For the most people savings accounts not only provide a safe convenient place to store extra cash but also provide a steady source of income by paying interest on the money invested. Unfortunately the interest rate for a savings account is very low and you have likely already noticed that there are many other types of investments that provide a significantly greater rate of return. This is primarily due to the fact that unlike most other investments savings accounts usually have no restrictions on when you can withdraw your money.
From the banks point of view, savings accounts are therefore less than ideal because there is nothing to guarantee you will not withdraw your money from the bank at any given time. A bank’s ability to make a profit is dependent on the money their customers deposit because that money is then used by the bank to reinvest in higher-yield investments such as issuing loans for homebuyers and small businesses.
When a customer withdraws their money from a bank it reduces the amount of money that is available for the bank to invest, which in turn reduces the banks profit. For this reason banks would much rather have customers depositing their money into an account such as a certificates of deposit that guarantees that the money cannot be withdrawn for a certain period of time. Consequently banks are willing to pay much higher interest rates on accounts with a fixed term than they are on savings accounts where customers can withdraw their money at any time.
The other thing to consider is that savings accounts are completely risk free investments meaning that no matter what happens the money that you have deposited in a savings account can never be reduced or lost. When you look at higher-yield investments such as stocks and corporate bonds you will quickly see that even though the average rate of return is many times greater than the interest rate of a savings account, such investments always have the risk of losing part and in some cases all of the money that was invested in them.
Savings accounts on the other hand are completely risk free investments and even if the bank itself gets robbed or goes bankrupt the money that is kept in savings accounts will not be lost because it is insured by the federal government. For this guaranteed security many people are often willing to accept a lower interest rate.