Online banks offer some of the highest savings and money market rates in the banking world, but many individuals are still nervous or skeptical about transferring their assets to banks that may not have a physical presence. This concern is being exacerbated by the sudden presence of so-called fintech companies and brands that are advertising on billboard all over major US cities. Fintechs should be avoided. If you can ignore the noise that fintechs are creating, opening an online savings or money market account with an established bank can still get you higher interest rates and the same convenience, control and insurance that you are accustomed to at a big money center bank (such as Citibank, Chase, Bank of America or Wells Fargo).
With Rates so Low Everywhere, Is it Really Worthwhile to Open Online Accounts?
In 2020 and 2021, we have seen rates come down so much and so quickly that many are questioning the utility of trying to get an extra few basis points.
In the late 2010’s, opening an online savings account easily led to a savings rate that was 1% higher than those offline. These days the incremental increase is much more narrow. The sexiness of online savings is gone, at least for now, but that doesn’t mean the utility is gone. Many online savings and money market accounts are still over 0.50% versus similar accounts at major money center banks that are likely to range between 0.01% and 0.05%. After accounting for taxes, lots of people, including very affluent people, decide that it isn’t worth the bother to run around opening online accounts. They find that the service that they get at Morgan Stanley, Merrill Lynch or Chase makes it well worth the loss of income just to stay put. But, many others are increasingly coming to the realization that it is so easy to open online accounts with major, well-recognized, safe banks that it makes more sense than ever before to get into online accounts just to try to keep their safe assets growing in any way possible against an inflationary backdrop (or to earn a little extra beer money).
Each person needs to consider the rates available, the amount of cash that they intend to hold into the foreseeable future (for retirement, for health emergences, to protect against the possibility of unemployment, or to prepare for a large purchase or investment) and make their own judgment about whether it is worth the effort to open online savings and money market accounts now.
They should also account for the likelihood that whenever rates rise (and they will eventually), online account rates will increase more quickly and the incremental margin in online savings accounts will likely return to pre-COVID-19 levels.
In addition to higher rates, most major online banks also offer the convenience of easy and immediate ACH transfers to other accounts and expanded customer service phone hours.
Is My Money Safe?
All of the online banks and banks listed on RatesAndInfo.com are FDIC insured. While being FDIC insured is not a guarantee that a bank is necessarily financially sound, it indicates that the Federal Reserve guarantees your money up to $250,000 per individual in each ownership category.
If you have any question about whether your bank deposits with a certain bank are allocated in a manner that is protected under FDIC insurance, you should use the FDIC’s “Ask Edie” function at https://edie.fdic.gov/.
Most of the credit unions that we list are insured by the NCUA that operates in a similar manner as FDIC insurance. You may click on the name of a credit union to go to their credit union page on RatesAndInfo.com and then click on the overview tab to see if a credit union is NCUA-insured.
Learn more about FDIC and NCUA insurance here.
In relation to online banks, it should be noted that many of the highest paying online banks have been around for some time or are part of larger, better known parent organizations. Large, well-known banks like Goldman Sachs Bank, Barclays, Capital One, and TIAA have rolled out online offerings with higher rates than their offline divisions.
Can’t The Online Bank Just Lower Its Rate With No Notice?
The biggest pitfall with online accounts is the same as the biggest pitfall with any savings or money market account. In particular, your rate is not guaranteed from one day to the next. There are three different strategies for mitigating this risk. First, you can look for savings rates that are guaranteed not to fall for new customers for a certain period of time. Second, you should look at those online banks that have long histories of remaining competitive and have never dropped their rates dramatically below the most competitive rates. Third, you should consider certificates of deposit (CDs) to lock in a rate for a certain period of time. In low rate environments (or any environment for those who may need liquidity), No Penalty CDs should be considered to protect your interest rate. Ally Bank, CIT Bank and Marcus have issued No Penalty CDs for several years. CFG Bank is a smaller bank that is offering a 13-Month Penalty-Free CD. And, Rising Bank is also a smaller bank that is offering a 15-Month No Penalty CD (but that only pays interest quarterly and involves the forfeiture of interest if you withdraw principal between interest payments).
The easiest way to gain a little bit of extra money is to open an online savings or money market account. They offer high rates, safety, and convenience to those willing to make the jump to cyberspace. When you consider the value of compounding even an extra one percent annually, your money can really add up over time.
You may also want to consider online certificates of deposit if you do not require immediate liquidity.