Since the Federal Reserve announced last month it would begin tapering its monthly bond-buying program called quantitative easing, economists and consumers have been speculating about what it means for interest rates.
One of the hottest financial questions of 2014 has been: Will interest rates rise this year, and by how much?
Unfortunately, the answer probably isn't what most people want to hear. Pulling back on QE will cause long-term interest rates to rise, and short-term rates to remain very low. For depositors, it means their deposit accounts like savings and certificates of deposit will continue to pay practically nothing. That is, except for customers of online banks.
Federal Reserve Chairman Ben Bernanke, who steps down today, said last year the Fed would not raise the federal funds target rate (the interest rate banks charge each other for overnight loans) until the unemployment rate falls well below 6.5 percent. According to a recent poll by Bloomberg, only four of 65 economists believe that will happen before 2015.
Obviously, we all want to get the best interest rates possible, but banks are somewhat limited in how high their yields can go until the Fed raises that overnight rate. Considering it may be a few years before we see rates climb back to pre-recession levels, what's really key in 2014 are low fees and heightened convenience. While many local banks and credit unions strive to stand out from their big bank competitors by offering account holders exactly these perks, online banks are created to provide the highest rates, lowest fees and smoothest service among financial institutions by operating solely via the Web.
Advantages of online banks include:
- Easy maintenance: Performing account transfers, updating personal information, making payments and checking the status of transactions and balances can be done easily from home without the need to visit a branch.
- Unlimited access: Limited hours or branch closures on weekends and holidays aren't an issue with online banks. Most operate 24/7, every day of the year. Additionally, customers who appreciate human interaction can talk to a live person by calling customer service, which is also available any time of the day or night.
- Higher yields, fewer fees: A lack of physical branches means online banks can return major overhead cost savings to their customers in the form of fewer fees and some of the highest interest rates available today on deposit accounts like savings and CDs.
- Better Web and mobile features: Because online banks function exclusively on the Internet, greater resources are dedicated to improving their sites, mobile apps, tools and other technological features. Whereas a conventional bank's website and features may be an afterthought, online banks prioritize these above all else.
- Greener banking: Banking via the Web eliminates a lot of waste – everything from stacks of paper traditional bank customers receive in the mail to the pollution generated from customers driving to and from bank branches.
Top Online Savings Options for 2014
Of course, like all other financial institutions, online banks differ from each other in terms of rates and services offered; not all Web-based banks guarantee the above benefits. It's imperative that depositors looking to open a new online account be cautious about where they put their money and ensure they're joining reputable institutions.
Based on qualities such as few fees, low minimums, high rates and excellent customer service track records, gobankingrates.com recently reviewed the bank accounts currently available from online-only banks to rank the best options for depositors in 2014.
Best Online Savings Accounts
1. American Express: No minimum opening deposit, no minimum balance required, no monthly maintenance fees, 0.85 percent APY
2. Discover Bank: $500 minimum opening deposit, no minimum balance required, no monthly maintenance fees, 0.85 percent APY
3. Barclays Bank: No minimum opening deposit, no minimum balance required, no monthly maintenance fees, 0.90 percent APY
Best Online CD Accounts
1. Ally Bank: No minimum opening deposit, no monthly maintenance fees, 0.95 percent APY
2. GE Capital Bank: $500 minimum opening deposit, no monthly maintenance fees, 1 percent APY
3. CIT Bank: No minimum opening deposit, no monthly maintenance fees, 1.02 percent APY
Also ranked highly were CIT and Ally Bank for their online savings accounts, as well as Discover Bank and GE Capital Retail Bank (a separate institution from GE Capital Bank under the General Electric umbrella) for top-tier online CD products.
Online banks can provide a number of advantages over traditional, brick-and-mortar banks, especially when it comes to their savings options. Even so, online-only bank accounts aren't for everyone. If you're looking for the most value and convenience out of your banking experience, an online account could be the perfect match. However, those who manage complex daily transactions or prefer one-on-one, in-branch service are probably better off sticking with a physical bank or credit union.
Casey Bond is the managing editor of gobankingrates.com, a source for the best savings account rates, CD rates, personal finance news and more.