Why the best high-yield savings account may not come from a bank with a local branch

Looking for a high-yield savings account?

According to Motley Fool’s The Ascent, your best option right now might be SoFi, an online bank founded by Stanford business students. In The Ascent’s May report on high-yield savings, SoFi offers annual interest rates up to 4.6%.

WalletHub’s top pick is My Banking Direct, an online subsidiary of the recently embattled New York Community Bancorp. The personal finance site says My Banking Direct offers 5.55% interest.

In an era of historically high interest on savings accounts, many of the best rates come from banks that do not have a branch at the local strip mall.

Interest rates of 4% to 5% have become the norm on “high-yield” savings accounts in the past two years in response to the Fed’s dramatic campaign of interest-rate hikes to curb inflation. Those lofty rates should persist for the foreseeable future after the central bank left its key rate unchanged at a 23-year high on Wednesday.

Protect your assets: Best high-yield savings accounts of 2023

That said, not all savings accounts pay such high interest. As of April, the average national yield on such accounts was 0.57%, according to an institutional survey by Bankrate.

To cash in on those historically high rates, a consumer has to do some hunting.

Many of the best high-yield savings rates come from online banks

Many of the best rates are from online banks, institutions that operate online, with few or no brick-and-mortar branches.

My Banking Direct, a New York Community Bancorp subsidiary, offered the highest rate on Bankrate’s table of high-yield savings accounts last week, according to Ted Rossman, senior industry analyst at the personal finance site.

“Is that an online bank or a brick-and-mortar bank? It’s kind of both,” he said, “but it has a much bigger reach online.”

The second-highest interest rate on the Bankrate list, 5.35%, came from BrioDirect.

“That’s actually the online version of Webster Bank,” a brick-and-mortar bank in Connecticut, Rossman said.

Online banks can offer some of the highest interest rates in the industry because they have lower overhead costs than big brick-and-mortar banks, industry experts say. Banks with lobbies and tellers cost money to operate.

Online banks have lower overhead costs

Many online banks can afford to pay high interest to depositors because they are collecting even higher rates from borrowers.

“Online banks generally specialize in higher-yielding loan products,” said Matt Frankel, a certified financial planner with The Motley Fool.

Ally Bank, an online bank with competitive rates on savings accounts, is largely an auto lender, Frankel said, with loans that fetch double-digit interest.

“If they’re paying 5% on deposits,” he said, “that’s still a really big margin.”

Some of the nation’s largest brick-and-mortar banks offer competitive rates on savings accounts. CapitalOne, for example, offers high-yield savings at 4.25% interest.

But many other big banks do not.

“They just don’t feel the need to be competitive, is the simple answer,” said Odysseas Papadimitriou, CEO of WalletHub.

Big banks enjoy one big advantage over their smaller online rivals: They already have your business.

People bank where their parents banked

Many consumers stay with the same large bank for decades. They often bank where their parents banked.

Changing banks is tricky: Direct deposit, online bill-pay and other routines go out the window when you switch banks. And customers count on those bank branches, even if they don’t visit them often.

“Consumers often will just stay with the bank they’ve been at their whole life and not shop around,” said Kimberly Palmer, a personal finance expert at NerdWallet, the personal finance site.

Consumers might think their money is inherently safer in a big bank if it's FDIC-insured, "which is not true," Papadimitriou said. "Your money is not any more secure there than it is at any other bank that is FDIC-insured in the United States, period."

Two-thirds of Americans with savings accounts earn less than 4% interest, Bankrate found in a February survey, which suggests many people either don’t know higher rates exist, or don’t want the hassle of changing banks.

Even so, many big banks are seeing deposits decline, which could signal that customers are moving their money to banks with better rates, Frankel said.  

Wherever they bank, consumers are doing more banking online. More than 2,500 bank branches closed in 2023, according to Bankrate.

Okay, we’ve talked about the upsides to high-yield savings at online banks. Now, the downsides.

Those high interest rates aren’t fixed

Whatever gaudy interest rate a high-yield savings account might offer right now, there’s no guarantee it will stay that high forever.

Savings rates “are liquid,” Rossman said, “so they can change at any time,” although forecasters don't expect big changes any time soon.

Banking experts predict savings-account yields will eventually go down, especially after the Federal Reserve begins to lower its benchmark interest rate.

But when will that be? It’s hard to say following Wednesday's Fed announcement, which offered no hint of when cuts would come.

“These rates are here to stay, but I cannot predict whether they’re going to stay for a year or two,” Papadimitriou said.

Even if the high yields aren’t fixed, experts say, the banks that offer them have an incentive to remain competitive.

“Banks are competing for your money, and they want to make it appealing,” NerdWallet's Palmer said.

Do I really need one more bank?

There’s no question: Opening a savings account at a bank where you don’t have a checking account is not ideal, if only for the sheer convenience of banking in one place.

Big banks are “banking on convenience,” Frankel said. They can offer the consumer a full plate of banking services on one platform, within easy reach of a neighborhood branch.

On the other hand, a consumer who opens a “sidecar” savings account at an online bank can link it to a checking account at another bank with minimal effort.

Once the accounts are linked, “if you need to move money back and forth, it takes a day or two,” Rossman said.

And perhaps that is a good thing. Personal finance experts say it is wise to keep a savings account partitioned off from your other accounts that you cannot easily tap.

"I actually think that can be useful,” Rossman said.

'Child care desert':In this state, parents pay one-third of their income on child care

Don’t count on high-yield customer service

Big banks compete on customer service. At online banks, experts say, your results may vary.

An online bank may not offer the same level of telephone support as the national brands. ATM locations may be scarce. And one cannot simply walk into a local branch.

Frankel, from Motley Fool, nearly lost a house when his online bank struggled to wire the funds to close the purchase.  

“Some online banks,” he said, “just aren’t set up to handle the banking conveniences you expect.”