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Jade Schulz for Money

Last year Cass Waddell opened a savings account at online bank Marcus. With the interest rate hovering around 2%, he hoped to earn what would amount to hundreds of dollars a year in essentially free money.

Now a year later the account’s interest rate has dropped by half. Much of those hoped-for gains seem unlikely to materialize. He’s disappointed and not shy about letting the bank know it: “Sad to see that @marcus dropped their APY,” he recently tweeted at the bank run by Goldman Sachs. “I hate the hassle of switching banks but it might be worth it.”

Marcus didn't respond to a request for comment.

Over the past several years online banks, including Marcus, Ally, Axos and others gained a cult following among young savers. With easy-to-use apps and no minimum balance, maintenance or ATM fees, online-only banks quickly grew popular with twenty- and thirty-somethings looking for high-yields when parking their cash. Well aware today’s savers relentlessly optimize in order wring every penny from their investments, the banks spent much of 2018 and 2019 competing to offer top rates — frequently 10 or 20 times what traditional banks paid — highlighting the latest offers with splashy posts on social media.

(Spokespeople for both Axos and Ally said in email statements that their rates remain "competitive.")

But the Federal Reserve’s decision to start lowering short-term interest rates in August 2019 — a process that has accelerated during the COVID pandemic — has made such attractive savings account payouts financially untenable. Now the banks' price war has kicked into reverse. Since the pandemic, the best rates top out a little over 1%, a far cry from offerings of close to 3% just two years ago. Customers, many themselves active on social media, are sounding off, even if experts warn that steep rate cuts during a recession are banking as usual.

“It doesn’t sound as sexy to have an APY of 0.5% when it used to be much higher, but there’s not much they can do,” says Kristin O’Keeffe Merrick, a financial advisor in Fairfield, NJ.

A spokesperson for Axos said its rates "remain extremely competitive," despite the falling interest rate environment. Ally said: "Through it all, we have remained committed to delivering consistently competitive rates."

Caught by Surprise

The promise of higher interest and an easy-to-open account prompted Bill Shepard, who runs a bookkeeping firm in Burbank, Calif., to sign up for an Axos account in May. The interest rate, originally 1.7% has fallen to about 0.4% — cutting his expected returns by more than half. Even though he read through all of the account information, such steep rate cuts caught him by surprise. “I read the fine print…but had no idea the variable rate can go down in such a short period of time,” he says. “I feel a little bit duped.”

Axos declined to comment on Shepard's experience. The bank's legal disclosures state: "We may change the interest rate on your account at any time."

For Shepard, who opened the account to keep the $50,000 that he received as a small business loan for coronavirus disaster relief, the drop in interest will make a big difference. On a $50,000 deposit, he’ll earn about $650 less per year at the new, lowered rate. Shepard is still considering other options, but isn’t sure he wants to take a riskier approach even if that means he won’t offset the interest that his disaster relief loan incurs over time.

“I don’t want to risk going into the stock or bond market with money I have to pay back,” he says. “It’s a bit of a sunk cost.”

Take it or leave it

With the Federal Reserve signaling that they’ll keep rates near zero until 2022, those who want to earn more on their savings may have to consider riskier options because most online banks (not to mention traditional banks and credit unions) are unlikely to significantly improve their rates, says O’Keeffe Merrick. “The Fed would have to increase rates or there would have to be some kind of massive move, which is increasingly unlikely anytime soon,” she says.

Jumping between two online banks to capture a higher interest rate often won’t solve the problem, adds Brad Michaelson, a New York-based manager at crypto-currency trading platform eToro. After signing up for Marcus when rates hovered around 3% roughly three years ago, Michaelson switched to Wealthfront, an investment service with banking capabilities which was advertising an even higher APY at the time.

Now, both Marcus and Wealthfront offer high-yield accounts. “It’s to the point now that all these fintechs are below 1% APY, which is not even that attractive,” he says.

"Our high-interest checking account comes with no fees, checking features you need like direct deposit, bill pay and an ATM [or] debit card, plus one of the highest interest rates” available, Wealthfront spokesperson Kate Wauck wrote via email.

Looking for options

For those looking to park their savings, David Rae, a Los Angeles-based financial planner still recommends online banks. While rates are now around 1%, traditional banks only offer 0.1%, meaning you’re still earning far more by going online. Additionally, online savings accounts allow for easy withdrawals compared to other high-yield options, an especially important feature during an economic downturn, Rae adds. “You are not having to lock your money up, so it’s still a good place for that emergency fund,” he says.

That said, many online banks have been expanding their product lines, offering longer-term savings vehicles like CDs. Some of these, such as the no-penalty CDs offered by Marcus, can last only a few months and offer higher yields without charging a penalty for withdrawals.

For savers willing to take on risk to their principal, O’Keeffe Merrick says she places some of her own savings in a short-term bond fund. Those funds have returned about 2.1% annually between dividends and appreciation over the past three years, on average. Unlike with a savings account, however, bond fund investors can lose money if interest rates rise (or theoretically as a result of defaults).

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(An earlier version of this story misidentified a Wealthfront checking account as a savings account.)