An online savings account is an interest-paying bank account managed primarily through the internet. Customers open and fund their online savings accounts through a bank website rather than walking into a bank branch to conduct business in person. Online savings accounts may be offered by internet-only banks or by online divisions of traditional brick and mortar banks. These banks may also offer other accounts through the internet, such as checking accounts, but online savings accounts have an important competitive advantage: higher interest rates.
Online savings accounts, sometimes referred to as high-yield savings accounts, generally pay higher interest rates than traditional bank savings accounts. Online savings accounts can pay more interest because they have fewer overhead costs compared to traditional brick and mortar banks. When banks can service accounts without the expenses of maintaining physical locations to service those accounts, the banks can pass along the savings by paying their customers more interest. The higher interest does not translate as more risk. The major online banks are all FDIC insured, so online savings accounts are just as safe as traditional bank savings accounts.
The higher interest rates offered by online savings accounts are more attractive, but they do not attract all banking customers. When it comes to saving money, some people feel more comfortable using their local bank down the street. They like the idea of walking into a branch location and talking with a live person rather than clicking through the bank website and seeing confirmation messages. However, the later scenario is becoming more common as technology advances. With credit cards, debit cards, direct deposits, and online bill pay, money is becoming more electronic, and online banking is becoming more popular.
As mentioned before, online savings accounts may be offered by internet-only banks or by traditional brick and mortar banks; however, the operation of the two may be indistinguishable. The traditional banks usually establish separate divisions to service the accounts offered exclusively online. In most cases, the online accounts cannot be serviced from the bank's physical branch locations. In addition to the web interface, customers may be able to access their accounts through ATM machines or by calling bank representatives, but they will not conduct business face-to-face with the bank.
FDIC-insured online savings accounts are a great choice for short-term savings or emergency fund savings. At this time, online savings accounts are earning higher interest rates than many money market funds, which are not FDIC-insured. High-yield certificates of deposit may offer higher interest rates, but of course, they are not as liquid as savings accounts. If the individual wants to earn maximum interest on liquid savings with guaranteed principal, online savings accounts may be the best option.
Click here for a list of popular online savings accounts and their interest rates.
