As a depositor, understanding bank deposit account rates is crucial for maximizing return. Exploring deposit options, and  knowing how rates are determined can help you make informed decisions that work in your favor. In this post, we’ll break down how deposit account rates are calculated, how banks determine what rates to offer, and strategies to ensure you get the best rates on your deposits.

How Deposit Account Rates Are Calculated
At the core of any deposit account is the interest rate, which determines how much your money will grow over time. The basic formula for calculating interest is straightforward:

Monthly Interest = Principal x Rate x 31 days / 365

Annual Interest = Rate x principal 

This formula calculates the interest on the initial amount you deposit, known as the principal, and identifies how much can be earned monthly or annually. Additionally, there are different types of interest. These are:

Types of Interest:

• Simple Interest: This is the easiest type of interest to understand. It’s calculated only on the initial principal. For example, if you deposit $1,000 at a 5% interest rate for one year, you'll earn $50 in interest.
• Compound Interest: This is where things get more interesting. With compound interest, you earn interest not just on your initial deposit, but also on any interest that accumulates over time. Depending on how often the interest compounds (daily, monthly, quarterly, etc.), this can significantly increase your earnings.

APY vs. APR:

• Annual Percentage Yield (APY): APY is the effective annual rate of return taking into account the effect of compounding interest. It’s the figure you should pay close attention to when comparing deposit accounts because it reflects how much you'll actually earn in a year.
• Annual Percentage Rate (APR): APR, on the other hand, is a measure used primarily for loan accounts and includes the cost of fees along with the interest on the principal amount.. 

How Banks Determine Deposit Rates

Banks don’t just pull deposit rates out of thin air; several factors influence the rates they offer. 

Economic Factors:

• Federal Reserve Rates: The Federal Reserve plays a significant role in setting the benchmark for interest rates across the economy. When the Fed raises or lowers the federal funds rate, banks typically adjust their deposit rates accordingly.

• Inflation: Inflation impacts how much interest banks need to pay to make their offerings attractive. In a high-inflation environment, you might see higher deposit rates as banks try to ensure your money grows faster than inflation.

Bank’s Strategy:

• Liquidity Needs: Banks that need more cash on hand might offer higher rates to attract more deposits. This can be especially true during times of economic uncertainty or when a bank is trying to grow rapidly.
• Competitive Landscape: Banks are always watching what their competitors are doing. If one bank raises its rates, others might follow suit to stay competitive and avoid losing customers.

• Profit Margin Considerations: While banks want to offer attractive rates to draw in deposits, they also need to maintain their profit margins. This balancing act is a key part of how they set their rates.

How to Get the Best Deposit Rates

Now that you understand how deposit rates are calculated and what factors influence them, let’s talk about how you can secure the best rates for your deposits. First and most importantly, as a depositor you need to know that without you banks cannot operate. Your deposits are the bedrock on which all financial transactions exist. Your deposits should be kept safe, and competitive rates should be made available to you. 

Large depositors have more complex needs than the average consumer depositor, often requiring the use of a bank network to ensure all funds are protected by the FDIC in the event of a bank failure. Additionally, these depositors often want to secure the best rates possible to ensure that their funds are providing a positive impact to their bottom line, not simply sitting in an account waiting to be used.

Regardless of industry, partnering with cash management experts who understand unique compliance and banking needs, as well as the importance of a core values-aligned banking partner, is a key step toward earning the best rates possible on your deposits.

Learn how Ampersand can help your organization with deposit management strategies. Contact Ampersand to get started.