Why Online Savings Accounts can offer Higher Interest

There is a pretty good chance that you have seen the ads for the online banks that promise an interest rate that is substantially higher than the one being offered by your regular bank. Did you ever wonder why they are able to offer an interest rate that is so much higher? After all it is not like it is slightly higher the interest rates offered by an online bank can be more than double those offered by your regular bank.

The main reason that online savings accounts can offer higher interest rates is that have a lot less overhead. Between not needing to maintain a physical branch and having far fewer employees it costs a lot less to run an online bank than it does to run a regular bank. These savings are then passed on to the consumer in the form of higher interest rates on the savings accounts that they offer. Since the savings of running an online bank can be substantial it is not at all uncommon for the interest rates to be more than double those offered by a regular bank.

Even the banks that have regular branches are now offering online banking that comes with higher interest rates. The reason here is the same as for banks that are exclusively online, it costs them less. Even though these banks still have to maintain a branch they still save money with online accounts since it requires fewer employees. Therefore you can likely find a high yield online savings account at the bank that you are already doing business with; it may be a good idea to switch over.

One of the reasons that online banks offer higher interest rates on their savings accounts is that they have to. The banking world is very competitive and the online banks are at something of a disadvantage by not having a physical branch that you can visit. This can make attracting new customers a bit of a challenge. In order to get around this they usually need to offer the better interest rates to get new customers. Since most people are not going to go to the trouble of opening a new account for a slight increase in interest rates they usually have to offer rates that are substantially higher.

Part of the reason that online banks have trouble attracting customers is that it can be a hassle to get your money out of an online bank. Usually they don't have their own bank machines which mean that you will have to make your withdrawals through another bank. This is a fairly minor inconvenience but it does tend to result in people making fewer transactions with their online account. That means that the money deposited in an online bank account tends to stay there for a longer period, which is good for the bank and tends to attract a higher interest rate.