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NY Times Article: Insights into Online Savings Accounts

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This article from the New York Times reports on the growth of online savings accounts and looks into how profitable they will be for the banks. Banks like HSBC and Emigrant Direct have been very successful over the past year in adding deposits through their high yield online savings accounts. The article mentioned two ways that banks profit from these deposits: one is the well known way of using it to make loans, the second way is by investing the deposits into financial instruments. The article states:
It is the selection of those financial instruments, and the performance of them, that can determine whether a bank profits from high-yield savings accounts, bankers and industry analysts say.

This can make these high yield savings accounts risky for the banks, and is probably a good reason why you want to make sure it's easy to transfer your money out without worrying about minimums. Although FDIC will protect your deposits (under the FDIC limits), a troubled bank may make big drops in their deposit rates.

The article describes the growing competition among online savings accounts. ING Direct led the way in the US in 2000 with their Orange Savings Account. Last year was a big year with Emigrant Direct and HSBC Direct. The growth seems to be continuing this year with major new players like Citibank. The article mentioned other major banks like Washington Mutual and Wachovia may be launching high-yield accounts soon.

The competition should help keep the rates high. The article had good news from a Citibank's managing director who was saying that their e-Savings account, which currently pays 4.5%, will remain high and "When the Fed increases rates, we will go up as well." We shall see if Citibank bumps up the rate next week after the Fed meeting.

However, competition alone won't result in higher rates. Customers must also be willing to leave for better rates. This is probably an important reason why banks like ING and Emigrant have fallen from their top rankings. Once they win customers and acquire deposits, many customers don't go through the trouble of moving their money even after the banks no longer remain competitive. Here's an interesting quote from an HSBC Bank executive:
Unlike credit card users, who freely hop from one product to the next to get a better rate, savings account holders tend to be more loyal. Thus, he said, HSBC Direct does not feel compelled to offer the very highest yield.

So this helps to explain why HSBC's yield on their savings acocunt fell to 4.50% after their promotional 4.80% ended. Once you attract customers and deposits, the bank just has to be good enough, not necessarily on top.

This is a good reason why you should move your money to the best deal. Even though the extra interest may not be much, it helps drive the banks to compete.
Comments
Anonymous
Anonymous   |     |   Comment #1
I moved my money from ING to GMAC money market at 4.75%, leave only $1 at ING, the down side of GMAC is the $500 minimum, let's see which bank have better deal now..
thanks for this great site..