Did you know that location is the single biggest reason consumers choose a bank? Despite pathetically low-interest rates – usually, just a hair above zero – depositors often choose convenience over earning much higher interest on their savings.
Local banks are well aware of this. The cost of maintaining a network of physical bank branches and the army of employees to staff them is the reason why the rates they pay on savings accounts are so low.
You don’t have to play that game anymore, and you shouldn’t.
The new trend in banking is online banks, paying much higher interest on savings accounts. If you’re not holding you’re savings with one of these banks, you’re losing money.
And not just a little. The higher paying online savings accounts are yielding at least 20 times more than the interest being paid at local banks.
Best online savings accounts overview
|Savings account||Best for|
|CIT Savings Builder||Learning to save|
|Discover Online Savings||Customer service|
|Ally Online Savings||Easy sign-up|
|Citi Accelerate Savings||High yield|
|PNC High Yield Savings||High yield|
In-depth analysis of the best online savings accounts
The typical online savings account, at least the high-yielding ones, are offered by banks that operate entirely online. That is to say, they have no physical branches anywhere.
But as more banks, including traditional brick-and-mortar banks, expand their online operations, there are some hybrids. These are banks that may have physical operations in certain states, but make their savings products available nationwide.
What makes me a fan of Chime is that with no fees and no minimum balance, you can start saving without even having to think about it. Plus, Chime truly blends their checking and savings options.
You’ll enjoy a free account when you sign up through Chime (there’s no opening deposit or minimum balance required). With your checking account, you’ll receive a Visa debit card. Every time you buy something or pay a bill using the card, the amount will be rounded up to the next dollar and the extra applied directly into your savings account.
You can also have up to 10% of your paycheck deposited to your savings account, and at 1.00% APY, you’ll be enrolled in one of the high-yielding accounts that is working to make sure your savings plan is getting a boost
CIT Savings Builder
The CIT Savings Builder is one of the best online savings accounts out there. You can earn 0.75% APY when you either maintain a $25,000 balance or deposit $100 each month into the account.
If the higher APY isn’t enough, there’s also no monthly fees or account opening fees.
Discover Online Savings
But the best part about Discover’s savings account is that you can earn 0.60%.
Ally Online Savings
Ally’s Online Saving’s APY is 1.60% with any balance. There’s a $0 minimum deposit, plus Ally charges no maintenance fees.
They, too, offer great customer service. They have 24/7 support via call, chat, or email.
Citi Accelerate Savings
Citi is one of the very largest banks in the country. But despite their size, they don’t have branch locations in every state. But they still make high-yield savings products available to consumers nationwide.
Citi Accelerate Savings requires that you share your location before they quote you the APY. There is no minimum opening deposit requirement, and you can access your funds at more than 60,000 ATMs across the US, even in states where Citi has no bank branches.
PNC High Yield Savings
PNC Bank – a major regional bank – operates primarily on the East Coast. But they make high-yield savings accounts available nationwide. The PNC Bank High Yield Savings also requires no minimum balance and is currently paying a 1.90% APY. The account also comes with no monthly service fees.
Summary of the best online savings accounts
|Savings account||APY||Fees||Minimum balance required|
|CIT Savings Builder||0.75%||None||$25,000 or deposit $100 monthly|
|Discover Online Savings||0.60%||None||None|
Ally Online Savings
|Citi Accelerate Savings||1.00%||None||None|
|PNC High Yield Savings||1.90%||None||$1|
About online savings accounts
For the most part, online savings accounts work similarly to savings accounts offered by local banks. The high-interest rates they pay aren’t a gimmick. They’re able to pay these rates precisely because many don’t have the network of physical branches that local banks do. This means they don’t have the operating expenses that come with branch networks, or the payroll costs for the employees to staff them.
But the bigger picture reality is that online banking has now become the industry standard. Virtually all banks offer it, but local banks continue to employ the hybrid approach, with both networks of local branches and online banking.
Here it’s important to emphasize that when you’re looking for the best online savings accounts, you’ll need to look very closely at the rates being paid by the banks you’re considering. Just because a bank has an online presence doesn’t mean they pay high interest. They have online banking, but if they’re only paying ridiculously low APY on their savings accounts, you should not be considering them.
There are plenty of online banks that are paying interest rates many times higher. And in my opinion, those are the ones you should favor.
How do online savings accounts work?
They typically have no physical locations
Online savings accounts are pretty much the same as savings accounts held at your local bank or credit union. The main difference between the two is that online savings accounts are usually offered by banks that either have few or no branches.
They work like any other savings account
But in most other respects, online savings accounts work like local bank savings accounts. You can deposit checks into your account – usually through a mobile banking app – and by direct deposit. You can make transfers into and out of other accounts with the same bank, or with other banks.
And while you won’t be able to go to a teller window at a physical branch to get cash, you can just as easily get it through an ATM machine. Most online banks – especially those without any physical branches – participate in large ATM networks. That will give you access to thousands of ATM machines across the country, usually fee-free.
APYs are not guaranteed but are usually constant
One fact you should be aware of with online savings accounts – or any savings accounts for that matter – is that the interest rates they pay are not guaranteed. However, you can generally expect that most online banks consistently pay higher rates than their local bank competitors.
If you look at the online savings accounts that are paying the highest rates now, they’re pretty much the same ones that were leading the pack a year or two ago. You can generally expect that trend to continue because that’s how these banks operate.
How to use online savings accounts
Exactly how you’ll use online savings accounts will depend on the services offered by the issuing bank.
Some online banks are full-service banks, offering checking and lending services. That being the case, you may be able to do all your banking with that online bank, while getting the benefit of high interest on your savings.
But in many cases, online savings accounts with high yields are offered by banks with more limited services. For example, it’s not uncommon for an online bank to not offer checking accounts. That’s because they specialize in high-yield savings vehicles, and may not offer other typical banking products, like checking accounts and loans.
If that’s the case, you can keep your checking account with your local bank, but hold the majority of your savings in a high-yield online savings account.
These accounts are particularly valuable for emergency funds or for savings earmarked for short- to medium-term savings goals. You’ll not only earn much higher interest rates than you can with your local bank, but you’ll be keeping the funds just beyond the reach of current spending needs.
That makes them an excellent way to segregate savings based on financial goals.
Pros of online savings accounts
Higher interest than you can earn at your local bank or credit union
FDIC’s Weekly National Rates and Rate Caps show the current yield on savings accounts at banks nationwide, but you can usually earn at least 20 times as much by keeping your money in an online savings account instead.
Losing out on rates like these are the price you’re paying for the convenience of keeping your money in a savings account at a local bank.
Cutting edge services
What online savings accounts lack in physical branches, they usually make up for in other ways. For example, online banks typically offer a wider variety of payment apps. Many enable you to pay with PayPal, Google Pay, Apple Pay or Samsung Pay. Also commonly offered are money transfer services, like Venmo or Square Cash.
It’s not that local banks never offer similar services. It’s just that online banks – being more technology-driven – offer them more frequently.
All banks are gradually transitioning to online banking. But the banks that are built primarily or entirely on online banking are just getting there first. And as they do, they’re adapting innovations much more quickly than their slower-moving local competitors.
24/7 access to your money
Since online banking is the basic foundation of online savings accounts, you’ll have the ability to access your account 24 hours a day, seven days a week. You can do this through a web app or a mobile app. And you can do it at 1 o’clock in the morning after your local bank has been closed for eight hours or more.
And it’s not just online and mobile banking. Because they have no physical branches, and only limited personnel, many online banks compensate by offering live customer service on a 24/7 basis. If you discover a problem with a deposit or a payment at 7:00 on a Saturday night, would you rather be able to call customer service right then and there, or wait for Monday morning at 9:00 – when you’ll probably be at work?
Easy transfers to and from other bank and investment accounts
While online banking can seem a bit exotic if you’ve always done your banking at a local bank, you should know that moving money in and out of your online savings account is incredibly easy.
Just as you can with a savings account with a local bank, you can link your online savings account with other financial accounts. That will enable you to transfer money between your online savings account and other accounts with the same bank. But you can also transfer funds to another bank, including your local bank checking account.
And for that matter, you can sync your online savings account to any investment accounts you have, for easy back-and-forth transfers.
Online savings accounts are FDIC insured
Like funds held on deposit at a local bank, your online savings accounts are fully insured by the FDIC. Each account is insured for up to $250,000 per depositor, per bank.
Cons of online savings accounts
No local branches
This is the major disadvantage of online savings accounts. But it has to be weighed against the much higher interest you’ll receive on your savings. And though you may not be able to walk into your bank branch and make a check deposit or withdraw cash at the window, in virtually every other respect you can use your account just as you would an account held at a local bank branch.
However, there are those times when you may need face-to-face contact. That may happen with a very complex financial transaction. But since those don’t come up often, that shouldn’t be an insurmountable problem.
Many online savings accounts, particularly those that pay very high interest, are offered by online banks that provide only limited banking services. For example, they may not provide checking accounts or loans, including credit cards. Also, very few provide small business banking services.
However, online banking is still evolving. Some online-only banks are moving toward full-service banking.
As online banking continues to expand, we should expect more online banks to become full-service banking institutions.
Limited deposit options
This really relates to the lack of branch operations. Obviously, you won’t have the option to walk into a branch and deposit a personal check into your account. There are even some online banks that don’t accept paper checks at all (though the number of those banks is falling fast).
And though some online banks do offer business banking services, small business owners may find it inconvenient to not have a local branch to go to for very specific services, like depositing a large number of checks, having a document notarized, or obtaining a bank signature guarantee.
Slow funds transfers
Funds transfers are sometimes slower with online banks than they are with local banks. This is particularly true with the depositing of checks or (especially) cash. The check clearing process may be slower with online banks by a day or two. But depositing cash is virtually impossible.
Online security risks
Since online savings accounts exist entirely online, the process is at the mercy of the Internet. If there are any disruptions, you may not be able to access your account.
But the truth is that really – the entire economy and financial universe are connected to the Internet. Any disruption will cause a problem, whether your savings are held at a local bank or an online bank.
Perhaps the biggest risk is the potential for identity theft. Since your banking will be done entirely online, there’s always the possibility of fraud, theft, malware, computer viruses, and other threats.
But once again those are inherent in the entire financial industry. Online banks, like local banks, will provide you with alerts against security breaches and other threats. Meanwhile, you can protect yourself by maintaining proper security on your computer and mobile devices.
All these threats also affect banking through local banks, but local banks often have hardcopy backup on accounts and specific transactions that may not be available with an online savings account.
Online savings accounts vs Certificates of Deposit (CDs)
Many of the online savings banks that offer high-yielding online savings accounts also offer high-interest money market accounts and CDs. In most cases, the money market accounts offered will pay interest rates comparable to online savings accounts.
But if you prefer to lock in higher interest rates for a longer-term, perhaps for a savings goal a couple of years in the future, CDs might be a better strategy. You can check out our list of the best CDs, but don’t be surprised if those are available at many of the same banks offering the highest rates on online savings accounts.
A good strategy to balance savings accounts and CDs is to hold a few month’s living expenses in an online savings account, just for liquidity. Setting up an emergency fund is always a good idea because you can hold funds in CDs for specific savings goals, like savings for the down payment on a house or a wedding. That will give you a solid mix of cash liquidity and an interest rate guarantee on your longer-term savings.
And you can still keep a checking account at a local bank for any services an online bank doesn’t offer. That’ll keep you covered on all fronts.
When looking for the best online savings account, you should be looking for an account that offers a high APY and also charges fewer fees. If you don’t mind trading in face-to-face time with a teller for more interest on your money, an online savings account may be right for you.