Sunday, October 08, 2006

The Emergence of Online Saving Accounts:

It seems everywhere you look these days in the investment community, there is another ad for an online bank offering very attractive rates in FDIC insured accounts. HSBC, ING, Emigrant, and even Washington Mutual have all sprung up online savings accounts. Because online accounts require no "brick and mortar" locations, they have minmal fixed costs to deal with. And, there is little advantage to one institution's online operations compared to anothers besides the rates they offer. This has led to vicious competition, with APYs reaching over 5%. This compares to under 1% offered by most "physical" banks. The accounts have practically no inconvenieces associated with them- money can be transferred from an online account to a regular bank account within three days and there is no additional fees.

The emergence of online savings accounts has big implications for customers and for investors. Personally, I recommend anyone with a sizeable savings balance to transfer excess money into an online account. I use Emigrant Direct, as it offers one of the most competitive rates with no minimums. E-Loan currently offers 5.50% APY, but requires a minimum of 5,000 dollars. With very little extra effort, you can add a hefty sum into your pockets. For investors, the internet seems to qualify as a disruptive technology. For the moment, checking deposits seem to be safe from online competition, but banks typically recieve most their deposits from savings. Overall, the cost of deposits will surely rise, eroding interest margins and increasing the risk for institutions. The internet can not destroy the traditional business model- their will always be a need for physical locations to deposit and withdraw. But as is usually the case, this increased competition from the internet will likely mean hard times are ahead for most banks.

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