Why big banks are cheapskates to savers

NEW YORK (CNNMoney.com) -- If you're looking for a place to park your cash, small banks are pretty tough to beat.

Consider the case of Prairie National Bank, a two-branch bank located in southern Illinois. It is currently offering an interest rate of 1.90% on an 18-month certificate of deposit.

Compare that to two of the nation's largest lenders - Bank of America (BAC, Fortune 500) and Citigroup (C, Fortune 500). Their national rates are hovering at just 0.85% and 1% respectively for a similar product.

So why are the big banks, many of which are once again generating big profits, relative cheapskates when it comes to CDs and other interest-bearing accounts? The answer is simple: because they don't have to.

Greg McBride, a senior financial analyst with Bankrate.com, says that rates at the nation's top financial institutions have remained low because big banks have not seen a need to compete for savers' cash.

By the mere virtue of their size and the convenience they offer to consumers, large banks have managed to attract deposits with little trouble in recent months.

In order to keep up, small banks have been left with little choice but to use the tried-and-true strategy of competing by offering competitive rates on their savings products.

"They can't buy TV ads or plaster the town with billboards. They can't do acquisitions or build new branches," said McBride. "It is more cost effective to pay higher rates on deposits."

So far, that strategy has proven pretty successful for the central Massachusetts lender Country Bank. In just the first five months of this year, the company has managed to grow its deposit base by $84 million, or 10%, by offering attractive rates on many of its CD products, including 1.49% for a six-month CD.

"That has really worked terrifically for us," said Paul Scully, the president and CEO of Ware, Mass.-based Country Bank.

High rates stand out. In fact, the rates offered by big banks on savings products are at their lowest levels in recent memory.

The average rate on a one-year CD, for example, stands at 0.7%, according to a survey of the nation's 10 largest banks and thrifts published last week by Bankrate.com. That's the lowest level since the firm started tracking data in January 1984.

Yields on other savings products, including five-year CDs and money market accounts, have also continued to flirt with historic lows, although they remain little changed from where they were just several months ago.

Local and community banks have been cautious however not to let savings rates get out of hand. In fact, many have lowered rates in recent months. That's partly due to the realization that they will eventually need to boost them again once the economy finally picks up steam and the Federal Reserve begins to raise rates.

Small banks haven't been able to compete against the big guys in every interest-bearing account category though.

Major financial institutions like Capital One (COF, Fortune 500), Discover (DFS, Fortune 500) and American Express (AXP, Fortune 500) have managed to outprice some local banks in the money market arena.

Online competitors like ING Direct and Ally Bank, formerly known as GMAC, have also continued to set a high bar on rates. According to the two firms' websites, they were offering rates of 1.10% and 1.29% on their respective online savings accounts.

"For most community banks, they know they can't compete with [online banks]," said Anita Newcomb, president of A.G. Newcomb & Co., a Columbia, Maryland-based consulting firm that works with small lenders. "They know those deposits can leave with a click."

But don't expect small banks to take it lying down. Experts are already anticipating that local and community banks will eventually start trying to win new deposits by offering more attractive rates on longer term products such as five-year CDs.

For rate-hungry savers however, that may not come soon enough.

"Unfortunately for savers, this environment of low yields ... is going to be around a while," said McBride.