Stashing Cash at Higher Rates

Peter Profesda admits he's a rate-chaser. The teacher of computer classes at a two-year college in New York spends a few hours a week checking bank Web sites and banking-related blogs to find the highest yield and other promotions. He's changed banks numerous times in the last few years, or has at least opened additional accounts, just to take advantage of promotions. Once a customer of ING Direct, a Wilmington (Del.) subsidiary of Netherlands-based ING Groep (ING), he switched to FNBO Direct last year after being lured by an offer of a 6.01% annual percentage yield (APY). Shortly after he opened his FNBO account, the bank cut its rate to 5.05%, and then to 4.30% and to 3.25%, where it stands currently. But Profesda was able to enjoy the promotional rate for his first three months at FNBO Direct.

More recently, though, online banks have had to lay low on promotions due to how dramatically interest rates have dropped over the past nine months, says Jim Bruene, editor of the Online Banking Report. "Lately I haven't seen too many promotions [for higher rates]," says Profesda, as he surfed the Web at ING Direct Cafe in midtown Manhattan on a warm June afternoon. (ING Direct Cafe offers Internet access and is a gathering place for consumers to buy coffee, tea, and snacks—the cafe does not have banking services.)

While online customers tend to chase higher yields, it's harder to get them to move their money when rates are around 3%, says Bruene. "There's some psychology at play," he says. "People have in their minds putting money away at 5%. Once they go into the [3% range], there's less motivation psychologically."

Stiffer Competition, Higher Yields

One bank still on the prowl for market share is HSBC Direct, which on June 2 launched a promotion that raised its rate for new and existing customers' savings accounts from 3.05%, to 3.50% through Aug. 15. The bank plans to review how interest rates are moving in the market in the interim, says Kevin Martin, the head of HSBC Direct U.S.

While the Federal Reserve has slashed its key interest rate since September, 2007, rates for high-yield savings accounts have come down only a fraction of the drop in the federal funds rate, says Greg McBride, senior financial analyst at the banking Web site Bankrate.com (RATE). "A year ago, [savings] rates were about 5.0% and they fell to about 3.5% despite the Fed funds [rate] going from 5.25%, to 2.0%," he says. That's mostly due to the stiff competition for customers and conditions in the credit markets that have made it less costly for online banks to pay higher yields on deposits than to try to attract funds in other ways, he adds.

Unlike short-term Treasury bonds, online bank rates aren't linked to the Fed funds rate or the London Interbank Overnight Rate, or Libor. Instead, they track the market of all banks offering online banking products. "It really is a micro market driven by the competition," says HSBC Direct's Martin.

Banks have the freedom to lower and raise rates on little or no notice to customers. To lure new customers, HSBC Direct is locking its new rate of 3.50% for 75 days. But this is "not a big leap in an environment when the Fed is expected to be on the sidelines [with respect to lowering rates any further]," says McBride at Bankrate.com.

Will Clients and Brokers Bolt?

Speculation_but Not Manipulation