Banks pay interest on savings accounts because they use your money to lend to others. Savings accounts are less liquid. The average borrower leaves their funds in the account to grow interest. The bank uses these funds to make loans to other clients and charges interest. They then pay you a portion of that interest, while keeping the rest for their own profits.\r Banks determine their interest rates, using the Fed's rate as guidance. They'll adjust the rate based on factors like competition in the area, their overhead, and interest they receive from lending to other clients.