The Flavor of the Year: Online High-Yield Savings Accounts

Online high-yield accounts are still a popular trend in the financial services industry. If credit unions fail to act now, they risk losing their competitive advantage to the attractive rates and ease of use of these accounts.


Online high-yield accounts appear to be the next “big thing” in the financial services industry. These accounts are becoming increasingly popular due to their high rates, low maintenance, and hassle-free usage. While some consumers enjoy interacting with employees at branches, many in today’s fast-paced life style prefer the 24-hour access of a high-yield, online-only account that they have full control over.

A $600 Billion Market
The popularity of these accounts cannot be underestimated. In an interview with the New York Times, Catherine Palmieri, Managing Director for, states that Citibank had forecast that the market for online savings accounts would be $250 billion this year and $600 billion by 2010.

Rates are the most visible feature of these accounts and the only number that matters to many. According to, of the 53 high yield savings and money market accounts they list, many of which are online-only, 4.49% APY is the average yield as of September 28, 2006. With standard savings accounts from major banks such as PNC and Bank of America priced at 0.40% and 0.50% respectively according to their websites, it is obvious why these types of accounts are so attractive to consumers.

Because these rates are so attractive, some banks look for the higher deposit consumer while others are available to almost any individual. Of the accounts previously mentioned, the minimum deposit to open these accounts range anywhere from $0.00 or $1.00, to $25,000 (

Once the account is open, many also require a minimum balance be maintained in order to earn interest or else a monthly service fee is applied. These also range anywhere from $0.00 to $25,000 – the majority being $0.00 (

Enticing Consumers with High Rates
Part of the success of these accounts has been the marketing behind them. Open a magazine or newspaper or search the web, and you’ll find some financial institution advertising a “great rate” on an online-only savings account.

Interest rates and the type of account can vary. These accounts can be either savings or money market accounts, but are primarily comprised of money market accounts. Money market accounts tend to have higher rates of return but also require higher balances to earn interest. The consumer’s attention is caught immediately by their high rates. The average money market account in the banking industry is currently returning 3.54% according to Comparatively, credit unions are returning an average of 2.23% to their members through money market accounts.

When the consumer goes to look for more information on the great rates provided by online high-yield accounts, they often see phrases like “Open in 10 minutes or less!” and “No Fees. No Minimums.” These account features entice the consumer, focusing them on the ease of usage and the compelling value.

The Response?
Very few credit unions have directly responded. Sunmark FCU ($425 million in Schenectady, NY) has opened an online financial institution, They currently offer 5.25% APY with no minimum required to earn interest and a $5.00 minimum to open an account.

Many have not responded directly to the competition. With online accounts growing at such a fast pace, credit unions risk losing shares as members look for better rates. How do we compete as the market becomes more and more competitive for every dollar of every consumer?

Should the industry begin delving into the online market itself or develop innovative ways through existing products to retain member deposits?

In many cases, credit unions are no longer offering the most attractive savings rates in their market. The industry needs to tackle this issue head on as more and more banks make it easier and more profitable for members to save.

To learn more about how your credit union can compete with online high-yield accounts, join us for CompetING with Online High-Yield Accounts to Retain Deposits, a webinar brought to you by Callahan & Associates.




Oct. 2, 2006


  • In the New York City market, Emigrant Savings has raised over $7 Billion in on-line savings. I think as a competitior, we are behind, do not know if we can catch up. Bob Edmondson, IBM Metro
    Bob Edmondson
  • Is there a way for credit unions to work together on this rather than replicating the effort and resources to develop products individually? My sense is that some credit unions are reluctant to commit time and resources until it is clear that online high-yield savings accounts are not just a fad driven by current interest rate dynamics. A collaborative approach, perhaps segmented by DP firm, could spread risk and potentially avert CUs being left out of the market entirely while ING and Emigrant and HSBC sew up the smart money.
  • With deposit pressures facing many credit unions - this looks like an option. Not sure how the FOM would work for or against this type of set up for the mid to small multiple group credit unions. Definitely food for thought.
    Nancy Wasczenski- PARDA FCU