By Brooke A. Masters
Washington Post Staff Writer
Sunday, May 21, 2006
Who says Americans don't save?
Right now, consumers are flocking in enormous numbers to Internet-based bank accounts that pay interest rates upwards of 3.5 percent.
ING Direct, the market pioneer, has $60 billion in assets and is adding $1 billion in deposits each month. HSBC Bank USA's deposits in this type of account shot up to $3.8 billion from $1 billion in the first quarter. Citibank, which began offering high-yield savings accounts on March 29 with the hope of gathering $4 billion by year's end, now expects to hit that target months earlier than expected.
These big financial conglomerates also have dozens of smaller competitors. Some are local thrifts, such as Emigrant Bank in New York, which has $6.5 billion in Internet deposits and only $4.5 billion at its 36 land-based branches. Others were founded to do business in cyberspace, such as Bank of Internet, which is based in San Diego.
But they all have several key things in common: They use the Internet to offer accounts, insured by the Federal Deposit Insurance Corp., that pay far higher interest than is usually available at brick-and-mortar bank branches.
The rates rise and fall with the bank-to-bank lending rates set by the Federal Reserve Board and currently hover between 4 and 4.75 percent, depending on the institution. A few institutions offer higher rates but require minimum balances of $50,000 or more.
That stands in contrast to the average interest-bearing checking account, which currently pays 1.06 percent, while money-market accounts pay 3.16 percent on average, according to the Web site Bankrate.com.
Consumer advocates and financial planners can't say enough good things about the Internet-based accounts.
"When you compare them to the alternatives, money-market funds and mutual funds, these are 100 percent safe up to" the $100,000 limit for FDIC insurance, said Stephen Brobeck, executive director of the Consumer Federation of America.
His organization calculates that more than $1 trillion is currently stashed in bank accounts that pay 1 percent or less. "Going from 1 percent to 4 percent, what's not to like?" Brobeck asked.
These accounts "are perfect for cash reserves," said Gordon Bernhardt, a McLean financial planner who routinely advises clients to keep enough cash on hand to cover three to six months of living expenses.
Unlike certificates of deposit (CDs) or mutual funds, to which investors may have to pay a penalty to withdraw their money early, Internet bank accounts are extremely liquid. Some institutions, such as HSBC, allow investors instant access to their money using an ATM card. Others require depositors to wire the money to their regular checking account, which can take up to three days.
Many of the accounts have no minimum balance requirements and charge almost no fees. ING Direct -- which does not offer ATM cards -- has no fees at all. Bank of Internet goes one step further: It will reimburse customers up to $8 a month in fees paid to other banks to use their ATM machines.
The banks are able to make these deals available for two key reasons: internal cost-savings and rising interest rates. Since June 2004, the Federal Reserve has slowly boosted its core lending rate from 1 to 5 percent, enabling banks to increase the interest they offer to savings accounts and certificates of deposit. The online application and money-management processes mean that customers do most of the work themselves, cutting overhead for the banks.
"We have $700 million in assets, and we have 25 employees," said Bank of Internet chief executive Gary Lewis Evans. "The typical bank would have 150 employees in lots of branches."
For many of the banks, online accounts allow them to attract customers in areas where they do not have a physical presence. HSBC, for example, has 428 branches, but 80 percent of them are in New York state, and even Citibank operates in only 10 states and the District of Columbia.
"The bet is that you will be so thrilled how easy it is to bank with us that you'll want a home equity loan," said Catherine Palmieri, managing director of Citibank.com.
The potential market is enormous. In addition to the more than $1 trillion already sitting in low-interest accounts, the Internet banks hope to reach out to the many Americans who have ditched their savings accounts in recent years. Between 2001 and 2004, the share of U.S. households that had savings accounts dropped 8.1 percent, to 47 percent, according to the Federal Reserve.
But many Americans may be willing to return to savings accounts now that rates are higher and the online application process is so easy. Several of the biggest competitors brag that their application process can be completed in less than 10 minutes.
"We see anyone that pumps their own gas as a potential Internet banking customer," said Bank of Internet's Evans. "Banking is a commodity."
Still, there are barriers.
First of all, it's not clear how much money Americans really are willing to devote to savings. The nation's overall personal savings rate has dropped to -0.8 percent in March from 4 percent in the mid-1990s. Americans have been spending more than they earned since the second quarter of 2005.
"Americans have been caught up with consumerism and spending. . . . Our vision is to lead Americans back to saving by simplifying financial processes," said ING Direct chief executive Arkadi Kuhlmann. He said 30 percent of his customers have a monthly savings plan in which they automatically transfer money to their account.
Although consumers are becoming more accustomed to using the Internet to shop, renew library books and other basic functions, many are reluctant to trust it with their money. An earlier round of Internet banks went belly up in the late 1990s for exactly that reason. ING, a Dutch financial giant, encountered significant skepticism from banking analysts when it first began to offer online savings accounts in 2000, Kuhlmann said.
This time, the bankers say, they think consumers will be more ready to move their money online.
"The security and the integrity of the Internet today is vastly superior both in terms of speed and in terms of security than it was in the 1990s," said Howard P. Milstein, chief executive of Emigrant Bank. "We take security very seriously, so we're constantly trying to be a little bit better," he said, adding that Emigrant is about to require customers to have 10-digit passwords, rather than eight, to make accounts that much harder to break into.
In addition, many of the banks offering Internet accounts have scaled back their expectations. Unlike 1990s offerings such as Wingspan Bank, most of today's online banks don't expect their customers to give up on tellers and the real world entirely.
Many of them, including Emigrant, HSBC and ING, offer only savings accounts online because they expect customers to keep their primary checking account.
"It may be that, in time, customers will pick and choose: I'm going to a particular branch bank for the service . . . but I'm going to go somewhere else for my savings," said Kevin Newman, head of personal financial services for HSBC.
Citibank has taken the opposite tack -- it requires customers to open a checking account as well as a savings account but then allows online account holders to use the windows at its 900 branches.
Internet bank accounts may also seem more attractive right now because of the current fluctuations of the stock and bond markets. Bond yields have been low, and bond mutual funds may shed value if interest rates rise. The best-known equity index, the Dow Jones industrial average, this month climbed within 100 points of its high and then plunged 400 points over the next week. Similarly, the Nasdaq Composite Index has given up all its gains for the year in the past two weeks.
In addition, many financial planners are reluctant to recommend longer-term CDs because they think interest rates are likely to rise further. "These days, it really doesn't hurt to be sitting in cash," said Joan H. Herrett, an Annapolis-based planner with Ameriprise Financial.