MW Capital One lawsuit reveals how bank customers can get smart and get their money's worth

Andrew Keshner

'Banks love sleepy, unmotivated customers,' says one industry expert

A new lawsuit alleging that Capital One cheated savers out of larger yields is a wake-up call for people who want to wise up and get the most out of their deposits, experts say.

Bank customers who want to be more savvy can start by looking at their account statements a little more often and proactively asking about the products a bank offers, experts told MarketWatch. Those sound like straightforward tips, but surveys show many people still don't take those steps - and banks can make money off those bad habits.

"Banks love sleepy, unmotivated customers," said Tod Gordon, senior advisor at Klaros Group, a consulting firm for banks and fintech companies.

For many people, it takes a lot to switch banks. Research shows that bank customers tend to stick with one institution for decades. But it can be especially costly for consumers to get bogged down with one bank now, considering current interest-rate levels.

The Federal Reserve has its benchmark interest rate at a range of 4.25% to 4.50%. Yet the average national rate on a savings account was 1.17% as of mid-December, according to the Federal Deposit Insurance Corporation. Bank accounts with higher-than-average yields are out there, but customers have to seek them out.

"Banks don't pay interest on savings accounts out of benevolence," said Greg McBride, chief financial analyst at Bankrate.com. "What a bank is paying is a direct reflection of their desire to attract and retain deposits. Those with large market share aren't usually in the market for more deposits, and their miniscule APYs reflect that."

That dynamic was on display in a lawsuit the Consumer Financial Protection Bureau filed against Capital One $(COF)$ this week, scrutinizing practices that allegedly happened long before the Fed's rate hikes and which continued into the higher-rate environment.

The bank allegedly kept the owners of one lower-interest savings account in the dark about a similar-sounding account that paid higher interest rates, regulators said in Virginia federal court.

For example, regulators said Capital One employees were not supposed to tell owners of the lower-interest account that they had the option to switch to a new higher-rate account unless "ask[ed] directly about the ability to convert accounts."

These account holders missed out on $2 billion in extra interest payments they could've otherwise received, according to the lawsuit, filed days before the start of the second Trump administration.

Capital One was ready to "vigorously defend ourselves in court," a spokesperson said. Its banking products "offer great rates, carry no fees and no minimums, and have always been available in just minutes to all new and existing customers without any of the usual industry restrictions," the spokesperson added.

The bank's higher-paying savings account "was marketed widely, including on national television, with the simplest and most transparent terms in the industry," the spokesperson noted.

That newer account, the 360 Performance Savings account, currently offers a 3.80% annual percentage yield. The older 360 Savings accounts - which continue to be serviced but are no longer offered to new customers - have a 0.5% APY.

Even beyond what the bank did or didn't do, consumers have ways to detect when they aren't getting paid what a bank promised them - and they have ways to fix that.

One red flag to look for with interest payments

If you think your money is earning significant interest in a high-yield account, but you don't receive a certain tax form, that's a clue that you're not getting what you expected out of the account.

The interest banks pay depositors counts as taxable income, according to the IRS. But here's the thing: Financial institutions only report the amount of interest paid that's over $10. The information comes on a 1099-INT form.

It may sound easy to collect more than 10 bucks of interest over the course of a year, but lower interest rates from many brick-and-mortar banks make that harder than it seems. If $500 sits in a savings account earning 1.17% for a year, the latest available national average, that produces roughly $5 of interest.

At a 0.5% APY, which Capital One offers on the original 360 Savings accounts, it produces even less. Some megabanks can offer savings accounts with rates as low as 0.01% or 0.02%, according to Bankrate. A mere 0.01% APY on $500 pays a nickel of interest.

Why it pays to check your bank-account statements

But bank customers don't have to wait to see if a tax form arrives to realize what kind of interest they're getting paid. They can check their account statements - but many people don't do that.

CFPB lawyers said Capital One publicized a survey in October 2022 saying 57% of people check their savings account less than once a month or not at all. Almost half of people (48%) didn't know what the interest rate on their account was, the court papers said. It's not clear whether the survey was a poll of Capital One's customers, or of consumers elsewhere. A CFPB spokesperson declined to comment.

Many people are not aware what interest rate their bank is paying, other polls say. Four in 10 people didn't know what interest rate their bank was paying on their savings account, according to a November survey from Santander Bank $(SAN)$.

Some people are dedicated rate-chasing savers who stay up to date on the latest yields, said Gordon. There are many more people who are generally aware that rates are rising or falling, but are not sure what it means for their accounts, he said.

It's a smart move for customers to know an industry benchmark like the FDIC's national rate averages, he said. There's also a range of websites where people on the hunt for better rates can compare banks' competing offers on savings rates.

But most of all, customers should periodically examine their accounts, he said. "Take 30 minutes a quarter and pay yourself," Gordon said.

"Life is busy and I have yet to meet anyone eager to receive additional email, but not checking your account statements is like not checking a boat for leaks," said McBride. It's a way to spot potential fraudulent use, forgotten subscriptions and bank fees - "and the way to stay on top of the APY you're earning."

As a reference for people looking at how the rates on their accounts stack up, there are still banks and credit unions offering APYs above 4.25%, McBride noted.

Why it pays to be a curious bank customer

Capital One allegedly told employees not to volunteer information about the higher-paying account "outside of very limited circumstances," the lawsuit said. Essentially, customers had to initiate the conversation about switching to the higher-paying account, regulators said.

Banks commonly tout promotions and special offers on certain products, said Gordon - yet it's also common for them to wait for a customer to make the first move. "The key case is you need to be a little proactive," he said.

Banks can't really negotiate terms and rates on a case-by-case basis for each customer, he explained.

They can recommend the chance to qualify for a better service, perhaps with higher rates or lower fees, as long as the customer takes certain steps. That could include adding more accounts with the bank or keeping higher minimum dollar amounts, he said.

"A little bit of curiosity can go a long way," said Gordon.

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-Andrew Keshner

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January 17, 2025 14:51 ET (19:51 GMT)

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