At the risk of being Captain Obvious here, I thought I’d spout my two cents on the future of online banking. Particularly, saving money in an internet-based savings account.
What is Internet Savings?
Internet savings is simply a bank savings account that’s based at an internet-only bank. Some people call it online savings, or high-interest online savings. The internet bank generally offers the exact same features as a traditional savings account. They just don’t have physical branches, and supposedly, because of this they can offer a higher rate of interest on your savings. They are regulated by the Federal Reserve Board just like traditional savings account, where under Regulation D, your withdrawals or transfers are limited to 6 per month.
The Current State of Internet Savings
These days, the most common internet savings accounts are offered up by ING Direct, Discover Bank, FNBO Direct, Ally Bank, Everbank (actually a Money Market Account), WT Direct, SmartyPig, and even Sallie Mae. Most of these banks also offer checking accounts and other financial products. Just no physical branches.
Internet savings interest rates are way down from their glory days. Thus, the savings accounts don’t have the huge appeal they once had. Some people have turned to other products, like high-interest checking or peer-to-peer lending, to get their liquid returns. Some may see this trend and think that internet savings has lost it’s luster. I say the rate is only one part of the appeal though, and in the future, most everyone will have an online savings account versus a savings account attached to a traditional bank.
To give you an idea of the current state of online savings, I reached out to ING DIRECT, likely the biggest online bank. They shared that since their “inception in 2000, more than 7.6 million Americans have entrusted their savings with ING DIRECT.” Using my guess-o-meter, knowing what I know of the industry, I’d say that anywhere between 30-60 million Americans (only 10-20% of all Americans) have an online savings account. So at this point I guess they’re a long ways from dominating personal savings. But I still think they’ll get there.
Why Internet Savings Will Dominate
Not now, Mom! I'm watching my internet savings grow.
Internet savings, online savings, whatever you want to call it, will likely dominate our personal savings future. If you don’t already have one of these accounts, you soon will. Here’s why:
FDIC Increases – 99% of these internet savings accounts have FDIC insurance. This now covers deposits up to $250,000 (temporarily up from the previous limit of $100K). I’m going to make the assumption that this limit won’t go back down to $100K. As more and more people learn that online savings has just as much FDIC protection as their brick and mortar counterpart, the deposits at internet savings accounts will grow.
Only Getting Safer – Traditionally, the biggest barrier to banking online has been the perceived risk of online financial services. People have a healthy fear of sharing information online. Identity theft is huge. However, online banking is only getting safer as new technologies allow for increased protection, and as online banks strengthen their own system security. In addition, younger generations are far more accepting of banking online. As their savings grows, so will the deposits at online banks.
Online Checking is Improving – Another barrier to using online savings accounts has been the fact that checking wasn’t as practical of an online activity. Now, with the onset of digital check deposits (by phone or scanner), online checking is far more practical. Not every bank has this feature yet. But in a few years they all will, and we’ll all be making online checking deposits. And when people start checking exclusively online, it only makes sense that they will have an attached savings account.
No Strings Attached and No Overhead – Without the need to have a building and all the overhead that comes along with a physical branch, online banks can offer up a really sweet deal. Higher interest, no minimums, no deposit requirements, no fees. They crush traditional savings accounts in just about every aspect.
People Have More Success with It – Finally, internet savings will dominate because it works better at helping you save. They naturally help you save more. Online savings accounts give you a special, separate place to put your hard earned money. And because of the online funds transfer timing issue, they also create a small time barrier between you and your money. People who struggle saving eventually get around to asking people who can save how they do it. More often than not they’ll be telling them about internet savings.
photo by @cdharrison
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{ 9 comments… read them below or add one }
I disagree. Virtual banks are limited in how they can make money if all they offer is savings and checking. I am getting better interest rates on free interest-checking from a local brick and mortar bank that offers other products to its customers. So the “sweet deal” theory is not yet reality in all cases. I agree that virtual banks are poised to take low net-worth customers from the “too large to fail” banks. But do not discount the value of a personal banking relationship for moderate to high net worth customers.
I do understand why many PF bloggers favor the large internet banks.
@Mr.GoTo – Keep in mind I’m just talking about personal savings, not online banking vs non-online banking. The brick and mortars have their place, but their savings accounts are a horrible product.
As for high-interest checking account, most come with a ton of hoops to jump through to get a good rate. Plus, it’s not a separate savings account. It’s a checking account. There is a huge difference with regard to success with savings. Spending and saving in the same account don’t mix well, imo.
When I read “personal banking relationship” the only thing that comes to mind is fees and bank employees pushing commission-based products on me. The brick and mortars are a dying breed.
I love them because the money actually STAYS there unlike in some of my other savings accounts. =)
I agree both with you, and Meghan:)
Also great follow up point concerning how the brick and mortars have their place despite horrible savings accounts.
I would not be surprised if down the line the only way to have a savings account was with an online bank. I mean, who would not want 1.10% compared to .6% if it was just as easy to use??
“When I read “personal banking relationship” the only thing that comes to mind is fees and bank employees pushing commission-based products on me. The brick and mortars are a dying breed.”
I disagree with you. As a financial planner, I am able to improve significantly the financial situation of my clients. Most people think they can manage their finance alone and they are wrong. They get fooled by “high yield savings account” at 2% and think they make a great deal. They chase rates without strategy. They don’t even look at opportunities.
High yield savings are good for what they are: letting money dying in an account with a small interest so you think you are making money. Beside building an emergency fund, I don’t really see the point.
If you are looking for real financial advice, you have to find a real financial advisor
Internet bank are like internet pharmacy where you order your medicine upon your own diagnostic; to use at your own risk !
“Beside building an emergency fund, I don’t really see the point.”
This whole post is about building personal savings. That’s what an emergency fund is. I would never advise someone to save for retirement in a savings account.
I realize the truth in this post is threatening to those in the financial services industry who’ve long used the savings account as a tool to push their other lousy products.
People should take control and responsibility for their own savings.
You think that internet savings companies are not using their savings account to push their lousy products? They get you in with the high yield savings account and then, they offer you other products such as CD’s and mortgages. It’s the same game regular banks plays, they only do it on the virtual playground
I must admit that I am not a big fan of emergency fund either. I would rather have an unused 10K line of credit if I ever need liquidity while taking my money to invest in my retirement account or for my kids’ education.
People should take control and responsibility for a lot of things… unfortunately they don’t do it most of the time
I agree that internet savings is a lead-in whether online or off. The difference is that the virtual playground offers many advantages over the traditional savings accounts. Thus, they are free accounts with high interest. I’d rather play there.
I agree that internet show great possibilities but I see a lot of banks (in Canada) that are offering high yield savings account that are very comparable to what is being offered on the internet. It was only a matter of time before regular banks show their teeth.
I guess there is nothing innovative that offering the same product at a cheaper price. It only benefits from the customers who can now access to a real savings account that will keep his money safe instead of grudging a few bucks each month in fees