How Do Online Banks Offer High Interest Rates?
One question I’m constantly asked by readers is how online banks like FNBO Direct and ING Direct can offer such high interest rates compared to your big name brick and mortar bank. The answer is actually simpler than you think. The reason why they can offer such good rates is because they don’t have to pay for the things a regular bank has to pay for.
Let’s list all the major things both online banks and brick and mortar banks have to pay for:
- Website - including online banking
- Call centers - to field customer calls
- Mailers - statements, offers, etc.
- Marketing & advertising
Now think of the things that only brick and mortar banks have to pay for:
- Branch locations - leases, taxes, tellers, managers
- ATM locations
While each one only gets a bullet, one of the most expensive items on either list is branch location. Think about how many branches each of those majors banks has. Tens of thousands. Bank of America has thousands of branches and over 11,000 ATMs. In addition to paying for the branches and ATMs themselves, those banks have to pay for the people it takes to support them. Tellers and managers and ATM technicians aren’t cheap. They need electricity, heat, water, health care, and so many other things.
Online banks won’t give you the personal relationship that a bank will. That’s for certain, but you don’t go to online banks for great relationships, you go for great rates.