Online banking has transformed the way that individuals conduct their personal finance. Along with innovations such as electronic bill pay and account statements, another innovative form of banking has developed over the internet. This development is the online savings account. With it you can expect to receive the same service and convenience of a regular savings account along with an interest rate that is much higher than you’ll receive in a traditional savings account.
How Online Savings Banks Work
Online savings institutions work like any other bank or credit union. You deposit your money and the bank lends it out or invests it. The money that the bank earns on your deposit is split between you and the bank. The bank takes a portion to cover its expenses and you receive the rest in the form of interest.
Now, banks have a vested interest in keeping as much of the interest as possible in order to keep their profits high. On the other hand, they also must pay their customers high enough rates to keep them from moving their accounts to the competition. If a bank can somehow lower its overhead costs relative to the completion, it can pass more of the interest along to its customers and also see an increase in profit.
Enter the online savings bank. An online savings bank is the same as a traditional bank in every way except one: it has no, or few, “real world” branches. Instead, customers can access their funds at every computer with internet access around the globe. Because such a bank does not have physical locations they are able to save money on expenses such as rent, teller wages, utilities, and cleaning services. The money that they save on these expenses is passed along to you, the customer, in the form of higher interest rates.
However, these higher interest rates do come at some small cost to the customer. Because these institutions do not have many physical branches you’ll have to have an account with a “real world” bank in order to deposit your funds. When you open an account with the online bank, it will be linked to your “real world” account. To make a deposit you simply move money from your traditional bank into your online institution. To make a withdrawal the reverse is done.
Also, the transfers between accounts take 1-3 days on average. This means that your money is not immediately accessible the moment you want it. It helps to think of the transfer as a check you’ve written to one institution or the other and the time in between banks is the time it takes for your check to clear.
In addition, with an online savings bank you won’t have the option of going down the street to your to make a withdrawal of cash. Instead you’ll have to transfer your savings to your checking account first. Most online banks do, however, have great customer service. You can call their customer service offices during most business hours and nearly all online savings institutions have customer service available through online chat 24 hours a day, seven days a week.
The Benefits of Having an Online Savings Account
There are many benefits of having an online savings account. The author has had an account with INGdirect (Now Capital One 360) since 2006 and has been more than pleased with the service. The most obvious benefit of an online savings bank is the high interest rate. When I first joined the rate was 4.5%. That’s a great return on an investment with absolutely no risk! In fact, most stocks and bonds don’t pay as well and carry a significantly higher risk load.
Unfortunately, the interest rate has since dropped. While online banks can cut their costs further than those in the “real world,” they are not immune to major economic movements such as the Federal Reserve lowering its interest rates, depressions, and recessions. However, the current rate is at Capital One 360 is 0.75% APY which is significantly higher than most savings institutions. I have full faith Capital one 360 will be raising their rates once the markets allow them to do so.
In addition to higher interest rates, online savings banks also have the benefit of a long transfer time to real world accounts. This transfer time can be anywhere from 1 to 3 business days. Now some folks might think of this as a negative attribute. It’s not! Instead think of it as plenty of time for you to consider if you really need that purse or fishing pole that you were going to buy with your savings. The time in between accounts can be viewed as a wall to protect your savings from impulse buys in a way that instantly accessible savings accounts cannot.
Many people are concerned with the safety of online banking. Rest assured that most online banks are FDIC insured. This means that should your bank close or fail for any reason the government of the United States will insure that you receive back the full value of the money and interest in your account up to $250,000. This applies to all bank accounts that have FDIC insurance, even those owned by foreign customers.
In addition to having the money in your account backed by the full faith and credit of the United States, your account information (login, password, address, email, account numbers, etc) are all encrypted to insure their security. Most of these online savings banks are large corporations, or like Capital One 360, have interests in “real world” banking. Their reputation is what ensures that customers continue to use their service and they protect this reputation because their business depends on it. This means that online banks will always use the best cyber-security that money can buy.
So is an Online Saving Bank Right for You?
Online savings banks offer a great opportunity for customers to earn a higher interest rate than they would in a traditional bank while still offering the same security and peace of mind. However, online banks are not for those who want immediate access to their savings. If you are a person who likes to tap into your savings regularly you will most likely be better off with a traditional savings account that allows you to withdraw whenever you have the need.
If, however, your savings account is an important part of your personal finance plan, I highly recommend that you look into starting an online savings account. Most even offer a decent sign up bonus. The author personally prefers to use Capital One 360. I have been using their services since 2006 and have never had an issue that wasn’t quickly and professionally resolved. The interest rates are always among the highest in the industry and the customer service has been second to none. There is even a $25 dollar bonus for signing up for a savings account and a $50 bonus for starting a checking account. If you’re interested in checking out Capital One 360, you can find them by following this link. Be sure to shop around, though. There are many different online savings institutions and each has its own unique features to fit individual needs. Good luck and happy saving.