I was a relatively early adopter of the Internet, and probably among the first 0.01% of people who got online in Germany back in the mid to late 1990s. I have memories of hanging out on Usenet groups and later on IRC, which was just a great time because there were absolutely no idiots around, and nobody tried to sell you anything. I don’t think there were even any e-commerce sites around back then. Yes, in the US, but not here in Europe. In the early 2000s, though, there was a time where I hardly cared about the Internet at all. These were the early days of boundless consumerism and hucksterism online, and plenty of sites put ads written in Adobe Flash up that made even a solid mid-range computer slow down to a crawl. I found that the Internet was nigh unusable at that time.
I still think that the Internet is pretty shit, but for a few years, you could relatively easily find people to discuss niche topics with, be it on specialized forums or blogs. Nowadays, such sites get suppressed by Google so if you do not know anything about them you will like not ever come across them. Now that the Internet is firmly in the hand of commercial entities, however, it gets more and more difficult to find good information. This just struck men when I wanted to research the underlying mechanisms behind US-style “high-yield savings accounts” (HYSA), a topic I was made aware of by some HR ditz posting on LinkedIn about it.
For those of you not aware of what an HYSA is, it seems pretty simple: They are like a regular savings account, with the same protections, except that they pay up to 25x the interest rate of the former. Simple, right? Well, my first question was how banks are able to offer a much higher interest rate on the latter, and the dozen or so sites I looked at in the hope of finding an answer to this question, all avoided answering it. They basically tell you how they work: you put money into them, and you make a large multiple of the standard interest rate. Duh!
Forget about Wikipedia, too. They just link to the usual articles written for morons instead of explaining how they work, i.e. how the bank makes money on them. It is nothing but frustrating. The Internet is bigger than ever, yet search is pretty useless. Maybe ChatGPT know the answer, assuming that wanting to get to the bottom of things is not “ableist” or “elitist” and therefore not allowed.
My skepticism towards HYSAs is quite simple: They do not exist in Europe. The most common bullshit answer about HYSAs I found was that they are offered by online banks as they do not have to shoulder the costs of brick-and-mortar branches. However, there are also online banks in Europe but they do not offer this kind of product.
In the end, I found a plausible answer, which corroborated my suspicion, i.e. that those accounts are partly deceptive as they are loss-leaders for the bank. It cannot be any other way as the bank is not able to make a risk-free return higher than the sky-high HSYA interest rate. They probably cannot even make this amount of money risk-free with those HYSA deposits. This is what someone on Reddit wrote five years ago:
The extremely high interest ones (3%+ are generally in this category today) are treating it as a marketing expense to try to sell you on their other products. They’ll usually have some requirements that make you interact with their other products on a regular basis, and they hope that you’ll move all your banking to them and start using products that’ll make them a profit. They’re also hoping that you forget one of the requirements so they don’t have to pay (you didn’t make 12 debit card charges? Too bad!)
Because the profit doesn’t come from the actual funds on deposit, there’s generally a cap on how much of a balance can get the high interest treatment. This limits their marketing expense per account to a tolerable level.
There’s nothing wrong with using an account like this but make sure you fully read and understand the fine print. As long as you understand all the limitations you can get a decent return.
If the Internet was not so crappy, information like this would come up first instead having to wade through a mountain of bullshit first.
I’ve found that I get somewhat better results if I do search on social media instead of using Google directly. SEO is a huge problem. Organic discussions and niche sites get suppressed because search results get swamped with huckster content as they are the ones who spend a lot of time optimizing their site so it gets recommended by the algorithm.
Aaron.
Short-term American Treasury bills pay more than any HY savings account. Banks simply take your money and lend it out higher or buy short term bills – it’s that easy.
HYSA’s were paying crap not too long ago – now they are paying a lot more. Guess what else went up a lot more sooner? US treasury bills.
The bank is counting on consumers to just park their money with them because it’s easy. But someone with half a brain can go right to the source in the US – http://www.treasurysdirect.gov – and buy tbills directly and earn more than any hysa
This is not correct. You can look up treasury yield rates easily online and you will find that they are well below 2% at the moment whereas I have seen HYSAs offering in excess of four percent. Also, buying treasury bills directly is not feasible, except in the very short term. Or do you really want to hold treasuries for 10 or 30 years, which are the maturities that pay a bit more?
3 year treasury interest rate is now (today) over 4.50%. It might seem counterintuitive, but sometimes shorter time range securities pay more. HYSA returns are strongly tied with federal reserve’s interest rates which are currently very high. Just a couple of years ago, with lower rates, a HYSA interest was around 0.1% – 0.2%
It is correct. You are looking at the wrong thing. Those are par yields which is the coupon rate at which bond prices are zero. Go up in that link and select Treasury Bill Rates and hit apply.
Yes treasury bills range from 4 weeks to 52 weeks – and when those fall so do HYSA rates. My HYSA was paying just 0.60% a year ago and now it’s paying 3.75%. But i bought 6 month bills and getting north of 5%!
There is nothing not feasible about buying treasury bills. The only advantage of having an HYSA is if you need immediate access to the cash – other wise just buy Bills which have expiratory dates ranging from 4 to 52 weeks.
Thanks for the explanation. I am still not fully convinced that this is a comprehensive explanation. Recall that many HYSAs have limits on how much you can put in, but if those banks just turn around and invest the money into treasury bills, then there would not need to be a limit on it as there is no shortage of these.
Aaron,
In the US, I’ve never heard of banks(the big ones anyway) having limits so in fact that is exactly what they are doing.
Anthony
I came across claims according to which some banks place limits on those accounts. Either way, thanks for your input. It nonetheless corroborates the point I make in my article as this information is apparently deliberately hidden from the end consumer.