In recent weeks, online bank savings APYs have plummeted. Our five favorite online savings accounts — Ally Financial Online Savings, American Express 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:
Bank Dec. 2009 APY Jun 2011 APY Current APY
Ally 1.59% 1.00% 0.89%
American Express Bank 1.70% 1.15% 0.90%
Discover Bank 1.75% 1.15% 1.00%
ING Direct 1.30% 1.00% 0.85%
SmartyPig 2.00% 1.35% 0.70%
[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.