Internet banks have a history of being the first to raise deposit account rates in a rising interest rate environment.
Even before the Federal Reserve started raising the federal funds rate, internet banks have offered savings account and certificate-of-deposit rates much higher than what brick-and-mortar banks have offered. Now that the Fed has started to increase rates, there is even more reason to look to internet banks for CDs and savings accounts.
However, not all internet banks have been quick to raise deposit rates. Several internet banks that have increased rates may not be the bank you want for the long term. Consumers should be aware of several issues as they open CDs and savings accounts in this new interest rate environment.
During the last rising-rate environment that started in 2004, internet banks competed for deposits with top savings accounts and CD rates. Several new internet banks were launched during that time. To compete against the more established names, the new internet banks grabbed attention by aggressively hiking rates paid to customers. A similar condition has emerged in 2017.
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One new internet bank is PurePoint Financial, the online division of MUFG Union Bank. PurePoint Financial began operation in February with a top savings account and 1-year CD rates.
PurePoint Financial didn’t remain the savings account rate leader for long. Flushing Bank launched a new internet bank called BankPurely with a savings account that just exceeded PurePoint Financial’s rate.
PurePoint Financial also didn’t retain the lead in 1-year CD rates. Other internet banks have been aggressively increasing their CD rates and offer higher rates. CD Bank, the new online division of TBK Bank, is one. Its 1-year CD rate now tops PurePoint Financial’s rate. Another new internet bank, Northern Bank Direct, recently took the top spot for 3-year CD rates.
Before consumers chase after the latest internet bank rate leader, it’s important to understand the issues that could lead to disappointing returns on your savings over the long term.
First, internet bank rate leaders rarely remain rate leaders. The banks are planning for a sizable percentage of their customers to remain with them even after they lose the rate-leader status. Furthermore, an internet bank can remain a rate leader without having to pay top rates to all of its customers.
One method is by creating new savings accounts that earn the best rates and attract new customers. The old savings accounts for existing customers are left alone with rates that then lag the leaders. Existing customers may be able to open new savings accounts, but many often don’t take the time. In some cases, they may not even be aware of the higher-rate account. That’s especially the case when the bank creates a new internet bank brand on a different website.
A pertinent example of a bank that has created multiple internet banks with widely dissimilar rates is Emigrant Bank. In 2005, it launched its first internet bank, EmgirantDirect. Later in 2009, it created DollarSavingsDirect, and later in 2013, it created MySavingsDirect. All three are still offering an online savings account, but the rates are very different. In April, DollarSavingsDirect’s savings account yield increased from 0.55 percent to 1.25 percent, which gave it the rate leader status for no-minimum online savings accounts. The bank recently increased the yield to 1.30 percent to retain the rate leader status. Customers who hold accounts at its sister internet banks are earning much less. EmigrantDirect’s savings account rate is currently 0.50 percent and it hasn’t moved since 2012. MySavingsDirect earns a little more, but it’s still far from being a rate leader at 0.85 percent.
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Consumers also have to be aware of rate histories when choosing CDs from internet banks. The rate histories may appear less important for CDs since the CD guarantees a fixed rate for the term of the CD. However, there’s no guarantee about the rate when the CD matures. The CD customer is free to move their money when the CD matures, but just like with savings accounts, a sizable percentage of customers just let their CDs automatically renew. Those customers will then be stuck in a CD for another term earning a rate that is far below the rate leaders.
Another internet division of Flushing Bank, iGObanking, offers a striking example of how much a rate can fall when a CD matures. CD rates at iGObanking have a history of being either very competitive or very uncompetitive. One example is its 12-month CD. In September 2015, the 12-month yield increased from 0.15 percent to 1.25 percent. The yield fell in November 2016 back down to 0.15 percent. If a customer had purchased this CD in December 2015, they might have been happy with earning 1.25 percent for the year. However, if they weren’t careful and let the CD automatically renew in December 2016, they may have found themselves stuck earning only 0.15 percent for the next full year.
Consumers shouldn’t necessarily avoid internet banks offering top savings account or CD rates. However, they should plan for the possibility the account will no longer be competitive in the future. If that happens, the customer should be able to easily move their money to a more competitive bank. This feature is often overlooked by consumers.
For savings accounts, the internet banks should offer a free electronic transfer service that allows the customer to initiate transfers to their accounts at other banks. In addition, the internet banks shouldn’t have small limits on the amount that can be transferred. Several internet banks, especially new ones, have surprisingly small limits. If consumers intend to deposit $100,000, they don’t want an internet bank that limits electronic withdrawals to $5,000 per day.
For CDs, internet banks should make it easy to receive the funds of a CD when it matures. The best internet banks allow customers to easily arrange for the funds of their matured CD to be electronically transferred to an account at another bank without a fee.
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Internet banks offer customers the best opportunity for the highest rates on their savings, especially in a rising-rate environment. However, consumers shouldn’t expect any internet bank to remain a rate leader over the long term. A bank may sometimes appear to be a rate leader, but existing customers don’t always benefit. That’s why it’s important that consumers look for internet banks that make it easy for their customers to electronically withdraw their money.
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Internet Banks May Be the Best Option as Rates Rise originally appeared on usnews.com
