Switching to online banks can lead to higher annual percentage yields
Online banks are giving traditional banks a run for their money. Interest rates at online banks are as much as four times higher than bricks and mortar banks and credit unions, according to a survey released by DepositAccounts.com, a blog that compares bank accounts across the nation.
The survey compared the annual percentage yield, or APY, of savings accounts at 6,278 bricks and mortar banks, credit unions and online banks over a one-year, five-year and 10-year period. Internet banks consistently allowed savers to stash the most cash while earning more money on their balances.
“Online banks are just as safe as bricks and mortar banks and they allow you to grow your money faster with no extra risks,” says Ken Tumin, founder and editor of DepositAccounts told USA TODAY.
Since January 2016, internet bank APYs have increased by 29% — three times higher than the 9% increase at bricks and mortar banks. Credit unions were even lower, with an average APY increase of only 2%.
That means, if a customer invested a thousand dollars a year in an Internet bank, they could earn more than $8 by the end of the year, compared with fewer than $2 at physical banks — and the savings only increase the more money is in the account.
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That may not seem like a hefty sum for small investors, but every little bit counts.
“The interest can really start to add up when you’re looking at your account as a whole,” says Chris Hogan, financial expert and author of the book Retired Inspired: It’s Not an Age. It’s a Financial Number.
Without expenses such as payroll and building maintenance, online banks can afford higher interest rates. Internet banks, many of which are unknown, also offer customers attractive interest rates as a way to compete with better-known banks.
Consumers also save money by way of fewer fees, such as overdraft and maintenance fees. This is especially advantageous for people who carry smaller balances.
“It’s a better overall banking experience,” Hogan says.
Some banks to consider are Ally Bank, Synchrony Bank, Discover Bank, CIT Bank and Barclays Bank. As long as the bank is FDIC insured, Hogan says, its just as safe as other banks.
And customers are not only saving funds, but time as well, since online banks eliminate commute times.
“I would never go into a bank,” says Kathryn Luttner of New York, New York. Luttner made the transfer to Ally Bank in 2010 after growing frustrated from excessive fees on her Bank of America account.
“I was constantly calling up Bank of America,” she recalls. I was saying, ‘Hey, I’m not this crazy over-spender. But you keep charging me fees because you’re not showing me my true balance on my statement.’”
And while credit union customers have been enjoying fewer fees for some time, Tumin says even credit unions don’t offer the higher interest rates on savings accounts.
“If interest rates are your main concern, then internet banks are the way to go if you want the most bang for your buck,” he says.
While consumers have the option of banking with more than one business and linking accounts, Tumin says one drawbacks could be the time it takes to transfer money from one bank to another, which could take up to four business days.
“There’s a potential issue if you need fast access to that money,” Tumin says.
Luttner, though, says she’s never had a problem with her online bank and is unaware of any fees.
“Ally Bank offers me a 1.15% APY, and Bank of America is 0.01%, so it was a no-brainer when I decided to switch banks,” she says. “If the interest rates were the same at all banks across the board that would be one thing. But if they’re different, then why not take more money?”
Follow Kellie Ell on Twitter: @KellieAutumnEll
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