National Online Bank Day - Do Branches Lower Savings Account Rates?

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.”

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 other online banks, I thought it was a good time to revisit the question I posed during last year’s National Online Bank Day:

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, three years ago. The average online savings account yield was 1.89% (based on our Online Savings Account Index). This October, that average fell to only 0.45%. The average brick-and-mortar bank savings account rate three years ago was only 0.24% (based on DA savings account data). Today, it’s 0.13%. The rate advantage of online savings accounts has fallen from 8x to 3.5x.

The current 3.5x 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 0.45% yield results in only about $45 of interest over an entire year. That’s just $3.75 a month. A dime may be 10x the value of a penny, but a dime is still not much. I think online savings accounts have that same issue. Their interest rate may still be 3.5x 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.

Online banks often have lower overdraft fees and ATM fees than brick-and-mortar banks. However, neither overdraft fees nor ATM fees are important issues for most savers. Savers rarely overdraft their accounts. For ATMs, 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.

As I mentioned last year, 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.

Do online-only banks have a rate advantage?

When I spoke with Ally officials three 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.

After more than 18 months in this new zero-rate environment, it’s not clear if online-only banks have a significant advantage in terms of interest rates. Below is a sampling of online savings account rates from two groups of banks:

1. Online-only banks that do not have a branch network
2. Banks with online divisions that maintain a branch network

I only chose online savings accounts that have been around for at least three years.

All rates are current as of 10/11/2021

As can be seen above, online savings accounts at online-only banks are not demonstrating a significant rate advantage compared to online savings accounts at banks that still maintain a branch network. Other factors like deposit levels and competition may be more important determinants for rates. It should also be noted that this is just a rate comparison snapshot for today. Click on the bank’s name in the above table, and you can review the rate history of these accounts. The online savings account rates of the above banks have generally remained close to their competitors’.

Online-only credit unions

In addition to bank online savings accounts, there are also online savings accounts at credit unions, and there are even a few online-only credit unions. There are quite a few credit unions that offer ways for people in any state to join, and many offer online savings accounts with rates that are comparable to the online-only banks. And a few of these credit unions have decided to embrace the online-only model with no branch access. Below is a list of a few of the prominent online savings accounts from credit unions.

All rates are current as of 10/11/2021

Digital-only banking from fintechs

In addition to the online-only banks, there are several financial technology companies (fintechs) that have partnered with banks to offer banking services, including online savings accounts. The partner bank is an FDIC-insured bank and holds the deposits for FDIC coverage. However, customers go through the fintech to open and manage their accounts. These are digital accounts that must be managed and opened from a website or via a mobile app. In some cases, account opening and management can only be done through a mobile app.

Several fintech bank accounts offer higher rates, but there can be downsides. One is that many fintechs don’t offer joint accounts and don’t allow beneficiaries to be designated. Another downside is that the partner bank may change to another bank or to a network of banks.

It should be noted that most fintechs don't have a long history of offering higher rates. Also, it's noteworthy that all of the banking partners of the fintechs listed below are fairly small banks that do have branch networks. The fintechs may be forced to lower rates as they attract more customers and outgrow their partners. Chime appears to be experiencing that issue now.

All rates are current as of 10/11/2021

Future of online-only and digital banks

Digital accounts at banks, credit unions and fintechs continue to offer higher rates than what you can find at brick-and-mortar banks and credit unions. The rate advantage over brick-and-mortar banks is small in today’s zero-rate environment, and online banks without branch networks haven’t been able to offer significantly higher rates than online banks with branch networks. Fintechs that partner with banks have been offering higher rates than the online banks, but it should be noted that these fintech accounts are fairly new. As they acquire more customers and deposits, their bank partners may not be able to continue to offer higher rates.

Online savings account rates appear to have reached a bottom this year. The average online savings account rate has essentially remained unchanged since May at 0.45%. Compared to the last zero-rate period (2008-2015), rates have fallen lower today. I don’t have online averages for that previous period, but based on a few of the major online banks, the online savings account rates generally fell to lows between 0.80% and 0.90%.

With rising inflation, the Fed may be forced to raise its benchmark rate in the next year or two. As you can see in the above graph, online savings account rates generally follow the federal funds rate with some time lag. Since rates fell lower this time, there may be less time lag.