In January I reviewed some internet savings accounts that became duds. For an internet savings account, I define a dud as an account that starts out as promising, but the rate eventually falls to a level which is no where close to being competitive.
I'm using ING Direct's Orange Savings Account as the baseline. ING Direct's Orange Savings Account has never been a rate leader, but it has a long history of being reasonably competitive for internet banks. So if an internet bank starts out with a rate that's above ING Direct but then eventually falls to way below ING Direct, that savings account is a dud. People would probably have been better off with just sticking with ING Direct.
So you can see how these duds compare, ING Direct's Orange Savings Account has a 1.00% APY as of 5/6/2011.
1st Constitution Direct
The rate of its Direct Super Savings Internet Special has just fallen from 0.75% to 0.45%, and this 0.45% APY requires a balance of $10K. Under $10K, the rate drops to 0.25%. 1st Constitution Direct looked promising from 2008 through the first part of 2010. In June 2008 it was offering 4% APY guaranteed for 3 months. As a comparison, ING Direct was offering 3% APY at this time. It remained competitive all the way to March of last year when it was still offering 1.50% APY (ING Direct was 1.10% APY at that time).
HSBC Advance (formerly HSBC Direct)
I had thought HSBC Advance would at least keep up with ING Direct, but that ended in the last year. HSBC just recently cut its online savings account rate from 0.90% to 0.80%. It had many years with rates higher than ING Direct especially in 2007 when it was offering a promotional 6.00% APY.
I first reviewed the Savings Square internet savings account in 2007 when it was paying 5.10% APY. As a comparison, ING Direct was paying 4.50% APY. Savings Square's rates held up well for a few years. In March 2010 the yield was still higher than ING Direct (1.35% vs 1.10%). However, in the last year that has changed. Savings Square's yield is now only 0.65% APY.
Danversbank has kept its reward checking account very competitive. Unfortunately, it hasn't done the same with its internet savings account which is called the DBK Online Savings. I first reported on this account two years ago when it was offering a 3.00% APY. As a comparison, ING Direct was offering 1.85% APY at that time. Now ING Direct's rate is 2x that of Danversbank. The DBK Online Savings rate is now only 0.50%.
Fort Knox Federal Credit Union
When I first reported on the Fort Knox Federal Credit Union money market account just over a year ago, the top tier rate was 1.85% APY for a minimum balance of $50K. ING Direct was only paying 1.10% APY at that time. Rates have fallen a lot on this Fort Knox money market account. The top tier rate is now only 0.85% APY.
Other Savings Account Duds?
What accounts do you considered as duds?
I mentioned a few others in my last savings account dud post. In that post readers mentioned WaMu's online savings account and the AARP Financial Savings Center. The closures of these banks explain why they became duds. Chase took over WaMu, and the bank that held AARP Financial Savings Center deposits failed without a buyer.
Another reader mentioned Provident Direct. This bank didn't fail, but it did get acquired by M&T Bank which hasn't shown any desire to keep any of its internet savings account rates competitive. For example, its internet savings account at OnBank.com has a rate of only 0.25%.
How to Avoid the Duds?
When a bank is taken over, that has often been bad news for savers. Also, large banks like HSBC and Citi haven't maintained competitive savings account rates. There may have been periods that they were competitive, but that didn't last.
For small banks, it's not as easy to spot potential duds. Several small banks that have come out with internet savings accounts in the last few years still offer higher rates than ING Direct. Some of these include CNB Bank Direct, Clear Sky Accounts and SFGI Direct.
One trend that has emerged in the last year is that the banks from the credit card companies have kept their internet savings accounts competitive (as compared to ING Direct and Ally). These include Discover Bank, American Express Bank and Capital One. Hopefully, the competition between these three will keep these accounts competitive.
One sure way to avoid a dud in the short-term is to look for banks that will guarantee a high rate on their savings account for a certain period of time. The rates will fall after the promo period, but at least you'll have some time where you don't have to worry about falling rates. Unfortunately, these guaranteed periods are typically short. EverBank has long offered its 3-month intro period with a high rate on its checking and money market account. Even after the promo, the rates have stayed comparable to ING Direct. The best guarantee period that's currently available nationwide is at Salem Five Direct which is guaranteeing 1.25% APY until April 1, 2012. This is for new savings account customers only, so this is one reason to close an account after it's no longer competitive.