Online banks lead the way in high-rate savings accounts

By Nick Clements / MagnifyMoney.com 

After years of record low interest rates, a deposit pricing war has finally started. Rates at digital banks are up more than 70 percent over the past year. Sadly, competition is absent at traditional bank branches. Bank of America (BAC), one of the nation's largest banks, still pays only 0.03 percent on its standard savings account.

But if you shop online for the best savings accounts, you can easily find much higher interest rates. Goldman Sachs (GS), famous for servicing the world's biggest companies and wealthiest individuals, launched an online bank called Marcus that welcomes people with a minimum deposit of $1. Its savings account pays a generous 1.80 percent APY, up from 1.05 percent a year ago. Goldman is facing intense competition from a number of other big players with deep pockets.

Credit card issuers are increasingly using internet-only savings products to help fund their lending portfolios. American Express (AXP) pays 1.75 percent on its savings account. Synchrony (SYF) and Barclays (BCS) also have online savings accounts offering 1.75 percent. Synchrony issues store credit cards for companies like Banana Republic. Barclays is most famous for its American Airlines (AAL) co-brand credit card.

Also paying 1.75 percent is Ally Bank, which is trying to make branch banking obsolete. In addition to a highly competitive savings account, Ally offers a free digital checking account, an integrated online brokerage, credit cards and mortgages. For people looking to leave their branch bank completely behind, Ally offers one of the most complete product sets.

It's not a coincidence that the interest rates are so similar at the leading banks. Over the past year, one institution will typically lead with a rate increase, and then everyone else will quickly follow. Competition is driving up rates.

But the competition isn't limited to big players. A number of smaller regional banks have created internet-only brands to raise deposits outside of their service area. SalemFive Direct is offering an online savings account that pays a 2.05 percent APY. The internet bank is a division of SalemFive, a traditional community bank based in Massachusetts. Ironically, if you visited one of its branches, you would earn only 0.05 percent on its standard Statement Savings Account.

How much more can I earn online?

For a customer with a $25,000 deposit, the difference can be dramatic. The Bank of America savings account would generate $7.50 of interest over one year. At Marcus by Goldman Sachs, the same deposit would generate $496.

Why can internet-only banks pay such high rates?  

Because they don't have branches, their costs are dramatically lower. Digital banks pass the cost savings along to customers in the form of higher interest rates.

Is it safe to keep money at an internet-only bank? 

All of the banks mentioned here are FDIC-insured, which means your deposits would be insured up to the legal limit. Cybersecurity is a concern, but it's not unique to digital banks. All banks now offer online banking and are susceptible to attack. The existence of a branch doesn't make your digital information safer.

Nick Clements is a former banker turned consumer advocate and co-founder of the personal finance and lending information website MagnifyMoney.com by LendingTree