It may be hard to believe, but a vanilla savings account at your regular neighborhood bank actually used to earn some amount of interest! However, since the early 2000s, most savings rates have been so low as to basically be meaningless. Currently, Chase, one of the largest banks in the US, offers just 0.01% APY (annual percentage yield) on a standard savings account. Meanwhile, so-called “high yield” online savings accounts offer as much 1.70% APY (based on our reviews as of May 11, 2020). If these are essentially the same product, why is there a 170x (that’s 17,000%) difference in interest rate offered?

While a savings account with a local bank and an online-only savings account offer the same fundamental utility – an FDIC-insured place to park cash – the features to you as a customer (and the costs and business model of the banks offering them) are different. This drives the difference in the interest rate you earn.

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Key Features of Local Bank Savings Account

“Local” here includes banks with physical bank branches – including the nation’s largest, like Wells Fargo or Bank of America. Even though the underlying account is the same, the key differences vs. an online savings account are:

  • A local bank branch. This is the most obvious one (and also highest cost to the bank).
  • Linked checking account. If you have a savings account with a local bank, chances are, it is your “primary” bank – where you hold a checking account, have your payroll deposited, etc. This allows you to easily and instantly transfer money from your savings account to your spending account.
  • ATM card access. You have the ability to instantly withdraw cash from your savings account at an ATM.

Key Differences of an Online-Only Savings Account

  • Online only, obviously. No local bank branch, no teller. Customer service is delivered via phone or, in some cases, only via a support ticket or email.
  • Limited ability to access your money. While both types of accounts limit you to six no-fee transactions per month, online-only savings accounts typically do not have an accompanying checking account or ATM card. If you wish to access your funds, you’ll need to move them via ACH transfer to your main checking account.

Other Savings Options

There are other options for managing cash – like money market accounts, CDs, brokerage accounts, and “neo” or “challenger” banks, which we’ll discuss in additional reviews — stay tuned.

Different Business Models

Less obvious to the end saver are differences in business models and marketing. Because banks with physical branches tend to hold primary banking relationships (checking accounts), they already hold an abundance of the consumer deposits necessary to run their businesses, like making loans. JP Morgan Chase held $1.3 trillion in consumer and business deposits as of 2017.

Their full service banking offerings, checking accounts, branches, and marketing campaigns serve to attract customers and their deposits, but are also expensive – thus the lower interest rate offered.

Online-only banks, like CIT Bank, Ally Bank, or Barclays, tend not to offer checking accounts and do less marketing, and instead attract deposits by offering a higher rate.

Is a Local or Online Savings Account Right for You?

Given the huge difference in interest rate, in pretty much every case, we recommend parking any cash savings in a high-yield online savings account. These accounts enjoy the same FDIC insurance as their physical bank branch counterparts, and there are plenty of well known, reputable institutions that offer them. The only exception is if you anticipate needing sudden access to your savings — transferring money from an online savings account to your main checking account could take 1-2 business days.

Read our Best Online Savings Account Guide 2020 for more.

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photo: Annie Spratt on Unsplash