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National Online Bank Day - Effects of Falling Rates

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In addition to Columbus Day, today is National Online Bank Day. Ally Bank established National Online Bank Day in 2015 to “emphasize the value, ease and convenience of banking with online-only institutions on Columbus Day, a day when most traditional banks are closed.”

I was told by an Ally official last week that they did not have any specific plans this year for National Online Bank Day, and it appears they didn’t even have a press release for the occasion. In 2018 on National Online Bank Day, Ally emphasized the interest rate advantage of online banks. With all-time low deposit rates at Ally Bank and at other online banks, I have a feeling Ally didn’t think today would be a good time to boast about rates.

Advantage of online banks in a zero-rate environment?

Today’s National Online Bank Day had me thinking about how online banks will compete in this new zero-rate environment. Can they offer interest rates high enough to pull consumers away from brick-and-mortar banks and credit unions?

When does an online savings account rate become so low that it does not motivate people to open the account?

For those without large savings, the value of online banks diminishes in this type of zero-rate environment. For example, two years ago. The average online savings account yield was 1.89% (based on our Online Savings Account Index). In October, that average fell to only 0.62%. The average bank savings account rate two years ago was only 0.08% (based on FDIC data). Today, it’s 0.05%. The rate advantage of online savings accounts has fallen from 23x to 12x.

The current 12x rate advantage of online banks over brick-and-mortar banks is less than it sounds when you look at dollar amounts. For a $10,000 balance, a 0.62% yield results in only about $62 of interest over an entire year. That’s just a little over $5 a month. A dime may be 10x the value of a penny, but a dime is still not much. I think online savings accounts and CDs have that same issue. Their interest rate may still be 12x that of brick-and-mortar equivalents, but the online rates still don’t offer much.

Other online bank advantages besides rates?

Besides interest rates, online banks offer lower fees than many of the brick-and-mortar banks. However, for savers, that’s not a major issue. For many of the brick-and-mortar banks, it can often be fairly easy to avoid fees when you maintain a balance of at least a few thousand.

The ATM fee is a common fee for banks. Large banks often have a large branch and ATM network where you can withdraw cash without a fee. Most credit unions don’t have a large ATM network, but many are part of ATM networks that allow you to use ATMs without fees.

The major online banks can sometimes have an advantage over brick-and-mortar banks and credit unions in their online and mobile banking features. However, I’m not sure how much advantage exists if you’re looking at the large brick-and-mortar banks like Chase and Bank of America. These large banks also benefit from a close integration of their credit cards with their online and mobile banking. Most online banks lack that type of integration.

In summary, I don’t think low fees or better online/mobile banking features are enough reasons for savers to move to online banks. Interest rates are more important.

Will online-only banks have an advantage?

When I spoke with Ally officials two years ago about how they plan to compete with other banks (many with large branch networks) that were introducing online savings accounts, Ally said that they were skeptical about those banks being able to sustain competitive savings account rates since those banks had to maintain an expensive branch network.

Signs that these banks with large branch networks won’t be able to compete may already be starting to show in this new zero-rate environment. PurePoint Financial and Capital One are two examples of banks with branch networks that have recently cut rates below their online-only competitors. I thought it would be interesting to compare these banks and their current rates to the rates of an online-only bank like Ally.

Ally Bank

APYMINMAXINSTITUTIONPRODUCTDETAILS
1.00*%--Ally Bank5 Year High Yield CD
0.65*%--Ally Bank12 Month High Yield CD
0.60*%--Ally BankOnline Savings Account
Rates as of October 12, 2020.

Like most other online banks, many of Ally’s rates have fallen to all-time lows. However, Ally has generally avoided any giant rate cuts. Its current online savings account rate is now just a little below the online savings account average of 0.62%. Its online CD rates may be low, but at least they’re higher than online averages (0.55% for online 1-year CDs and 0.79% for online 5-year CDs). Also, most of the CD rates are higher than the online savings account rate.

PurePoint Financial

APYMINMAXINSTITUTIONPRODUCTDETAILS
0.40*%$10k-PurePoint FinancialOnline Savings
OTHER TIERS: 0.10% Up to $10k
0.25%$10k-PurePoint Financial12 Month Online CD
0.25%$10k-PurePoint Financial60 Month Online CD
Rates as of October 19, 2020.

PurePoint Financial was launched in early 2017 by Union Bank, a large regional bank in the West that has almost 350 branches. Before this year PurePoint Financial was a strong competitor to the online-only banks. However, that has recently changed. Its online savings account rate is now only 0.40% (far below the online savings account average of 0.62%). Its online CD rates are even worse. PurePoint’s highest CD rate is only 0.25%. All of their CD terms from one to five years have this disappointingly low rate.

Capital One

APYMINMAXINSTITUTIONPRODUCTDETAILS
0.50%--Capital One360 Performance Savings
0.40%--Capital One60 Month 360 CD
0.20%--Capital One12 Month 360 CD
Rates as of October 19, 2020.

Capital One acquired the online-only bank ING DIRECT in 2012. Since that time, Capital One has slowly made the online accounts the primary deposit accounts of the bank. In the last few years, they’ve been heavily advertising their Capital One cafes as a kind of hybrid model between online-only banks and brick-and-mortar banks. The cafes aren’t branches, but they offer free ATMs, free WiFi and access to bank “ambassadors” who can assist customers in handling account questions. However, Capital One hasn’t given up on its branches. It continues to maintain a sizable branch network with almost 450 branches in several states.

Before this year Capital One had been fairly competitive with its online accounts. Just like ING DIRECT, it was rarely near the leaders, but the rates were often close to what the major online-only banks were offering. That has started to change. The rate of its online savings account, the 360 Performance Savings, has fallen to only 0.50% (below the online savings account average of 0.62%). Like PurePoint, Capital One's online CD rates have fallen even more than its savings account rate. Currently, the 360 CD rates range from 0.20% (for the 6-, 9- and 12-month terms) to 0.40% (for the 5-year term).

Vio Bank

APYMINMAXINSTITUTIONPRODUCTDETAILS
0.76%$100-Vio BankHigh Yield Online Savings Account
0.50%$500-Vio Bank60 Month High Yield Online CD
0.15%$500-Vio Bank12 Month High Yield Online CD
Rates as of October 19, 2020.

Not all of the online banks that are divisions of banks with large branch networks have become uncompetitive on rates. Vio Bank, the online division of the 78-branch MidFirst Bank, continues to offer an above-average online savings account rate (currently 0.76%). Vio Bank’s online savings account rate has just over two years of history with rates above the online averages. However, the same can’t be said of its online CD rates which haven’t held up as well as its online savings account. Currently, its 1-year CD rate is only 0.15%, and its 5-year rate is only 0.50%. These low CD rates don’t bode well for Vio Bank’s online savings account rate.

Future of Online Banks and Deposit Rates

As this new zero-rate environment drags on, online banks may find out that rates can’t be lowered too much. At some point, the rates fall too low and their value over brick-and-mortar banks disappear. Competition among the online banks should also help prevent rates from falling too close to zero. Online-only banks without expensive branch networks may be in the best position to compete.

The pandemic has caused many people to live without bank branches, and that may encourage people to switch to online banks. But online banks will have to prove that they offer more value than the brick-and-mortar banks and credit unions. In this current zero-rate environment, it's going to be difficult to make that value case based on interest rates.

This new zero-rate environment has already proved to be worse than the last one as deposit rates at many banks and credit unions have fallen to all-time lows in the last few months. The surge of deposits this year has been one important factor that has been different than the previous zero-rate period. As deposit levels return to more normal levels, online banks may find it necessary to raise deposit rates at least a little even if the Fed continues its zero-rate policy. We did see small rate increases many times during the last zero-rate period. So it’s quite possible that 2021 won’t be worse than 2020 for deposit rates.

Related Pages: savings accounts, nationwide deals, Internet banks
Comments
Choice
  |     |   Comment #1
Another unspoken aspect of the movement to on-line banking is the goal to eliminate, or minimize, paper currency. Bad guys do not use electronic banking for obvious tracing issues. And, some foreign countries use the US dollar as it’s currency...thus we may see that use continue but not in the US under this scenario. There are other less intrusive methods to ferret out the bad guys while retaining paper currency.  Will you be grandfathered?
P_D
  |     |   Comment #12
There's another side to that coin (pun intended).

Paper currency provides a useful way for good guys, law abiding citizens, to engage in private transactions amongst each other that neither banks nor the government have a right to track. Take away the paper currency and take away that measure of privacy and liberty.

I'm becoming more interested in the idea of abolishing the official federal currency in favor of letting private industry create its own currencies. Let the public make decisions about which forms of currency have the most utility and value to them without government manipulation.
Buckeyes
  |     |   Comment #2
This is a great article explaining just how ugly our world is right now. I am on course to lose 5k next year as my cd's are expiring and i wasn't smart enough to lock in long term. I just couldn't envision it getting this ugly when i purchased them,
GreenDream
  |     |   Comment #3
Unless you are withdrawing early, no you are not losing 5k. Your principle remains what it was. What you are on course to do is not gain 5k like you would have had rates not plummeted. if you stick to the same course of action. You choices, however are "ugly". Stick to safe investments (cds for example) and gain very little or move to riskier investments (stocks for example) to potentially gain more but also risk actually losing as well.
Buckeyes
  |     |   Comment #5
My interest income is forecasted to drop 5k next year. To me that's a loss. My 3 Ally CD's all paying more than 2% mature early next year. I guess it's all symantics greendream. They basically gave me, and all savers, a pay cut. Now if they can prove to me that this policy is keeping the market afloat so I get my 5 grand back in the market vs CD's, well, I guess I can't complain, although I am not sold that this is actually happening. It's a TINA world. There is no alternative.
GreenDream
  |     |   Comment #6
It's only a loss in the same sense that congress *increasing* the budget by less that previously forecasted is somehow a budget cut. IE it's not but people like to pretend it is for whatever reasons.

You characterization of it as a "pay cut" is a much better description as it's your income stream that is being cut.

There's no guarantees when you play the market (risk is always a factor). Even if the market is "kept afloat" you could choose poorly and lose a bundle, even in the most down market you could have chosen well and still come out a head. That said, over time, a well diversified portfolio in the market is as close to guaranteed to do well as it gets.
goldismoney
  |     |   Comment #14
definitely a real loss since rates are below even the official inflation rate
Choice
  |     |   Comment #7
We go through these “adjustments” every x number of years...change creates opportunities and thus why the “big players” luv these times. But individually what was learned from Big R? Financially this can be foreseen. This site in many places has advocated laddered CDs yet you went a different direction...why? Did you look at EWPs as a way to move to other CDs...why not? Help us help you ...what and why did you do it given the most recent test in the Big R..
Got it
Buckeyes
  |     |   Comment #8
if the question is directed at me, the Ally CD's were my first. I've always been satisfied with the money market rates as I have instant access to the money and it is usually on par with inflation, until now. Buying those CD's locked me into at least a small gain for this year, and I doubt I do that without all the wisdom this site provides. I count my blessings I somehow found this site.
Rickny
  |     |   Comment #11
Buckeyes Rates are some of the lowest I've ever seen. Trying to take advantage of easy bonus offers when the intrest rates are so low. Got $200 from Chase to open a savings account for 6 months with 15k. My wife opened a Fidelity Charge card with 2% cash back and a $150 bonus if I charge $1500 in 90 days. She has an 850 credit rating so it won't take a bad hit Today I'm going to Keybank to get a $400 bonus if I open a checking account with $10 and deposit $500 in 60 days. No direct deposit and I have to keep the account open for 60 days I had problems with the local branch with opening the account but I contacted the CEOs office and the problem has been corrected. 
Buckeyes
  |     |   Comment #16
I got the same Chase promotion on their savings and investment product. I recently got the Chase credit card bonus and I'm also waiting on Citi's savings bonus. It's sad as this only way to put money to work that isn't a crapshoot like the market. My brother is fuming that he bought a "safe" Citi stock and it's crapped over 10 percent in a month. Capital One and Bank of America both caught up to me and denied me a credit card even though i have a FICO score north of 800. I think the banks are catching on to people like me who are desperate to find "interest" anywhere. I just love that 13 cents a month interest I get from Chase as I wait for their bonus to hit.
enduser
  |     |   Comment #4
The only thing Ally national online bank day accomplished was make it impossible for me to access my account on Oct 12. What it did do was show the system weakness to handle such volume. When I was finally able to get past the logon screen there was a message that the accounts information could not be displayed right now. I gave up in frustration since I could not complete my online banking session.
Rosedala
  |     |   Comment #9
"Bad guys do not use electronic banking for obvious tracing issues."
Oh my goodness, Choice, I never knew this and wonder what the credit card companies may think of my "intentions" when I insist on getting paper statements so I can remember to pay on time... :(
Choice
  |     |   Comment #10
Personally b/c of hacks, no notice from Equifax on breach, etc. I do very little ebanking. I noticed I didn’t get a couple of paper bills in the mail a few months ago and then I went to pen/paper to track due dates, etc. I also reminded those credit card, utilities, etc. that they assume the risk of nondelivery of Bill, etc. since they selected the method of delivery, not me. Just like I select the method of payment delivery and thus my risk for that. And the correlative is ...if they are not responsible for delivery, then neither am I. At least that is my position...and I’m not changing. Stay safe
P_D
  |     |   Comment #13
"I also reminded those credit card, utilities, etc. that they assume the risk of nondelivery of Bill, etc. since they selected the method of delivery, not me. Just like I select the method of payment delivery and thus my risk for that. And the correlative is ...if they are not responsible for delivery, then neither am I. At least that is my position...and I’m not changing."

Good luck with all of that. Which is a better chance a slim chance or a fat chance?
Choice
  |     |   Comment #15
Some chance is better than no chance...I offered an approach and we see your approach! Merely b/c a person sends something does not mean it is received...thus the default rule is what I suggested...both ways
FresnoMan
  |     |   Comment #17
Regardless any biller can hold you responsible for knowing you are liable for the debt even if you don't receive a bill. I don't think a court in this country would side with you after you have made charges to a credit card knowing you are responsible to repay the debt. Not receiving a bill will never absolve you of your responsibility to repay. But I think you know this.

My gosh I just read a story earlier of a postal carrier who had two trash bags of mail he failed to deliver sitting out for the trash collector. If one of your bills was in that trash bag let us all know how your argument turns out.
Choice
  |     |   Comment #20
Notice and due process are bedrocks of the US
#24 - This comment has been removed for violating our comment policy.
Rosedala
  |     |   Comment #18
You better change Choice, if you don't pay on time you'll be slapped with a large fee AND interest too. It happened to me, hence I urged them to send me the paper statements which I can't miss and thus pay on time. Was able to get them to waive these charges but who wants to waste more time doing these things. As it is the computer burns so much humans' time with tech problems which sometimes are only annoying but other times outright miserable! :D
Ally6770
  |     |   Comment #19
I have utility bills etc debited to my credit card. Some I put on myself, such as house and car insurance and Comcast bill. The credit card debits my checking account paying it in full each month. I charge everything including clothing and all my groceries to my cash back credit card. The cash back is not taxable. This guarantees all bills are paid on time with no fees. If you can't afford it don't buy or charge it. BUDGET.
P_D
  |     |   Comment #21
Wish I could do that, but the only utility that allows a credit card payment is the cable company. Gas, electric and water don't accept it. But no big deal, I never have to worry about them, I just have then direct debit from one of my bank accounts. The only thing I don't have on autopay are various taxes and certain specialty bills like legal or medical bills. Everything else is automatic.

By the way I've been doing this I think since at least the mid 90s.  I never once had a problem or missed a payment.  I don't have time to pay individual bills.
deplorable_1
  |     |   Comment #22
Very smart Ally I do the same thing with the Huntington voice card 3% back on water, gas, electricity, phone, cell phone and internet bills. Home and car insurance goes on the Citi 2% card. 5% on groceries in quarterly bonus categories or 3% with the NFCU AMEX. See we do have something in common.
deplorable_1
  |     |   Comment #23
@Choice comment #10: Good luck with that one when they shut your power off.
DTE energy story:
I had a electric meter go bad and always paid my bill in full and on time. They sent me a large estimated bill while I was on vacation not even using power. I called them and initiated a investigation of why my bill was so high. They sent out a repair man who replaced the meter. They concluded that I should have known the meter was bad because my electric bills were so small. I told them I wasn't even home using power but to no avail. They forced me to pay 3x my normal bill and told me they would shut off the power if I didn't pay it. Well I just paid it as I'm not going to court over a couple hundred bucks and meanwhile lose power. These companies with monopolies can and do extort you and unless you want to fight it in court there is basically nothing you can do.
Choice
  |     |   Comment #25
Elementary...estoppel works! I’m on the police and fire circuit as well as having a generator, ie electricity is never off (proper prior planning prevents...poor performance)...doing nothing is not an option!
Rickny
  |     |   Comment #26
D1 In NY we have a Public Service Commission that you could contact to rectify problems with utilities. I had a large gas bill on the house I moved into the 1st month we bought the house. We weren't even living in the house and had the heat low as I was painting before moving in. I had a large gas bill. Called the utility and asked that the meter betested and they refused. Contacted the PSC and the utility was forced to change the meter and test the old one. The meter was OK and the problem was due to has leak at the water heater that the prior owner changed themselves. The leak was found when I had an energy audit done.
deplorable_1
  |     |   Comment #27
You are lucky you didn't get blown up Rickny I'm guessing the painting stopped you from smelling the gas. When I first moved into my house one morning I heard something on my back deck. I looked out the window and the DTE guy was disconnecting my power! I asked him what he was doing and he said I didn't pay the bill. I told him I hadn't yet received one yet I just bought the house! It took me all day on the phone to get them to leave my power connected and then they tried to get me to pay the former occupant's bill. DTE is the worst but I have no choice unless I want solar or wind.
Rickny
  |     |   Comment #28
You didn't smell any gas in the house but it registered on the gas sniffers the utility and a home energy used. After I got the big bill the utility suggested an energy audit. The auditor's meter could not find the exact leak location but that it wss near my boiler and the water heater. I called the gas company .The gas utility repairman had a more accurate meter and traced it at the hot water jester When he checked the connection at the water meter the pipe fell off. He tightened and greased the connection. No smell in the utility room. He said the has was probably venting through the hot water heater vent.
Rickny
  |     |   Comment #29
In NY they have to send you certified letters and I believe visit you house to inform you that they were disconnecting service. With the new smart meters they can cut your electric service remotely. Not sure the had meters can be shut-off remotely.
Buckeyes
  |     |   Comment #30
It is amazing (not here) how many people seem to think deferral means free. It seems like a nice gesture by the loaner, and its just simply an extension. People who constantly defer are probably eventually going to get crushed.
Rosedala
  |     |   Comment #31
Hey Deplorable_1, how about having your credit card company stop payment and fight them? You could prove you weren't there to see the bills. That's what I did a couple of times and got my money back...

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