Online Savings Accounts
While many online banks afford their customers with full Federal Deposit Insurance Corporation (FDIC) coverage, nearly all of these entities offer higher savings account interest rates than traditional brick and mortar banks. Despite the fact that these are often labeled “high yield” savings accounts, which may connote the same level of risk associated with high yield or junk bonds, these accounts are no more risky than other savings accounts. Certainly during this period of high economic and financial turmoil, when the very safety of the banking system seems to be regularly called into question, ensuring that one is dealing with a “healthy” financial institution is important. However, online banks offer attractive savings rates for a couple of key reasons, neither of which is as sinister as some would like to suggest.
One of the reasons that online banks are able to offer higher interest rates is that their cost structure is lower so they are able to pay out more than their traditional brick and mortar competitors. Without the need to maintain multiple physical locations, or to employ the various staffs to keep these locations operating, a greater percentage of the profits that these institutions generate may be paid out to customers without sacrificing the long-term viability of the enterprise.
The other reason that online banks often pay higher savings rates is that they want and need to attract understandably hesitant customers to their organizations. The loss that they suffer as a result of paying the higher rate is a calculated cost of growing their business to a more sustainable level. This is known as a loss-leader and dates back to the first free-toaster-with-every-account-opened offer that banks have been making for decades.
