In the current economic model, banks are a fundamental institution to drive growth. Interests rate are a focal point in this regard, as the current time period marks that of a hybrid between recovery and growth.
In order to instill the confidence among investors, banks have been lenient on their interest rates. The meager interest rate creates a paradox for finance since it provides fewer earnings in terms of savings. The important question arising from this scenario is whether there are alternatives in the financial institution.
Exploring online banking
Much has been said about the technological impetus driving growth in the banking sector. Online banking provides convenience and comfort for users. However, it has one larger benefit from the finance point of view - the ability to shape monetary assets in favor of the customer.
Gone are the days when conventional banks could give interest rates of 2 percent or more on saving accounts. The rates have hovered at one or less than one for quite some time now. This is where online banks have seized an opportunity.
The institution of banking has become some sort of fractured primarily due to diversity in fiscal habits. This diversity has created a treasure map of sorts, by which consumers search for the best deal.
On a comparative scale, the rate of savings on offer from online banks can be as high as six percent as compared to traditional banks. And herein lays the incentive of making the money work for the customer
Online Banking and Investment
A Discover Bank online savings account provides a decent example of the benefits. The current national average rate on saving is a meager 0.08%. However, the online bank gives a rate of 0.80%. That gives a tenfold advantage and the benefits compound when more money is deposited. If an individual is investing $13,000 in an online savings account, then he/she would end up with approx. $13,000 in additional savings after five years.
Another relevant point concerns the customized mobile banking app, which provides users with easy management of finances.
Recently, the Wall Street Journal reported that a lot of capital is being diverted towards health savings accounts. These are online accounts and provide a good demonstration of how practicality benefits investment options.
More importantly, it shows a significant trend that investment banks such as J.P Morgan are favoring the online mode of banking transactions. Another reason is that the health saving accounts are tax favored spending accounts. So the online advantage provides an ideal investment vehicle as well as a debt management option.
The health saving accounts is mostly funded using pre-tax money. This means that the income continues to grow without adding tax to it. Furthermore, the interest rates are pretty lucrative, ranging from 1.98% to 4.11%.
Maximizing yields with online saving accounts
The key trait of online banking is its infrastructural efficiency. This is what allows it to provide better interest rates to users. Less man power, infrastructure, paperwork and a simple approach provides online savings accounts, and online banking in general, a competitive edge.
The notion of interest rate margins within banks has been well captured by the FDIC in a paper on the sensitivity of bank net interest margins as well as the profitability.
The yield of online accounts is an advantage which allows it integration within the financial infrastructure. Consumers can pursue different avenues such as stashing their online savings within such accounts. It would serve as a safe investment vehicle, providing steady growth without the need for a market crash buffer. Rather, investment in saving accounts itself becomes a buffer against riskier investment elsewhere in the financial market.
The interest that is earned from the savings account itself becomes an investment option. In the current financial paradigm, online saving accounts and investment in CDs has become a popular approach.
In the financial market, the liquidity of assets is an important point. Online banking is crafted on the principle of liquidity and users can easily manage multiple accounts without needing expert advice. Furthermore, the competitive market ensures that the interest rates on online saving accounts will continue to rise. It will become more and more easy to shop around in the online market and look for the best rates.
Current financial conditions warrant growth with a safety valve approach. Furthermore, technology and fiscal models have allowed different investment vehicles to emerge. In such cases, a wise approach is needed, one that compounds money with minimum risk. Online banking and saving accounts have emerged as an ideal buffer.