With all this talk about the Fed Funds rate drop, a lot of people are wondering what it means for consumer rates like savings accounts, credit card APRs, and mortgage rates. Here, I wanted to explore the savings account relationship. First, some quick definitions:

What is the Fed Funds Rate?
With our current system of fractional-reserve banking, US banks only have to keep a certain amount of money reserved at all times – Currently, it’s only 10% of checking account deposits and nothing (!) on time deposits like savings accounts. Banks usually try to keep as close to this minimum as possible, so that they can lend out the rest at higher interest rates and make that juicy profit.

In order to stay as close as possible, banks often lend money to each other overnight as needed. One bank may have extra in reserves, while another may temporarily not have enough, and this way it’s win-win. The target interest rate for this is the Fed Funds Rate (FFR).

What is the Fed Discount Rate?
This is the exact interest rate at which banks can directly borrow from the Federal Reserve. This is usually a last resort, as such loans are an indication of financial weakness and subject to audit.

What is the relationship between the Fed Funds Rate and interest rates on high-yield savings accounts?
This is just my own speculation, but I would imagine that banks would not want to offer significantly more than the Fed Funds rate. Why would you pay 6% interest out to individuals when you could just pay 5% to another bank? Still, I doubt that banks can borrow an unlimited amount of money via other other banks, so they may be willing to pay a bit more than the FFR if they have the ability to make a profit. Finally, they may just be operating at a temporary loss in order to grab some deposits that hopefully will stay later from branding or just convenience (*cough* FNBO Direct *cough*).

Here is a historical chart of the Fed Funds Rate versus the APY paid by online banks Capital One 360 and Emigrant Direct. I chose these two because they have (1) been around longer than others, and (2) are online and as such should be operating with the thinnest margins. The data points for ING should be close, but not perfectly accurate, as I used Archive.org at 2-month intervals for rate info not available in my own archives.

You can definitely see some correlation, but it’s not perfect. It looks like ING was more aggressive in 2002-2004, and then gradually become satisfied with fatter margins. Emigrant seems to be following the curve closely, which would indicate an interest rate drop soon. So if you want to predict the interest rate of your own bank, not only do you want to look at the FFR, but also the bank’s historical margins and whether they are looking to gain (or simply defend) market-share.

A little birdie told me to expect an FNBO Direct rate definitely under 5% after 9/28. I’m just writing this here to see if it turns out to be correct.

Bank of America now has their own high-yield savings account, though with a minimum balance. You won’t find it advertised though, it’s tucked away in their new My Expressions banking section. If you click around the various organizations, you’ll see a variety of checking/savings combos with different interest rates. The two highest I found were the Humane Society and the Defenders of Wildlife. Here are the current rates for those two groups as of 9/17 for Oregon:

You need $1,000 to open, and a minimum daily balance of $2,500 to avoid a $12 monthly maintenance fee. If you already bank with BofA and can always keep $2,500 in savings, this looks like a great way to boost your interest rate from the usual piddly 0.20%. Be sure to look at the ‘Money Market Savings’ account, not the ‘Regular Savings’ account. Can’t find it? It took me a while too, so I went ahead and made a video showing how to locate the account online.

If you are already have a BofA account you can login at the bottom and have the application pre-filled for you. New customers will experience a hard credit pull. Per a phone call, you don’t need to be a member of the actual association to apply for the account. I just hope these high rates don’t disappear once everyone finds out about them! (Though I’m not helping…) Thanks goes to Trice and BankDeals.

Update on 9/21: The rates have dropped to a range of 4.65% for $2,500+ to 5.01% APY for $50,000+.

Many people who are with FNBO Direct right now earning 0.65% APY are asking – What is FNBO Direct’s rate going to be after September 28th? After a few phone calls, the official answer is apparently “We’re not going to tell you until we have to… on 9/28.”

This is actually pretty smart on their part. If they announced that the rate is going to drop now, then people may already start moving their money out. It’s better to keep us in suspense, playing off our hope that it will somehow stay high. I personally feel like it’s going to go back to 5.25% at the highest, otherwise they would have told us to kept us from preemptively moving. But that’s just my guess.

If this turns out to be the case, then the rates for no-minimum balance, no-monthly fee, liquid savings accounts will be again clustered closely around (a respectable) 5% APY. For those that want to keep chasing, I also tried to find the best combination of highest rate, FDIC-insured, lower minimums, and high liquidity:

6.01% APY for up to 6 months from EverBank, $1,500 minimum
Although this is technically a promotional rate for their FreeNet Checking Account, since it’s guaranteed you could simply treat it like a 3-month, 100% liquid CD paying 6.01% APY. Here are the details:

• 6.01% APY guarantee for first 3 months, after it goes to 3.35-4.89% APY based on balance.
• $1,500 minimum to open, no monthly minimum or fees, no direct deposit requirement
• Online Billpay costs $4.95/month if you have less than $1,500 in there, $25 fee if closed within 30 days of opening
• Free ACH in/out funds transfer system
• Checkwriting (1st 50 free), ATM rebates (up to $6/month), Postage-paid deposit envelopes
• FDIC-insured (certificate #34775), 3 star “Performing” Safe & Sound rating

After the first 3 months (assuming it’s still available), you can then open a Yield Pledge Money Market that also has 6.01% APY for 3 months. Also $1,500 minimum to open. It has more restrictions since it’s a savings account as well as a monthly minimum balance, so go with the Checking first. In total, this offers up to 6 months more of 6% goodness.

5.70-5.75% APY from IndyMac Bank
Indymac Bank has seen some troubles from the subprime loan mess, even though it specialized more in “Alt-A” loans, which are between prime and sub-prime in quality. However, it does offer some of the current top FDIC-insured rates. Here are two options:

$5,000 Mininum – Internet CD

• 5.70% APY for 5-month or 6-month Certificate of Deposit.
• Minimum to open is $5,000.
• It’s important to note that these are certificates of deposit, and so you can’t transfer money in and out as with checking/savings accounts. In addition, there is a early withdrawal penalty of 1 month of interest.

$25,000 Mininum – Internet First Rate Money Market

• 5.75% APY for balances above $25,000. No guaranteed term for this rate.
• Minimum to open is $1,000. Monthly fee of $7 if your balance falls below $1,000.
• Limited checkwriting is available.

Indymac’s FDIC certificate number is 29730, and it has a 2 star “Below peer group” Safe & Sound rating. Worried about their financial health? Check out my post exploring What happens if my bank goes bankrupt or fails? There may be ways to expand your $100,000 FDIC coverage.

You have seen via Google Ads on my or other financial sites advertising 8% CD rates from Millennium Bank. Wow, sounds great! But given the internet age, when you see “bank”, it could be from any corner of the world. The terms “certificate of deposit” or “savings account” may imply security here, but don’t necessarily mean anything internationally. The FDIC website gives some good guidance on Safe Internet Banking:

Read key information about the bank posted on its Web site.
Although it tries to distract you by saying it is owned by some Swiss trust company, if you read further it you find that Millennium Bank is located in the Caribbean nation of St. Vincent and the Grenadines (SVG). So, it’s not even located in the United States. From Wikipedia, St. Vincent has a population of just 119,000, it’s main industry is banana production, and has an unemployment rate of about 22%. Also of interest:

There is […] a small offshore financial sector whose particularly restrictive secrecy laws have caused some international concern.

Does this sound like a place that you would want to keep your money? Maybe if you were trying to hide it! If something goes wrong, do you want to navigate a foreign system to get your money back?

Verify the bank’s insurance status.
This bank isn’t even located in the United States, so there’s no point in even running a bank search to see if it is FDIC insured. It doesn’t even appear to insure its deposits by any private or public agency. If a bank claims to be a subsidiary of a bank that is FDIC-insured, call the parent bank. If they’ve never heard of it, run away.

Gut check: Is it too good to be true?
Finally, risk and return are closely linked in legitimate bank products. If the best any other bank can do is barely 6%, there’s virtually no way a bank offering 8% return with the same level of risk. They have to be doing something riskier, whether it is making some currency bets or investing in lower-quality debt. Given the lack of disclosure of what these risks are, you might as well buy some junk bonds, which are at least rated by reputable independent companies.

Bottom line, I hope you’ll agree there’s absolutely no reason to put your money anywhere near this institution.

For a while now there have been rumors that HSBC planned to enter the online checking account arena, competing with the likes of Capital One 360’s Checking. Instead of using the apparently taboo words “checking account”, HSBC Direct announced today the Online Payment Account, which has the following major features:

• $1 to open, no minimum balances
• Yield of 2.50% APY
• Three non-HSBC ATM fee rebates per calendar month
• Link with unlimited external accounts
• Online Billpay Service
• Can send paper checks via BillPay, but no checkbooks
• Instant transfers to/from HSBC Online Savings account available, but account not required

However, I also got an e-mail from them saying you can’t apply for it until May 31st, and there is no mention of it on their main page. Weird.

My initial impressions? If you use the HSBC Direct savings account already, I’d definitely sign up for this. Why not? You get more features, and there are no minimums. One possible use would be when you needed cash, you could just go to an ATM, move money over from Savings -> OnlinePayment account, and then withdraw to take advantage of the ATM rebates. For people who rarely receive or write paper checks, this could fill a void and allow them to go completely electronic.

But really, how awesome would it be if they just added Billpay and ATM rebates to the Online Savings account, or even better, just made this Payment account pay 5.05% interest?! How hard it is to merge them together instead of adding more complexity?

Personally, I still both write and receive enough paper checks each month to prefer my current Washington Mutual bank setup or even my old Presidential Bank setup over either ING’s or HSBC’s paperless checking accounts.

I opened up a savings account at FNBO Direct originally for their high interest rate and no monthly fees. They are currently offering 0.85% APY as of January 2013, still competitive in this current rate environment. Here are my experiences so far as well as some first impressions of this online savings account:

Legitimacy and FDIC Insurance

FNBO Direct is a division of the First National Bank of Omaha, which is a member of the FDIC. If you call the First National Bank of Omaha, they will confirm this link and the website. For the techie folk, the nameservers and IP address range of FNBO.com and FNBODirect.com are the same. Combined with the fact that this account has been around for months, I see no need to worry about the legitimacy of this bank. Many banks choose to distance their online branches from their existing customers, as they are trying to gain new money and low-cost customers who are comfortable with things like electronic statements and online banking.

Opening Process Overview

The opening process went very smoothly. The CashEdge-based application is similar to that of HSBC Direct, but unlike with HSBC there is nothing to wait for in the mail. Nothing to send in either; No paper needed at all!

The application does include an identity verification test based on information from your credit reports. This is identical to what Washington Mutual does for its online savings account. If you have troubles with this, I recommend checking your credit reports for errors. However, a hard credit pull is not performed so it won’t affect your credit.

You can fund via wire transfer, online transfer, or by mailing a check. Here was my timeline:

• Day 1:Apply online, pass identity verification. Receive e-mail that application was approved. I chose to do an online transfer. Trial verification deposits were sent to funding bank.
• Day 2:Trial deposits received, and verified (free 57 cents!). FNBO Direct initiates funding transfer.
• Day 3: I receive my new account number via e-mail, and enroll for online account access. Initial deposit hasn’t showed up, but should go in on Monday (see below). I can add link additional accounts (max of 3) and initiate other transfers.

Account Features, Transfers and Usability

Features
Overall, your basic Capital One 360 clone – $1 to open, no monthly fee, no minimum balances. Otherwise, it’s pretty barebones. No checks. No ATM rebates. You can request an ATM card, which I did, but since it costs $2.50 for each cash withdrawal, I never plan on using it. Here is their complete fee schedule.

Of course, we all know the best feature is the 6% APY interest rate 😉

Transfers
Again this is the familiar CashEdge interface behind the online fund transfers of banks like Bank of America, Presidential Bank, and HSBC Direct. All transfers are free, and the transfer limits are very generous. The transfer schedule appears to be identical to that of HSBC Direct, and takes three business days. (Worst case: If you initiate on Thursday, money is taken out on Friday, but deposit won’t show up at receiving bank until Tuesday.) I know many people dislike these slow transfers, so you should be aware. Here is a screenshot of the schedule:

Note that your initial deposit will not be available for withdrawal for six business days, probably for security reasons.

Usability
The interface is very simple and utilitarian. I like it. There are only three tabs – View Accounts, Account Services, and Transfer Funds. (Click for a full screenshot of the interface.)

More Information

Customer Service: 877-370-3707, open 24/7.
I’ve called customer service a couple of times, and they do answer and are helpful. Hold times may last a few minutes, but it’s probably due to the recent rush of applicants.

Number of external bank account links allowed: 3

ABA Routing Number: 104000016
I asked them if I could set up third-party transfers like paying my credit card bill with the routing and account numbers, and they said that would be fine. Hopefully it stays that way…

Download formats available: I see no options at all for this. No MS Money, Quicken, or even .csv options.

Interest compounding frequency: Interest is calculated daily and is compounded and credited monthly. Remember, how often interest is compounded really matters very little, especially if you are comparing APYs.

Source: The official website for this online savings account is http://www.fnbodirect.com