As online savings accounts get more and more popular, I get the feeling that they are becoming a mature product, almost a commodity. Sure, there will still be the occasional promotions, but for the most part all of the banks now are hovering around the same interest rate (currently ~5% APY). I believe that the banks simply don’t have the ability to go that much higher and remain profitable.
Exhibit A: E-Loan Savings, which burst on the scene with a 5.5% APY rate, is now back down to 5.25% after only a few months. GMAC Bank is down to 5% APY. Both are tightly connected with streamlined internet mortgage lenders. If they can’t go higher, who can?
Exhibit B: HSBC Direct is currently offering a nice 6% APY rate on new money, but it’s temporary and will revert back to 5.05% in May.
Once every account starts paying around the same rate, they’ll will have to start competing more on customer service and convenience. People want easy online transfers between their accounts, ATM access, and a reliable and user-friendly website. Most people also value the ability to stay with their current bank.
Exhibit C: I am increasingly using my Washington Mutual 5% APY savings account (my review) because I can deposit checks and withdraw cash directly to and from the account from a local ATM, and also initiate external online transfers. If I need to write a check or make a bill payment, I just move over some money instantly to their free checking account (with 1 free overdraft as a backup). In the meantime, all but a few hundred dollars are always earning 5%.
I expect other banks with a large physical presence to follow suit, but notice that they will be only targeting internet-savvy folks who are aware of all the options! Checking accounts paying zero interest are their bread and butter, and they don’t want to make it easy on everyone to switch. WaMu’s account is only available online. (Even for their own employees! I asked.) Citibank has their e-Savings Account paying 4.75% APY, which also must be opened online. Bank of America recently rolled out an online-only 5-month CD paying 4.50% APY ($5,000 min).