Dec 19 When the online banking site
SmartyPig.com dropped its savings interest rates yet again
recently, many of the institution's goal-oriented savers - who
joined up to get better interest rates on their cash deposits -
watched in dismay.
As one of the bigger names in that space, SmartyPig was
taking a big step to drop its yield below a line with symbolic
meaning: 1 percent. It was the third time since August 2010,
when the website (which places savings accounts at BBVA
Compass, an FDIC-insured bank) was offering 2.15 percent on
savings, that it has cut rates.
Interest rates these days are puny, but the latest decline
- from a leading position at 1.1 percent to 0.7 percent -
rubbed SmartyPig customers the wrong way. SmartyPig's own blog
was filled with angry comments from users.
"This is terrible. I've recommended SmartyPig to friends
time and time again, and successfully sent some customers your
way," one customer wrote. "But now, it's time to move. My
typical bank now offers more competitive rates. I didn't join
SmartyPig all that long ago, and I remember it at 2.65 percent.
SmartyPig spokeswoman Sarah Foss wouldn't comment on the
latest drop or the fallout. But the move is emblematic of what
a lot of other online banks are experiencing. ING Direct
dropped its rate to 0.85 percent earlier this month after
lowering it from 1 percent to 0.9 percent just a bit over a
month earlier. Depositaccounts.com lists only eight banks now
paying 1 percent or more on savings accounts, topped by UFB
Direct at 1.3 percent.
While a lot customers are complaining, Internet banks
aren't folding up and going away any time soon. "It takes a lot
for a customer to actually switch banks," says Jacob Jegher,
senior analyst in research firm Celent's banking group. As
unhappy as consumers might be with the interest declines, he
doesn't see any major shift coming.
In the first place, online banks still tend to offer higher
interest rates than can typically be found at their
brick-and-mortar counterparts. A common basic savings rate at
the biggest brick and mortar banks is 0.05 percent, based on a
Reuters review of the published rates of several major banks.
On a $10,000 deposit, the difference between earning 1.3
percent interest ($131) and 0.05 percent ($5) over one year is
When consumers do the math and realize there's little to be
gained by shifting their small accounts to pick up half a
percentage point or less, they'll stay put to avoid the hassle
of shifting accounts. "What would be the incentive for the
customer to switch?"
So instead of focusing on their puny rates, online
financial services companies are hyping their lack of fees and
aggressive cash-back and rewards programs. Fees can add up. On
checking accounts at regular banks, for instance, Bankrate.com
estimates the average account comes with $170 a year in fees,
so an online account that offers totally free checking can be
worth more than a fraction of a percent more in interest,
especially to small savers.
Still, the numbers sting some customers. Cynthia Nevels,
who runs a Houston, Texas, management consultancy, says she had
been saving the maximum insured amount ($250,000) on ING Direct
bank because of the advantageous rates, but the last interest
rate drop on top of the company's impending sale to Capital One
is too much to ignore.
"It just really rubbed me the wrong way to be reducing the
rate once again," she says. "Their expenses aren't necessarily
going up or increasing." But Nevels hasn't actually moved her
money yet. She says she'll find another online bank to shift
her money to when she gets around to it.
IT'S ALL RELATIVE
Of course, there isn't any bank now paying the 4 percent or
better interest rates that used to be everywhere pre-credit
crash in 2006. Greg McBride, senior financial analyst
Bankrate.com, says consumers shouldn't focus on the interest
rate declines or think online banks have lost their edge. It's
all relative, given that lending rates are also at all-time
"Online savings accounts are still at the top of the heap,"
he says. "The banks that have the most aggressive payouts now,
even though the numbers are low, are likely to pay out higher
returns once interested rates start to go up."
Dan O'Malley, CEO of PerkStreet Financial, is banking on
consumers buying into his company's model of getting cash back
from spending using debit cards tied to PerkStreet accounts.
(Like SmartyPig, PerkStreet is an online financial services
company that has ties to an actual bank; in this case it is
Bancorp Bank in Delaware). PerkStreet offers only checking
accounts and pays no interest; just cash back. And he sees the
industry moving more in that direction.
"Savings account are a gigantic misnomer. They don't help
people save," he says. "You've seen some banks launch the
ability to get deals with specific merchants. That's a great
From a marketing point of view, O'Malley sees bigger
benefits in rewarding people for spending, instead of trying to
compete on interest rates for small accounts. "The average
person in the US doesn't have that much sitting in their
checking account," O'Malley says. "We wanted to create a
checking account, really a whole banking relationship, built
around giving them cash back."
Frank Trotter, president of EverBank Direct says
online-only institutions retain their advantage of lower
overhead and, as such, should provide better rates, less
reliance on fees and other consumer-friendly
"Looking at the market as a whole, online banks are
continuing to provide some of the best value for savers across
the board," he says. "As we survey checking and money market
account rates nationwide, there are very few banks that are
saddled with an expensive branch network that appear to even
attempt to be competitive for rates."
The author is a Reuters contributor. The opinions expressed
are his own.
(Editing by Linda Stern and Beth Gladstone)