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 Capital One 360, 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 Capital One 360, likely the biggest online bank. They shared that since their “inception in 2000, more than 7.6 million Americans have entrusted their savings with Capital One 360.” 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
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