People looking at a free online savings account have to be asking themselves, “Is this a scam?” I mean how on earth can a bank afford to offer a free online savings account when every other bank is charging me fees up the yin yang just for the privilege of allowing them to hold MY money.
Online Banks Have a Lot to Gain from Nationwide Savings Deposits
Online banks specialize in managing the short term deposits of customers like you and I. They have become specialists in understanding and predicting the cash flow needs of consumers willing to leave their money in a bank that is not local. Savers who go online looking to open a free online savings account are more likely to treat that deposit like a CD – ie. not touch it for an extended period of time. The longevity (length of time) deposits stay in online accounts is usually considerably greater than that of local accounts. As a result the online bank has a greater ability to pay higher interest rates and offer the accounts without service charges.
What Is the Catch? There Must Be Some Reason Online Savings Accounts Are Free
The catch is online banks know it is inconvenient for depositers to store cash in accounts away from home. It’s that simple. An account at your local bank can be accessed at any of the ATMs your local bank has near you. The same can not be said for an online bank. If your online account has a brick and mortar branch near you that is one thing (don’t count on it), but in most cases access to your funds is delayed at LEAST a day or two if you want to transfer money for free (same day wires cost $15-$25 depending on your bank). A free online savings account which pays a higher interest rate is designed to draw your money into a longer term / relatively low interest (in the bank’s eyes) deposit in exchange for you being inconvenienced by the delayed availability of funds.
It Is a Win-Win Scenario for You and the Bank
The reason the free online savings account model works as a win-win scenario for both you and the bank is that you receive a higher floating interest rate on your deposits, and the bank receives your deposit on a longer term basis – which represents a source of lower cost financing for them. An online bank, like any other bank, has the ability to use your deposited funds to make investments an earn a return on the money they technically borrow from you. Because your online deposits tend to stay in the account for a longer period of time, the bank can expect to be able to invest your money for a longer period of time as well. This allows them to offer free accounts AND pay you a higher interest rate. It’s a win-win situation.
Free Online Savings Accounts Are Not a Scam
Whether you decide to open an online account or not, you can rest assured that a free online savings account is not some sort of bait-and-switch scheme. There are legit reasons online banks can offer free accounts and good rates.