Capital One is being sued by the Consumer Financial Protection Bureau for ‘cheating’ customers out of $2 billion in interest on their savings accounts, pitching their 360 Savings account years ago as high yield but adjusting interest rates down when the Fed did so, but not raising them when broader interest rates went up.
The product’s rate was as low as 0.30% last summer “even as the Federal Reserve raised rates above 5 percent.” Meanwhile, Capital One also offered the 360 Performance Savings account which had much higher rates. They didn’t proactively tell consumers to switch products. The CFPB pressed to get this lawsuit in under the wire before the second Trump administration comes into office.
Bloomberg‘s Matt Levine is incredulous. The whole business of banking is predicated on depositors not maximizing returns on their funds so that banks can earn a spread. He says that the basic problem underlying the 2023 banking crisis was that deposits have become more mobile, and that put institutions like Silicon Valley Bank at risk.
I’m sorry but the whole theory of banking, the basic core of how banking works, is that a lot of people don’t pay attention to the interest rate on their bank accounts, so banks can pay them below-market rates. This is not a minor peccadillo of nasty bankers; this is not a little malfeasance at the periphery of a basically customer-centric industry; this is not “oh those sneaky bankers, trying to keep deposit rates low even as the Fed raises rates.” This is what banking is. “Banks can keep deposit rates low even as the Fed raises rates” is why there is banking.
Capital One was supposed to reach out to customers and say “we have another product that pays you more for the same thing, do you want more?” That might have been nice for the customer but – as he says – “it’s bad banking!”
Capital One is not an adviser who is looking out for its depositors! It’s a bank! Its relationship with depositors is “we want to pay you a deposit rate that is low and insensitive to the market rate.” That is the very heart of the relationship. It’s not very nice, for you, if you’re the depositor. But that’s banking, man. If you are a depositor at a bank, you are not so much “a customer” as you are “raw material.” You are valuable to the extent you don’t pay attention. If they went out of their way to pay you a market rate on your deposits, they would not be a bank.
And regulators usually favor this arrangement, because they want banks to earn a strong return (and do so “at the expense of customers”) because that’s how they avoid failures that risk systemwide contagion.
[I]t’s hard to imagine a bank regulator, like the Fed, bringing a case like this. You suggest this case to the Fed and they will say things like “I don’t understand, of course the deposit beta is lower than 1, what is the problem.” “Only be reactive in offering a higher rate to depositors who aren’t complaining about their lower rate” is Banking 101. Going out and proactively calling depositors in low-rate accounts to switch them into higher-rate accounts is not just expensive for the bank; it is potentially destabilizing. Losing the cheap deposits — by telling the depositors that they’re cheap — is how banks fail. The Fed doesn’t want that.
CFPB doesn’t say Capital One lied to customers. It says they failed “to fulfill the consumer expectations it created” by pitching a savings account that was “high yield” at the time customers started but that isn’t anymore (and hadn’t been marketed that way since 2019).
The consumer regulatory agency wants consumers not to have to pay attention, though it’s not clear that what Capital One did was illegal, in fact it’s almost obligatory. In most contexts, consumers do have to pay attention to get the best deal, and their counterparties are not fiduciaries on their behalf.
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