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What's the catch? That's what we have been taught since day one
of our lives. The truth is that online savings accounts are much
better products and interest bearers than offline savings accounts.
The main reasons being:
1. Customer Support is Cheaper for Banks-
The cost of supporting an online customer is a fraction of the
cost of traditional bank products. They don't have to pay a person
to sit in a branch that has 1000 accounts to see you twice a month.
Instead they create a call center that can manage millions of accounts,
from one or several satellite facilities. Not to mention the fact
that most of these jobs are outsourced overseas. So on top of the
facility costing nothing in comparison, the workers are making pennies
on the dollar.
2. Electronic Money Doesn't Require a Ten Ton Vault and Armored
Guards in Hundreds of Locations-
Electronic Funds are much more scalable for any financial institution.
They can hold more money, assuming they can cover the liabilities.
They can accommodate more customers. All of this with less overhead
and less fuss on their end. Banks pass this savings on to you by
offering you a better rate. Based on the size of the bank they can
only accept X number of accounts. Basically a financial institution
must have cash on hand to cover all of the accounts it has. This
is in addition to paying for insurance on the account volume. As
they gain more accounts, they gain more money. This means more cash
they have to keep on hand and a higher premium to their insurance.
This also means more loans that they have to close, so that they
can make money off of your money. So in affect, banks try to find
a sweet spot as far as the number of accounts they provide for consumers.
They try to find a nice margin for themselves.
When a bank first offers an online savings account, they'll give
a great rate. As a result of the great rate, thousands of new accounts
will be opened. The bank will then come close to its margin and
try to slow people down from signing up. To do this, they will decrease
the rate of return to consumers. The signups will slow down and
they'll stay close to their margin. This works like clockwork in
off-line accounts.
But, in the online world; banks are starting to see that people
are not loyal to brands. People are loyal to rates. When a rate
drops and stays low, current account holders withdraw their account
and move to a better rate at another bank. Online banks are now
forced to try to keep better and more stable rates. In fact, this
is why I have created this site.
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