Americans are finally getting the memo: You don’t have to settle for microscopic bank savings rates anymore.
With short-term interest rates rising broadly across the economy the past few years, a small but growing share of customers are moving their cash to online banks that pay higher yields on savings and money market accounts. In the past 24 months, 21% of Americans have transferred their money to an online bank that pays at least 2% interest, according to a NerdWallet online survey of 2,012 adults for USA TODAY earlier this month.
Before that, only 6% of Americans had their savings account at an online-only bank, such as Ally, E-Trade or Discover.
“If you work hard to save any money, you want to make sure it’s there when you need it and that it has the same buying power,” says Greg McBride, chief financial analyst of Bankrate.com. A 2% savings rate simply lets consumers keep up with annual inflation that has been running around 2%.
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Many savings-account transfers seem to have taken place recently. Fourteen percent of consumers polled by Bankrate April 30-May 5 were earning more than 2% on their bank savings, up from 6.3% in July. The share differs from the NerdWallet survey in part because the latter tracked people earning at least 2%.
Not all of the increase was the result of transfers. The portion of Americans earning 1.5% to 2% has dropped from 11.5% to 7% since July, indicating that interest rates automatically rose to above 2% for some savers in that category. Still, overall, the share of savers earning 1.5% or higher has increased from 17.8% to 21% since last summer, Bankrate figures show.
Traditional banks are still lagging. While top online banks offer rates of 2.25% to 2.5%, the average bank pays 0.10%, according to Bankrate.
The difference isn’t chump change. On a $10,000 balance, the typical bank with physical branches pays out $10 a year, compared with $250 for a leading online bank.
The pickup in shifts to online banks is a positive development for the economy, handing people more spending money or shoring up their emergency and retirement funds.
McBride calls the growth of online banking customers “encouraging,” but adds: “It’s still not nearly enough. You can open an online savings account in 10 minutes. It’s a really low lift.”
Easy to set up
Fifty-two percent of the accounts can be started with a minimum deposit of $100 or less and 35% have no minimum, according to Bankrate. The vast majority have no monthly fees.
Justin Galloway, 42, of Burleson, Texas, shifted a few thousand dollars from a local branch to Barclays, an online bank, three months ago. He did a Google search for the highest rates after seeing a social media ad. His former interest rate, likely less than 1%, “just didn’t seem viable when I can have a higher rate.”
Now, $200 a month is automatically deposited from his paycheck to the Barclays account.
He still has a checking account at the local bank, which is linked to his Barclays savings account. “I still like the security of a branch” that can provide him cashier’s checks and other amenities, he says.
Galloway says he doesn’t view the extra money he’s earning at the online bank as a windfall he can spend but as a supplement to his 401(k) plan and an emergency fund in case he’s ever laid off.
Give credit to the Fed
Online banks began providing 2% or more on savings and money market accounts about a year ago, McBride says. That’s because the Federal Reserve has lifted its benchmark short-term rate nine times since late 2015, including four times last year, as the economy has improved.
The rate, currently in a 2.25% to 2.5% range, was stuck near zero for years after the Great Recession of 2007-09. As the key rate – which is what banks charge each other for overnight loans – climbs, banks have more room to raise their rates for consumer and business loans as well as for savings accounts.
Since last July, “There have been two Fed rate hikes,” says Arielle O’Shea, investment and banking specialist for NerdWallet. “That has probably increased awareness that there are higher interest rates out there.”
McBride adds, “People slowly come to grips with new technology.”
So why haven’t traditional banks had to raise their rates to stay competitive? They’re flush with deposits and don’t need to attract more to make loans.
“They have the benefit of being the bank everybody knows, of being on every corner, of having a captive audience,” O’Shea says.
And since they made do with razor-thin margins – the difference between what they charge for loans and pay on deposits – when rates were near zero, they’re now making up for the lean times with fatter profits.
Some still wary of online banks
Online banks, meanwhile, can be more generous because their lack of physical branches means lower costs, O’Shea says. Also, she says, they’re the new kids on the block, hungry for deposits to finance loans.
Many people are still leery. A quarter said they haven’t switched to an online bank chiefly because they want to be able to go to a bank in person, according to the NerdWallet survey. Forty-five percent are comfortable with their current bank. Nearly one in five said they don’t trust online banks.
In a separate survey by Bankrate, 25% of those polled said they didn’t have enough savings to make it worthwhile.
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Mike Bash, 25, of Monroe, N.J., was a bit wary of online banks but had no qualms moving $5,000 from his local bank to American Express last November because of the company’s well-known brand.
“We all know who American Express is,” Bash, an accountant, says. “I’m not worried American Express is going to out of business.”
At his current 2.1% interest rate, he figures he’s earning about $9 a month in interest compared with the pennies he generated with his former rate of 0.05%.
“I didn’t think I was ever going to get rich from it,” he says. But it could help build savings for a down payment on a house so he can move out on his own.
“It’s more of a long-term thing,” he says.