Are Online Savings Accounts Becoming A Commodity?

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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).

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  1. Seeing how the national savings rate is negative, I’m not so sure *any* type of savings account is becoming more popular.

    In any case, banks know that most people are either too loyal or too lazy to look for a better deal. This is why they offer limited time deals, they know they will catch more lemmings then rate chasers.

    A perfect example is that BofA CD you mentioned. Why would anyone open a CD at 4.5% when they can get 5.0% in a regular savings account and (quick rate check of brokered CDs) as high as 5.16 for a 6 month CD elsewhere? The answer has to be either bank loyalty or sheer laziness.

  2. “Seeing how the national savings rate is negative, I?m not so sure *any* type of savings account is becoming more popular.”

    LOL, perhaps you are right. Think of all the HDTVs being bought right now 🙂

    You’d be surprised how many people are reticent to change banks.

  3. Yup, ELOAN was a big disappointment. It sure seemed like they had a chance to stay on top.

    Note, WaMu has also started online-only CDs with some half-way decent rates.

  4. Yeah, I noticed those. But at max of 5.10% APY, why lock up your money when you can have a 5% at the same bank and 100% liquid?

    I’m probably going to close my E-Loan account this week.

  5. You said: “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.”

    Amen. This is exactly why I am with ING (which, surprisingly, you did not mention in your piece). They win the customer service battle on almost all fronts, so it is worth the loss of about 1/2% interest to be a happy customer with them. I am a happy enough customer that it wasn’t even worth chasing the 6% teaser rate from HSBC, but it would have been nice if HSBC would have pressured ING to juice their number up just a touch!

  6. “Yeah, I noticed those. But at max of 5.10% APY, why lock up your money when you can have a 5% at the same bank and 100% liquid?”

    Exactly! I’m a banker and it kills me when people come in and get excited about a 5.10% APY on a CD when I know what they can get online in a liquid account. I have a real hard time believing that there is much room for growth in retail banking over the next 30 years.

  7. I opened a Citibank eSavings account back when their rates were 5% APY. I liked being able to transfer to/from a brick-and-mortar account with no delay. But to be honest, I haven’t had the need to do these transfers much. So after Citibank dropped their rates to 4.75% APY, I moved the bulk of my money to Vanguard Prime Money Market currently at 5.22% APY. The rate will fluctuate more than a regular high interest savings account but it’s worth it to avoid the hassle of chasing rates.

  8. I think banks are getting desperate for cash since there is so much credit out there. i think the rates can go higher since interest rates on credit has gone up more and more. the more available funds banks have to loan out the better for them, and with overall negative savings, this means banks are going to have to compete more to get the diminishing available cash.

    your local brick and mortar banks are falling vicitim to same cash flows as well. Grand Bank of Texas offered a 10% 1-yr cd max $5k deposit last june (lucky i have a friend who’s mom/dad banked there at that time and informed me of the promotion) with the only stipulation of opening a no-fee checking account with $25. Too bad there isn’t a way to track brick and mortar banks for these kinds of deals.

  9. Hmmm, start a fund where you chase after the highest interest rates. Not exactly going to return a high %age, but better than sitting still not making the best rate possible

  10. “Exactly! I?m a banker and it kills me when people come in and get excited about a 5.10% APY on a CD when I know what they can get online in a liquid account.”

    Don’t get rid of CDs just yet! I am a minor with a substantial CD from a lawsuit settlement. The court ordered that the executor of my estate keep it in a FDIC insured account. I found the most competitive rate in my area, and have just kept it there. The paperwork required to move it to an online account would be ridiculous, believe me I tried.

  11. Why would you close your E-Loan account? Besides the HSBC promotion (and UFB Direct, slightly), whose rate is higher? I moved almost everything to HSBC, but I’ll move it again when the 6% expires. In 3 months, no one knows which bank will have the best deal.

  12. Reticent to change banks – definitely. When I changed from bank of america to Wamu it was a real pain. Changing all my linked accounts, making sure all payments still went through without interuption, setting up the new system, etc. I ended up having both for about a month and a half to help facilitate this.

    But I cannot say enough good things about washington mutual. I feel like their 5% savings account is unprecedented in terms of providing both high interest and 100% liquidity. Online banks like ING or Emigrant aren’t as liquid because it takes 3-5 to transfer your money in or out.

    Nowadays the only think I kick myself for is staying with bank of america for as long as I did. Oh well… they got a little comeupance when jonathan posted about the free $100 for opening a business savings account with them with no time or balance minimums… which I did…. twice 😉

  13. I think it all depends on how you will use your online savings account. For me, I’m thinking of opening an online account to stash away emergency money. Money I’ll never touch unless I really have to.

    So for me, I want the account that allows my money to work the hardest for me, i.e. the highest rate. I don’t care about checking, or ATM access, I just want the highest rate.

    That said, I also need an account that will let me transfer money to my BOA checking in as little time as possible, should I need it in an emergency.

    So for me, it IS about the rate, but like I said, it’s all in what you’re using the account for.

  14. Dave the H. says

    hayhehes writes: “Online banks like ING or Emigrant aren?t as liquid because it takes 3-5 to transfer your money in or out.”

    My Emigrant experience is quite different. If I initiate a transfer in or out on one morning, it arrives the next day. Faster than ING (which is generally two days), WaMu (typically five days), or HSBC (several days).

    Nevertheless, I like WaMu a lot, too. One key advantage if you have a branch near you: Federal law limits customers to only 6 online transfers out (withdrawals) per month per savings account. But ATM transfers are unlimited. So, if you need more than 6 withdrawals in one month, the ATM supplements the Internet very well.

  15. U mean that there are banks online? 😉

    I have been with ING and have been TOO lazy to transfer my money elsewhere!! Before ING, my bank was paying 0.25% interest…so its already a great improvement for me. I am a lazy couch was even amazing i evetually transferred my money to ING.

    ING needs to win some kinda award for their interface! It is very non-threatening. The new security feature must have scared some grandma and grandpa, but its still the best out there!!

  16. Yeah, it seems like Ing decided the sweet spot was at 4.5%, given the strength of their product.

    Personally, I moved a lot of money to HSBC and I’m not sure it was worth the hassle for 0.5%.

  17. i went with igo. i was tempted to go with HSBC for the three months, but after the teaser it would settle lower than igo. i have ing as well, but 4.5% is just not worth it these days. i like ING’s interface, too, but it also is slow in terms of funds being available. at least with igo you can get $2k right away or $100-$500k in three days. there’s not much you cannot buy with credit cards these days and I have 0%/12mo ones, which I’m using as my emergency fund transition period covering money (i.e. use it while I’m waiting for the online savings account to transfer funds).

  18. HSBC seems to be getting a great deal of free advertising for their promo deal. I’ve seen “articles” in the Wall Street Journal, at, and in my local paper via a syndicated AP story that all feature the promo rate as if it’s newsworthy.

  19. Your point in exhibit C is interesting because you suggest an overall strategy on the part of the banks to reach out only to Internet-savvy customers with special offers. The reason that happens is because they have marketing teams that only care about “Internet Customers” — which means customers they acquire online. These teams have their own P&L’s, product marketing etc., and have goals like # of accounts opened online.

  20. Dave the H,

    I would not recommend using Emigrant as a liquid, transfer account. Are you aware that you lose all interest on funds that are not held in the account for the entire interest period. For example, $1,000 in your account on January 1 and you withdraw $400 on January 29th. You will only be credited for interest on the $600 and will forfiet 29 days of interest on the $400 because it wasn’t in the account at the end of the interest period. This negatively impacts your yield on the account. Feel free to call them to verify this. I did after I opened the account. I therefore only use it as a savings account and when I move funds out, will do so on the 1st of the month.

  21. Just curious why there is no mention of GE Interest Plus? I have been saving there for years with a current APR of 5.30%. Their online system has improved over the years and I also get check writing (minimum $250 per). I also have HSBC, ING, Emigrant and USAA and enjoy their online hospitality and competitive rates also. Just to note, ING now offers Electric Orange Account with tired rates from 5.05% to 5.30% APY.

    Competition is defiantly louder and this spurs the saving herds in new directions first and foremost based on higher rates. Remember, they have met the masses and it be us. It?s great to seeing them competing for that small sector of society that saves!

    Enjoy your site. -Joel

  22. I’ve seen no recent mention in MyMoneyBlog of Presidential FSB’s interest-bearing checking or the same Maryland bank’s high interest savings. Moving monthly automatic deposits from another bank to Presidential (without which the higher interest rate for checking is inoperative) can be a hassle. Still I think these accounts are worth holding. Perhaps Jonathan has had a negative experience with them?

  23. Although ING has a lower APR, they also have a $25 signup bonus which helps. The others could have signup bonuses as well, but I’ve never heard anything about it. How does this affect returns? ING’s APR on $5,000 is then 5% for the whole first year (($25+interest)/$5000). If you leave it in for only a month, the APR goes up to 10.5% (($25+interest)/$5000*12).

    It may not be worth the trouble for some of you though. For example, I won’t be moving my money out of ING because it’s not worth the aggravation and days of lost interest. And they’d probably raise the rate the day after I move it, anyway.

  24. Pancho,

    The information you have is incorrect. You will not forfeit any interest by making a withdrawal before the end of the month. This can be verified by calling ED, checking their account terms, or just looking at your monthly statement, average daily balance, and interest earned. The customer service representative you spoke with either didn’t know what he was talking about, or maybe he confused it with the fact that if you close your account before the end of the month, all your accrued interest for that month if forfeited. If they actually followed the practice you described, they would probably lose most customers because that is a terrible banking practice (and maybe even illegal?)

  25. but you do not need to put $5k to get the $25, so from a interest wise point of view, put the min. required to keep ING open and to collect $25 signup and then put the rest in a higher yield savings account.

    citibank is also currently offering $50 signup with no min balances.

  26. and as mentioned before, wachovia is giving $50 for $100 min deposit, too. I figure I can let these minimums sit for 30-180 days depending on which bank promo for the signup bonuses. although i’m not sure what wachovia’s “good faith” standard means.

    cameron, i thought the same way and teetered about leaving ING. I bit the bullet, b/c in the long run it was just a smarter thing to do to gain a higher interst. i funded with my checking account min. to open, and after it was opened, i withdrew from ING, leaving min. in ING. this still gives me flexibility to move back to ING if they increase anytime soon.

    The only problem with chasing rates and signup bonuses is that I have accts w/ citibank, bank of america, usaa, penfed, hsbc, ing, igobanking, grand bank of texas, and wachovia. lots to keep track of, but good news i only have to keep most of them for 60-90 days, and I only use two on a regular basis.

  27. I still use my Presidential account and remain satisfied with it. In fact, their savings account paying 5.25% APY is why I’m considering closing my E-Loan account. (It’s the one account linked to E-Loan already.)

    Overall, it’s similar in that it takes $5k to open and after that there is no min balance. However, Presidential only recently started allowing online interbank transfers, and it’s still severely limited as to the amount of funds you can move in one month (like $1,000 a day max?) It’s much better with the Prez checking account which you can link up easily to other places, but which also requires a sizable real direct deposit.

    Much of the cash I can’t predict any instant need for I place in 28-day Treasury bills. (I like to keep 0% balance transfer money completely liquid because I’m paranoid.) Due to their state-tax exemption, the equivalent rate is over 5.50% APY for my tax situation. See the T-Bill category for more info.

  28. Wisely Sunshine says

    Hi, I just get started on saving money and wondering what’s your thought on Emigrant Saving Account.

  29. I agree these online savings accounts are becoming commodities and the interest rate differences between the top players are so narrow.
    The idea that you don’t have to change banks to take advantage of the rates is attractive and with the ACH transfers becoming more commonplace, speed and service will be the new differentiator. Banks have painted themselves into a corner as it is now soooo easy to move money to the bank offerring the highest rate in a s little as a few days. Why not link HSBC, ING, Citi, Wamu, Countrywide Bank, and Emigrant to your checking account and simply move to whoever has the highest rate. Once the acounts are set-up, the movement of money is easy – and there’s no need to open a new checking account (the real pain).

  30. One account I haven’t seen mentioned around here is the Capital One MMA. It is very similar to the other online savings accounts mentioned, but offers check writing + an atm card (like GMAC Bank). What are your thoughts on these accounts? I keep stumbling across all the negative reviews of Capitol One’s credit card business, some of which are very disturbing, so I am a little hesitant..

    I would prefer not to hop around from online bank to online bank just find a good/reliable account setup (as many of you have done), but it seems like every other page I pull up from the web has a negative review of one of the “popular” accounts. Almost feels like I’m just doing way too much research as they all really are becoming more the same. Is it really too much to ask for competitive rates, daily compounding, good/reliable customer service, quick transfers/access to funds, and low fees/balance requirements at the same place?

    A simple desire to open a “free” brick & mortar checking account + a high yield savings account for emergency fund use and “go between/temporary money” on its way to the brokerage account has turned into a nightmare of a selection process – I think I had an easier time reading reviews + selecting a notebook computer! 🙁

    Any and all advice is welcome.

  31. Is there some reason why AmTrust Direct hasn’t been mentioned? They seem to have the best deal going as far as APY is concerned: 5.36%. $1,000 minimum to open, but only a $1 minimum after that. I just opened an account with them last week, so I don’t have any experience with them yet. Just looking forward to good interest rates.

    The fact that they’re not mentioned makes me wonder if some of you have had bad experiences with them…?

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