The following post is from our analyst, Rodney, and is part of an ongoing series of articles that seek to take a deeper and more concerted look into what we can glean from our proprietary database of depository rate and product data.
Modern consumers love handling business online. The veritable explosion of opportunities to conduct an ever-widening array of business-related tasks via the Wide World Web has left few industries untouched, including the banking industry. E-commerce has taken full advantage of the connectedness of our culture and offered access to everything we could need or want right at our fingertips through websites and mobile apps. The growth of the online marketplace has changed the way consumers interact with financial institutions and created opportunities for those institutions to meet every banking need many consumers might have – at least as it relates to certain deposit product types – without requiring them to step foot inside a bank.
Part of the allure of conducting business online is its relatively low cost. Online businesses have lower overhead, which gives them the ability to pass along their savings to consumers through lower prices (or in this case, through higher deposit rates). We wanted to see to what extent the same was true of internet banks, so we dug through our data to see just how favorably their rates compared to other financial institutions. We previously compared the rates offered by credit unions and banks, determining that credit unions–particularly the largest credit unions–offered the best rates. The logical next step is to add internet banks to the mix.
What is an Internet Bank?
In order to parse rate differences between "internet banks" and their brick & mortar (B&M) brethren, we need to first define the term. For these purposes, two main types of internet banks fall within our category definition:
- True internet-only banks that have no physical locations (a few may have a single branch), and therefore conduct all business online. Ally Bank, Synchrony Bank, and American Express Bank are examples of this sort of institution.
- A separately-branded online division of a traditional, B&M bank. Deposits are held by the parent bank, but the online institution operates under its own brand, featuring its own unique website and its own, online-only products. Examples of this type of internet bank are AmTrust Direct, Capital One 360, and FNBO Direct. The majority of internet banks, as we define them, actually fall in this category.
The short version of all of that information is that internet banks offer nationally available products and conduct business solely online. By this definition, we have 60 total banks are categorized in our database as being internet banks.
Just as with many categorizations, in general, this one–defining Internet banks–has a caveat that bears mentioning. A few select banks (e.g. Everbank) explicitly brand themselves as internet banks and focus the vast majority of their attention toward online business, yet they operate a small number of physical locations. Those banks do not fit neatly into our definition, per se, but given that they define themselves as internet banks and conduct the vast majority of their business online, we have included those banks as Internet banks in our database and, therefore, the research herein.
With the term defined, we can now dive right into the numbers. Our research for this comparison, as in the past, centered around four main products – checking accounts, savings accounts & MMAs, 1 Year CDs, and 5 Year CDs. We pulled the averages of B&M banks, credit unions, and internet banks. Here are the results:
The difference in rates is stark, with a clear advantage for the internet banks emerging on each product, followed by the credit unions, and with banks bringing up the rear. The smallest overall rate difference between the B&M banks and internet banks on any product we researched was almost 25% and was found on the 5 Year CD (1.29% APY to 1.61% APY, respectively). The most extreme disparity was the 362% difference on Personal Savings & MMA products. Internet banks offered an average APY of .60%, which dwarfed the comparatively measly .13% offered by B&M banks (and the .15% APY offered by CUs).
Keeping in mind that the sample size of internet banks was relatively small (60 total internet banks), we researched their ranking among the top 20 nationwide rates for each product. The results were very telling. Of the top 20 rates...
- Among 1 Year CDs, 9 were internet banks (45%)
- Among 5 Year CDs, 7 were internet banks (35%)
- Within Personal Checking, 12 were internet banks (60%)
- Within Personal Savings, 16 were internet banks (80%)
- Within Personal MMA, 13 were internet banks (65%)
Of the top 100 products represented by the five categories listed, 57% of them belonged to one or another of the 60 internet banks. That is a very high percentage for such a small group of banks.
Best of the Internet Rates
Of the highly-rated internet banks that overshadowed the B&M institutions, several were distinctive for their prominence within the Top 20 rankings. UFB Direct posted the top nationwide savings APY at 1.20% (though this account does have a volatile rate history). The highest nationwide rate (tied with two other B&M banks) for MMAs was found in an internet bank called Redneck Bank, out of Snyder, OK. It boasts an APY of 1.25% ($35,000 max), as well as one of the most entertaining bank names around.
The highest-ranked internet banks for the 1- and 5-Year CDs came in at number six for each product. AloStar Bank of Commerce (1 Year CD at 1.26%) and Colorado Federal Savings Bank (5 Year CD at 2.15%) offered highly ranked CDs on each of those lists. Also, for those who have followed our three-part series (Part 1, Part 2, Part 3) on CD Early Withdrawal Penalties, Colorado Federal’s 5 Year CD is one you might want to check out. With a high APY and a good EWP of 180 days, it would outperform the highest-rated nationally available 2- and 3-Year CDs if broken before maturity.
No internet bank made the top 20 list for every product, but several banks had multiple entries. Here is a look at all of the internet banks that appeared on the Top 20 rankings for at least three of the five products:
Why The Higher Rates?
The data clearly demonstrates that internet banks, on average, offer higher rates across the board on all of these products than do their B&M counterparts. The question is, "Why?" The answer is fairly simple, in that, for the most part, the higher rates are due to lower costs of operation. As we mentioned in the introduction, part of the allure for businesses to operate online is lower overhead which leads to better deals for consumers.
Without physical buildings, internet banks save on mortgages or rent, upkeep of the facility, insurance costs, and utilities. No physical space also means less staffing costs, like tellers, loan officers, managers, and security guards that would normally fill the space. All of that translates into savings for the banks and special deals for consumers.
Hard to Ignore These Rates
Internet banks undeniably offer some of the best rates available on all types of deposit products across the board. Maybe the biggest story in the numbers, however, is the sizable disparity in the Savings/MMA numbers. These accounts may not generate as much discussion here on the blog – as many of our daily stories focus on CD offerings – but when it comes time to find a savings, money market, or checking account, they should be the first place to look for the rate-conscious saver.
Of course, many of our astute readers have already taken full advantage of the deals offered by internet banks and are enjoying healthy returns as a result. Others may be stepping foot into those waters for the first time. As you can see from the above information, if higher rates is your thing, consideration of internet banks and their products is a must.