Interest rates are going up – but in a rare bit of good news for Canadian bank customers, this time it involves savings accounts.
A battle for depositors is quietly unfolding in the financial sector, led by President’s Choice Financial, which is introducing what its calls “aggressive” interest rates on savings accounts. The discount bank, a partnership between Canadian Imperial Bank of Commerce and grocer Loblaw, is offering 2.6 per cent interest on all new deposits in a bid to lure clients away from rivals.
While the limited-time offer is a far cry from the much higher rates depositors were paid by their banks more than a decade ago, the upward move is a welcome reprieve from the interest erosion that has overtaken the personal banking sector during an era of historically low rates.
The 2.6-per-cent rate on deposits made until July 15 represents the highest interest rate available from a Canadian bank, narrowly edging out ING Direct Canada, which has been advertising 2.5 per cent on all new deposits until the end of June.
The interest rate dust-up comes during broader upheaval in the no-fee, high-interest savings account market, as banks battle for market share. For CIBC, it is a direct shot at rivals Royal Bank of Canada and Bank of Nova Scotia , which have both acquired discount banks over the past year.
Royal Bank recently purchased Ally Financial, which operated no-fee, high-interest accounts, while Scotiabank bought discount banking juggernaut ING Direct Canada.
RBC announced it was moving those Ally customers over to RBC’s high-interest accounts, which carry rates of 1.2 per cent. Sensing an opportunity, PC Financial and ING Direct introduced the short-term offers as a way to lure as many of those customers away from RBC as they can. The Ally business has more than $2.8-million of deposits on its books.
“There’s opportunity here,” Barry Columb, head of President’s Choice Financial, said Monday after the offer was made public. “This is about creating awareness in the market that there is a banking alternative.”
In a time of historically depressed interest rates – where the payouts on deposit accounts has become almost inconsequential and have failed to keep pace with inflation – any news of deposit rates going up is good news, but its unclear whether these new offers are a short-term phenomenon or a sign that the downward pressure on savings accounts is starting to lift.
Banks use deposits as a cheap source of funding for their lending operations, paying out a lower interest on deposits and collecting higher rates on loans.
However, the margin between the two has been steadily shrinking for the banks, as persistent low interest rates also drive down their profits from lending.
A spokesman for ING Direct Canada said the bank has no plans to up its 2.5-per-cent rate for now, but said the fact that such accounts encourage people to save is a good thing.
“We think competition is good,” said ING Direct spokeswoman Buket Oktem. However, she said one key difference is that ING’s rate can be used for registered savings such as retirement savings plans (RSPs), but the one offered by PC Financial is for non-registered deposits.
Other banks have been trying to lure Ally customers as well. The financial services arm of Canadian Tire Corp. has been offering 1.7-per-cent interest on its accounts, with no minimum on deposits.
In an effort to retain Ally clients, an RBC spokesman said the bank is offering those depositors an exclusive limited time rate of 1.8 per cent on a one-year non-redeemable GIC, and 1.5 per cent on a one-year redeemable GIC.