Interest rates from online banks often trump traditional accounts
Like many Americans, Air Force Staff Sgt. Sean Moeller wishes he could save more than the couple hundred dollars he squirrels away each month.
As his savings sits in a bank somewhere in the States, Moeller said he isn’t sure what kind of interest his money is earning him.
“I don’t even know it off the top of my head,” said Moeller, who was passing through RAF Mildenhall, England, last week on his way back to Grand Forks Air Force Base, N.D. “My wife takes care of that.”
It’s easy to not pay much attention to a savings account. When looking for a place to stash cash, a low-interest rate in a traditional savings account seems like a secure, if unprofitable, option.
But in a meeting of the online world and the timeless allure of a good deal, online banks have become an emerging option when it comes to putting money away and earning some more in the process.
Insured just like traditional banks by the Federal Deposit Insurance Corp., many online savings account rates are 5 percent or higher — numbers that conventional competitors usually can’t match.
“The consumer has become increasingly sophisticated as to how banks operate and how to make their money work hardest for them,” Michael Baras, a New York-based financial planner, said in an e-mail.
While many military personnel bank with USAA, that bank’s lucrative savings rate of 5 percent or more is often tied to minimum balances and other requirements, as are other traditional banks’ rates. Online banks can offer comparable rates with no minimum balance and an initial deposit as small as $500.
Customers willing to go online also can snag better deals on money market accounts and certificates of deposit.
The average interest rate for a standard bank savings account is about 0.35 percent, according to bankrate.com, an online clearinghouse for financial data.
With that kind of rate, a thrifty customer who keeps $2,000 in a traditional account will net only about $7 by year’s end. But in one of the exclusively online savings accounts, an interest rate of 5 percent or more could nab $100 for that same $2,000 deposit.
Plus, many online banks offer perks such as no introductory fees, and some offer high-interest checking accounts, according to Baras.
“It’s better than a conventional savings account,” said DeDe Jones, a financial planner in Colorado. “When people realize what’s going on, it’s going to be the rare person that will settle for so little.”
Many traditional banks try to keep up, but the economics of operation can limit them, Jones said, and higher rates often can be just introductory. These virtual banks can offer such rates because of their lack of overhead, Jones said. No buildings or tellers helps cut down on operating costs.
“The fact that they have no bricks and mortar makes it possible for them to offer these high rates,” she said.
While Defense Department representatives on behalf of Community Bank of America did not comment for this article, that common bank for overseas bases advertises a savings account interest rate of 1.75 percent on its Web site.
USAA offers rates of about 3 percent for savings accounts less than $5,000, according to its site.
Compare that to AmTrust Direct, a Cleveland-based online bank that advertises savings account rates of 5.2 percent, according to banknote.com.
People are starting to catch on to the deals.
According to statistics provided by Online Banking Report in a Christian Science Monitor article earlier this month, the number of virtual-banking households jumped 61 percent, from 2.3 million in 2004 to 3.7 million in 2006. According to the article, Americans are now stashing between $80 billion and $90 billion in virtual accounts. Despite the allure of these higher rates, Jones said online banking isn’t for everyone.
There’s no tangible building where a customer can cash in a jug of coins or chat with Esther, the kindly teller. Transactions are largely paperless.
“Having less infrastructure can mean less service,” Jones said. “When you have a question, you can’t drive down and talk to a bank manager.”
Internet familiarity is another factor to consider, she said.
“It depends on their comfort with the technology, frankly,” she said. “Some folks are OK dealing with just a computer. It becomes a style question.”
And don’t be quick to close out those traditional accounts, Baras said in e-mail. Money that you won’t need for a while is best suited for these online options.
“There will (always) be a place in the market for traditional banks (at least for a long time to come),” Baras wrote. “Many of the online banks require you to have a ‘traditional’ checking account for transfers in and out of your internet account.”
A traditional banking relationship also comes in handy when money is needed in a pinch, Jones said.
“Always have a local banker who knows you,” she said. “It’s important to have that flesh-and-blood relationship. You just can’t predict when you’re going to need that service quickly and in a customized way.”
Part of the reluctance of people to go online with their money may have to do with its new nature and security questions, said 1st Lt. Apphia Taylor, of Mildenhall’s 100th Air Refueling Wing, who gets an interest rate of 5.25 percent with an online Capital One account.
“I don’t think people know about these other options,” Taylor said. “Some banks can also be seen as untrustworthy. My grandmother kept money in her mattress until she died.”
The following is a sample of some of the savings account rates currently available with online banks that require an initial deposit of $1,000 or less.
Is your money ‘dumb’?
Within the financial world, the phrase “make your money work for you” is sacred. And when people just let savings sit somewhere at an interest rate of 1 percent or less, folks in the financial world call that “dumb money.”
“It tends to be money people have forgotten they have or chosen to not take action with,” said DeDe Jones, a financial planner in Colorado. “The banks are punishing them for their inaction by paying low (interest) rates. If you don’t take action, it’s sitting there making, what, 1 percent? We all want money that is working for us.”
Inflation is another side effect of dumb money, and without a good interest rate, that money is basically shrinking, Michael Baras, a financial planner in New York, said via e-mail.
Jones recommended keeping traditional savings accounts with low balances, using them as a way to introduce your child to banking or to maintain a relationship with an existing bank.
Finding a good interest rate for that savings account should be the first step for people looking to put their money to work.
“Twenty years ago, we didn’t have the same choices,” Jones said. “As the choices have presented themselves, my money has worked harder and harder.”