Thanks to online savings accounts, 1.8 percent interest has never been this exciting. With federal interest rates increasing for the first time since 2004, Internet-based banks are poised to steal customers away from the brick-and-mortar scrooges.
If you’re thinking about switching banks, here are a few tips for choosing the best savings account. We’ll also talk about what you’ll get (more interest) and what you won’t get (monthly surcharges).
Why Online Savings Accounts Are So Popular
Online savings banks are relatively new, yet they’re attracting a large number of customers in all age groups. Younger consumers, particularly millennials, prefer online banking and dislike monthly surcharges. A 2016 study conducted by Fair Isaac Corporation (FICO) found that millennials are two to three times more likely to switch banks than customers in other age groups. High fees were the driving force behind 45 percent of their account closures.
Baby boomers also prefer online banking over other channels according to data that Salesforce.com collected from its bank and credit union customers. Federal Reserve research shows that older Americans have more money in their checking and savings accounts. They’re often willing to forego physical bank branches to earn more interest. For years, Americans have accepted annual yields near zero, but that is finally changing.
How Online Banks Offer Higher Interest Rates
Since the Great Recession, low interest rates have helped the economy grow slowly and steadily. Around the end of 2015, interest rates began to increase to their highest point since 2009. These rates are determined by the following investments:
- Treasury bills: These debts are backed by the U.S. Treasury Department and are used to fund federal projects.
- Federal funds rate: This government-specified rate applies to money that banks set aside to meet reserve requirements.
- LIBOR: The London Interbank Offered Rate is the fee imposed on international short-term loans between banks. It’s similar to the prime rate.
When these three benchmarks increase, you pay more for credit and earn more interest on your savings. According to New York Times analysts, financial institutions focus on maintaining a wide gap between the amount they receive for loans and what they pay for credit. That’s how they make money.
For example, the APR on your credit cards has probably crept up while the yield on your savings account has remained the same. Basically, conventional companies are quick to move when they make money and slow when they could lose. Internet banks have capitalized on that attitude.
How Online Savings Accounts Work
Online banks are the Aldi of the financial sector. The industry-leading yields that they deliver aren’t a miracle. They’re part of a new business strategy that’s purely pragmatic. Because customers can complete so many banking tasks remotely using phones and computers, local branches aren’t as important. Suddenly, a bank can build a national customer base without spending all its profits on real estate.
Across industries, Internet-based companies operate on smaller profit margins by minimizing their operating expenses. The best part is that they pass the savings on to consumers. Online banks may raise their interest rates several times a year just to stay ahead of the competition.
Benefits of Online Savings Accounts
The main benefit of online savings accounts is the higher interest rate. If your brick-and-mortar bank gives you one-tenth of a percent interest, you’ll earn a measly $10 per year on every $10,000. With an online savings account paying 1.8 percent, you could earn $180. There are other benefits too, including:
- You can open an account with just $1.
- Most companies do not have minimum balance requirements.
- You may qualify for a signup bonus if you deposit $10,000.
- In most cases, there are no monthly service charges.
Accessing Your Money
Accessing your savings isn’t quite as simple as standing in line at the branch down the street, but most companies offer several deposit and withdrawal options. Plus, limited account access means that you’re less likely to raid your savings. Other benefits include:
- You can complete most transactions remotely using your bank’s mobile app.
- It only takes a few days to transfer money between a local bank and online account.
- Some banks provide free ATM cards, but there are still daily withdrawal limits.
- Taking care of bills is easy when you pay using direct ACH debit.
Finding the Best Online Savings Account
Due to consumer demand, more companies are offering high-yield online savings accounts. In this rapidly growing industry, banks are constantly raising their interest rates and signup bonuses to retain existing accounts and attract new customers.
Today, well-known financial companies and innovative startups are vying for your business. You can open online savings accounts with American Express, Discover, Capital One, Goldman Sachs, or a credit union. Startups turned stalwarts like Ally haven’t lost any ground. Unlike the competition, Ally offers two online savings accounts as well as a checking account that could eliminate your need for a local bank.
What to Look For
If you’re interested in growing your savings, remember that you’re in the power position. To find the best account for your goals, Consumer Reports recommends checking these details before you enroll:
- Searching for local branches or ATMs
- Understanding the account closure process
- Determining whether you’ll forfeit interest if you close your account
- Evaluating competitor’s interest rates periodically
- Ensuring you can designate a beneficiary
- Checking withdrawal restrictions
It’s a wonderful time to say goodbye to monthly surcharges and hello to higher interest rates. You won’t miss those long drive-through lines or crowded lobbies. Compare the best options by starting a search today.