Place For Cash: High Yielding Online Savings

Hottest Piggy Bank Is Online Higher Yields Make Web-Based Savings Accounts More Popular

By NICOLE URBANOWICZ
Wall Street Jounrnal
July 15, 2006; Page B4

Online savings accounts -- with yields now surpassing the 5% threshold -- are becoming an enticing place to stash cash despite the security concerns.


While traditional short-term cash investments like CDs and money-market accounts have been on an upswing, online savings accounts are severely beating their traditional banking counterparts. And with short-term interest rates reaching their highest levels since 2001, keeping cash liquid is a good bet as analysts expect interest rates to rise.


The recent jump in interest yields are thanks to the Federal Reserve's cumulative 4.25-percentage-point increase in interest rates in recent years. Also, competition is growing among financial institutions, which is pushing more brick-and-mortar banks into the booming, low-overhead online-banking business.

Nearly a year ago, some of the first online savings accounts with 3% to 4% annual percentage yields were considered attractive. Today, the highest-yielding online savings accounts of 5% are competitive with money-market mutual funds, which invest in short-term fixed-income securities and aren't insured by the Federal Deposit Insurance Corp. They are even above the overnight average for a money-market savings account, which is currently hovering around a 3.31% annual percentage yield, according to Bankrate.com.


London-based HSBC Holdings PLC's online savings arm, HSBCdirect.com, has one of the top savings rates in the U.S., according to Bankrate.com, with a 5.05% annual percentage yield.


Citigroup Inc.'s Citibank NA is also competitive with a 5% APY for its e-Savings account. This is the same account the company began piloting almost a year ago at 3.25%. And Emigrant Direct, the online-banking unit of Emigrant Savings Bank, is also on the top rung of the highest-yielding online savings accounts with its 5% annual percentage yield.