DollarSavingsDirect lowered its savings account yield today from 4.00% to 3.50% APY. They had avoided a rate cut longer than any other major online savings account. The yield had been 4.00% since October 8, 2008. Emigrant Bank launched DollarSavingsDirect in early August 2008 with an APY of 3.75%. In addition to the savings account rate cut, the 16-month CD rate also was cut. It's now 3.25% APY (down from 3.50%).
Now the interesting question is what plans does Emigrant Bank have for DollarSavingsDirect? The launch of DollarSavingsDirect was a little strange. DollarSavingsDirect is basically a copy of EmigrantDirect which was Emigrant Bank's first online savings account. EmigrantDirect started in 2005 with a very competitive interest rate (almost 1% higher than what ING Direct was offering).
It would have been better from a customer-point-of-view if Emigrant Bank just raised rates at EmigrantDirect instead of creating DollarSavingsDirect. But by creating a new online bank, it could attract new deposits without having to pay higher interest to existing customers. Existing customers were free to open new accounts at DollarSavingsDirect, but I bet many didn't take the time to do that.
So now that DollarSavingsDirect has brought in a lot of new deposits, I'm afraid DollarSavingsDirect's rates may become less and less competitive similar to what happened at EmigrantDirect. EmigrantDirect is currently only paying 2.40% APY (recently down from 2.50%). This matches ING Direct's Orange Savings Account yield, but it's far away from the top online savings accounts.
One feature that may help DollarSavingsDirect maintain higher rates than EmigrantDirect is the minimum balance requirement. Unlike EmigrantDirect which pays one rate for all balances, DollarSavingsDirect has a $1,000 minimum balance that's required to earn the top yield. When your average daily balance falls below $1,000 during the statement period, the APY falls to 1.00% (see disclosure). Refer to my DollarSavingsDirect account review for more details.
Alternatives to DollarSavingsDirect?
I still have one bank as of 1/23/09 on my savings account list that's paying 4% on a savings account. It's the small bank Broadway Federal Bank. I first reviewed this account in November 2008 when it was offering 5.13% APY. The rate soon fell to 4.08% APY where it has remained. Like DollarSavingsDirect, it has a $1,000 minimum balance requirement to earn the top yield. However, unlike DollarSavingsDirect, it has a $10 monthly service fee if the balance drops below $1,000. Readers have also reported other issues that you won't see at mature internet banks like DollarSavingsDirect.
Another alternative is the new internet bank Clear Sky Accounts (see my review). It was launched early this month and is paying 3.75% APY. For those who open this account, the rate is guaranteed until 3/31/09. Unlike DollarSavingDirect, the rate applies to all balances of $1 and up.
If you want higher yields from a liquid bank account, a reward checking account is an option. I have a list of 312 banks and credit unions offering reward checking accounts around the nation in my High Yield Checking website. The average yield is 4.45% APY, and there are many offering yields over 5%. The highest yield is 6.31% APY at MidWest America Credit Union (see post). For much of last year, they were offering 7.01% APY on balances up to $25,000.
In my nationwide list there are 36 banks and credit unions offering reward checking accounts that are available nationwide. Out of these 17 are still paying 5% APY or higher.
Like online savings account rates, reward checking account rates have been falling. On the right column of my High Yield Checking Website, dates are included of the last updates. Most of these updates have been rate cuts. These update notes link to the review of these accounts with a history of the rates.
I'm afraid reward checking rates will likely decline just like the online savings account rates. But in the last two years that I've been following reward checking accounts, rates have remained higher on average than the online savings account rates. I described how banks can offer higher rates in these reward checking accounts in this recent post. The debit card usage requirement is a major reason along with the balance cap which is typically $25,000. Refer to my reward checking overview to learn more about these accounts.