

“The personal savings rate went way up, people put more money in the bank, [and] so banks are flush with deposits,” Ken Tumin, founder of DepositAccounts.com, told Yahoo Money. “That put downward pressure on rates. We may see more tiny declines this year, but they’re bottoming out.”

'Not in any rush to raise rates'

Thanks to huge government transfers last year like stimulus checks and extra unemployment benefits coupled with a major pullback in spending, Americans’ savings jumped during the pandemic.

Banks held $17.8 trillion in deposits at the end of the year, an all-time high and up 22.6% from the $14.5 trillion held at the end of 2019, according to a new report from the FDIC this week. The first, second, and fourth quarters of 2020 saw the largest inflows of money into bank accounts dating back to 2008 when the FDIC began collecting the data.

Read more: Checking vs. saving account: How to choose

"The string of tremendous challenges last year – onset of the pandemic, business shutdowns, significant layoffs, and an unprecedented economic downturn – drove households and businesses to shore up their savings," said Rob Strand, senior economist at the American Bankers Association. "We don’t expect a significant change in deposit balances until people feel confident the pandemic is under control and the economy is back on surer footing.”

Tumin also doesn’t expect rates to budge higher any time soon, either, because the Federal Reserve has indicated it plans to keep short-term interest rates — which savings rates track — where they are.

“More stimulus checks are probably coming out,” Tumin said, which would potentially balloon deposits even more. “Banks are not in any rush to raise rates.”

Searching for higher yields

Over the past few years, Goldman Sach’s Marcus, Betterment, and Wealthfront, among other fintech companies, offered savings rates that neared 3% to lure younger customers from traditional brick-and-mortar banks, which provided paltry savings rates returns.

But the low-rate environment has undermined that incentive.

Read more: Here's how to avoid overdraft fees on your bank account

Americans looking for the highest yield now to stash their considerable savings should consider reward checking accounts that link to a high-yield savings account, Tumin said. Community banks and credit unions often offer these and require a minimum number of debit card transactions, because they may make money off debit card swipe fees.

The average yield on these reward checking account is 1.52%, according to Tumin, but they typically have balance caps that can range from $5,000 to $50,000, averaging around $15,000. The yield on the savings account it's linked to is lower, ranging between 0.5% to 1%.

Still, "that can be two to three times what online savings accounts offer,” Tumin said.

Janna is an editor for Yahoo Money and Cashay. Follow her on Twitter @JannaHerron.

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