The age of online savings accounts

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By Lynne Blundell
September 4, 2009

We've become so used to thinking of banks as one homogenous mass that we're at risk of missing the opportunity to cash in on the differences. And when it comes to savings accounts these differences can really add up.

The variation in fees and interest rates between different savings accounts is considerable. This applies not only when you compare a traditional savings account - or transaction account - with an online product but also for each online savings account within the sector.

Damian Smith, chief executive officer of RateCity says banks are a lot more competitive, particularly with interest rates, than people think.

"When you look at the spread there is an enormous difference in the interest rates of savings accounts. Some are below four per cent and others are well above that.

"An interest rate of 4.5 percent compared to 3.5 percent can make a huge difference over two years. It can add hundreds of dollars to your savings," says Smith.

Online products pushing competition
Online savings accounts have brought a new level of competition into the savings account sector. The reduced need for interaction with customers and lower overheads has allowed online accounts to offer higher interest rates and reduce fees, or completely remove them.

This has forced banks to become more competitive with their traditional savings accounts and has also seen a massive increase in new online offerings.

Smith says this proliferation of online savings accounts is only going to increase, particularly as younger generations expect to be able to conduct all of their business over the internet.

"Some customers, typically younger people, want to handle all of their transactions online. But while a big chunk of banks' business is going to be online there are still some things you need to go to the bank for and there will also be people who prefer a traditional account," says Smith.

The trick when choosing a savings account is to think about how you need to use it.

Most online accounts are linked to an everyday transaction account and require you to transfer your money across to access it.

This can take up to four business days so if you want regular and immediate access to your money, this option may not suit you. Most don't have ATM access or cheque facilities.

But if you are interested in parking some money in an account and adding to it regularly, online savings accounts with higher interest rates can allow you to save more, faster.

How big are the savings?

The benefits of shopping around are clear when you look at a simple scenario. By using the interest rate comparison on RateCity we can compare the results of putting your money into two online accounts.

The USaver account from UBank is offering 5.11 percent p.a. interest. If you were to deposit an initial $10,000 and add $1,000 each month to the account, after one year you would have about $22,808.

If you were to compare this to a savings account with a 4 percent p.a. interest rate, you would have returned about $178 less.

If you then compare this to a transaction account offering 1 percent p.a. interest the difference is even more dramatic - at the end of the year you will have $22,156.

Just by shopping around and changing from a traditional savings account to an online account you can add about $652 to your savings.

Read the fine print
Of course there are other factors to consider when choosing your account. Some online accounts may require a minimum deposit and some offer the best of both worlds - high interest rates as well as ATM access and cheque facilities.

Key factors to look for when choosing an online account are:

  • Are there any account keeping or other fees?
  • Is there a minimum balance required?
  • Are there any extra features such as ATM access and cheque facilities?

Smith advises it is important to read the fine print of the account's terms and conditions even if the high interest rates look particularly attractive.

"A database like ours can check all the features and compare rates and this plays a very important role in helping Australians make informed decisions.

"But there is no substitute for reading the detail. Each person must make sure the features of the product suits them and that can only be found in the fine print," says Smith.


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