In recent weeks, online bank savings APYs have plummeted. Our five favorite online savings accounts — Ally Financial Online Savings, American Express Bank, FSB. High-Yield Savings, ING Direct Orange Savings, Discover Online Savings, and SmartyPig Savings — have all dropped their annual percentage yields by a substantial amount, shedding basis points like it’s going out of style.

From our basket of five online savings accounts, 131 basis points have disappeared from aggregate APY in the last six months — an average of 26 basis points per account. The biggest loser was former industry leader SmartyPig, which boasted a 1.35% APY in early June; starting December 9th, SmartyPig’s savings product will offer only 0.70% APY — a 65 basis point loss. 

Ally Financial, formerly GMAC, offered a more stable savings product; their online savings account only dropped from 1.00% APY to 0.89% over the second half of 2011.  See the table below:

BankDec. 2009 APYJun 2011 APYCurrent APY
American Express Bank1.70%1.15%0.90%
Discover Bank1.75%1.15%1.00%
ING Direct1.30%1.00%0.85%

[Compare more rates with our Savings Account Rate Comparison Tables]

Looking at the data from two years ago, though, it’s hard for savers not to be disappointed by the precipitous decline in online savings yields. The basket, as a whole, has lost 400 basis points over the last two years, an average of 80 per account. Note that 1/3 of that decline in rates has accrued over the last six months — the downward trend has been speeding up a little bit in recent months.

Why Are Rates Dropping?

Annual percentage yields correlate with Fed interest rates and market conditions. Currently the Fed is keeping money very cheap and the market is much too risky for smaller investors. Because money is so cheap right now, banks don’t have to pay you that much for the privilege of holding on to your money for you, and because the market is so volatile, people are putting their money in savings instead of the stock market.

Why would a bank pay you a lot to save your money with them if a) you’re going to do it anyway and b) market rates are so low? This is why your online yields have gone so low. But that poses a serious problem to their business model, which is predicated on high interest yields — not just high relative to megabank APYs, but high.

Do Online Banks Have a Problem?

When online banks launched they had so much promise for savers. Sick of paying for megabanks’ massive brick-and-mortar infrastructure in the form of low yields, savers had the option to avoid this by putting their savings in an online bank. It’s pretty inconvenient to withdraw cash from on online bank for obvious reasons, and when their APYs drop so low it calls into question how useful it is to save with them.

Has the decline hit a floor? Or does it have further to fall? That’s hard to say. The Fed announced back in August that they would be keeping rates low until 2013. If markets get more stable and people start moving their money out of cash, back into the markets, banks will have to compete once again for your savings dollars by raising rates.

So is it worth it to stick around? Unfortunately, in this case, the markets are usually right. Compare your 0.70% APY with SmartyPig to the 0.05% you get with Bank of America®, and you might opt to stick it out. At least online banks respond to market forces, unlike megabanks, who don’t have to bother.

Or, put your life savings into the stock market while the Eurozone is on the brink of collapse and let us know how that works out for you. It’s your money.

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  • serend

    I’m kind of surprised you don’t include some Credit Unions with higher rates, especially with all the praise Credit Unions have been getting lately.
    Alliant Credit Union is open to anyone (after a $10 donation to Foster Care for Success)Current rates:Savings 1.15 APYChecking 1.10 APY

    • Willy

      There are 7,600 credit unions in the United States. I don’t disagree that those are some great rates, but I think you shouldn’t be so shocked we didn’t arbitrarily shoehorn five or six credit union rates into a story about online banks.

      • serend

        Oh, I understand that there are a heck of a lot of options to sift through, and the point of this article isn’t to illustrate who has the best rates.  

        I was more focused on the line in the intro paragraph, talking about “our five favorite online savings accounts.”  With all the positive articles about Credit Unions, I think some of the larger, more accessible options deserve a look.

        The reason I mentioned Alliant specifically is because it is nationally available.  They are based in Chicago, but anyone can join online.  They also offer a lot of the same “perks” as the other guys-  Free checks, co-op + allpoint ATMs are free, deposit at home, sub-savings accts, etc.

        • Right on, serend. That’s a good point. I think we’ll be following up on this, so thanks for the lead.

          • serend

            Now if only they had a referral link 😛

            • Alex Matjanec

              Seriously, Alliant CU needs to start showing some love.

  • Shawn Knutson

    I agree with serend. Alliant Credit union offers great rates on checking and savings products. They also offer great customer support and loan rates. I would like to see more articles that include the big picture and not tied to just banks.

    • And I don’t disagree with serend on the matter of whether Alliant Credit Union offers great rates on checking and savings products. But the fact of the matter is that the vast majority of credit unions are local and this makes it harder to tie them to a conversation about nationally available products. But this would make a good second story on the topic. Stay tuned.

  • Dillon Davis

    Why not HSBC Advance, they offer a .80%, have mega AHC allowance, and one of the, if not the most secure online sign-on sites.  Just curious? 

    • Well that’s a few basis points lower than 4 of 5 in the basket, and it’s part of a brick-and-mortar bank. So, you know, kinda doesn’t fit.

  • Rocky2

    Consumers Credit Union in Illinois is currently offering 4.02% on their Rewards Checking Account up to $10,000 which only 12 debit (actually credit) card transactions per month.  I am from Ohio and all you need to do to become a member is deposit $5 to a special charitable fund they promote.  The rates are great, the people are superb to do business with over the phone, and many perks and discounts are available including discounts on cars, loans, etc.

  • There are a lot of institutions that should be showing love.  Many get free press as bloggers add content highlighting them.  But such is the world.  Rates will also likely continue to erode.  The longer fed funds is held at basically zero, the more likely rates will approach them.  The only thing you can really hope for is some supply and demand to kick in. 

    If loans pick-up banks will need money, then they will need to start paying a little more to attract deposits.