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Online Banks Boost Rates to Lure Savers


Big online banks are bucking a trend and raising the rates they pay to savers. The question for consumers is whether it’s worth chasing higher yields from bank to bank.

Last month, Sallie Mae Bank, a subsidiary of Sallie Mae Inc., increased the annual yield on its money market account to 1% — the second increase since July, when the yield was 0.85%. Ally Bank raised its savings and money market account yields twice over the same period, from 0.84% to 0.95%. In August, American Express Bank’s savings account yield rose to 0.90%; in May, it was 0.75%.

Prior to the recession, changes this modest would have been seen as small potatoes. But this is the first time since 2008 that several large online banks have raised rates in the same small time window, says Ken Tumin, cofounder of DepositAccounts.com, which tracks bank account rates. With the average savings account now paying just 0.1%, according to Bankrate.com, some analysts see relief for consumers in the trend.

“It looks like a good old-fashioned price war, and that may be the first break that depositors have gotten in a long time,” says Richard Barrington, senior financial analyst at MoneyRates.com.

The changes arrive amid signs that savers are souring on today’s paltry rates. New deposits at banks insured by the Federal Deposit Insurance Corp. slowed to $136 billion during the first half of this year, compared with $343 billion during the same period in 2011, according to research firm Market Rates Insight. Greg McBride, senior financial analyst at Bankrate.com, notes that bumping up savings and money market rates can be a low-risk marketing tool for banks, since they’re free to slash them again whenever they like.

Another factor in play: Competition from newcomers to the U.S. online-banking market. In February and May, respectively, financial services firms TIAA-CREF and Barclays introduced online deposit accounts yielding 1% or more. (TIAA-CREF’s offer closed to new customers in July.) A spokeswoman for American Express says that the competing offers were one factor in its decision to raise rates. Sallie Mae says competing offers weren’t a motivator, but attributes its hike to an effort to bring in more deposits and additional customers.

For account holders at the low end of the yield scale, the newer offers present an opportunity to earn up to 10 times as much interest. The math gets more complicated, however, when the gap between rates is smaller.

Changing accounts to tap into a 20-basis-point increase, for example, would result in an extra $200 per year in earnings for a customer with $100,000 in savings. But consumer advocates note that customers often encounter unexpected fees and other glitches when moving accounts, as a result of the logistics of direct deposit arrangements, fund transfers and automatic bill payments.

Banking analysts say that a switch only makes sense if a consumer is moving enough money — and making a big enough jump in rates — that the extra interest outweighs such hassles. “Otherwise, the gains you might get from it could be hard to justify,” says Tumin.


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    • In regards to the hassle of moving accounts, I think there are a few, though I would still consider the move to online banking worthwhile despite these potential hassles.

      **Update ALL your auto-pays to withdraw from the new checking account (you forget one and that NSF fee will wipe out much of the interest you were hoping to earn)
      **Account closing fees (I’ve heard some banks charge this)
      **Updating direct deposit with your employer

    • Fair article overall. I like my online banking experience and will put the effort in to aligning with banks that maximize yield on cash. One challenge I’ve seen is what to do when banks revert to lower rates after their business objectives have been met. I’m reluctant to close down accounts (what if they raise the rate back up?) which leaves the prospect of a lot of little accounts laying around, each with just enough deposits to avoid monthly fees. What are others doing?

    • brick and mortar banks are stone age..i can see the hand writing on the wall, no pun intended

    • I check http://www.bankrate.com on a regular basis. They list which institutions are paying the best rates for savings, money market accounts and checking. You can also click on the link and see what fees are being charged and what the minimum is. I don’t care if the bank is online or brick and mortar in another part of the country. There are so many ways to access your cash that a brick and mortar bank has no benefit to me at all. In fact I don’t think I have been to one either than to use in the cash machine in over 10 years. Oh and many of these banks will reimburse you if you use another bank’s cash machine or you can move money freely between them and your account at another bank or stock brokerage. Why not? Who should have the extra money you or the bank?

    • The author must be trying to get a pat on the back from brick-and-mortar banks to say that there is a hassle and cost to moving accounts to online banks. In general, there isn’t.

      And of course cdg doesn’t have a clue. The online banks have the same FDIC insurance as your local bank.

      Online rates are still pathetically low, but not as bad as or 0.1% that you will probably get from a regular money market account or a even some CDs at brick-and-mortar banks.

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