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The Growing Trend In Online Banks

MINNEAPOLIS (WCCO) — The Federal Reserve's trend of lowering interest rates is good news for anyone buying a home, but bad news for people saving money.

In recent years, online banks such as Ally, Wealthfront and Goldman Sachs' Marcus, have grown in popularity. They can offer something traditional banks can't: high-yield savings accounts.

By comparison, online banks offer between 1.5-2.5% interest, roughly 20 times the national average. As an example, someone who puts $1,000 into a savings account and leaves it alone for five years will earn $93 through a typical online bank, and $5 through a traditional one.

"The ones that are fully online like Ally are saying, 'Hey, we're new, and we're nimble. We don't have all this legacy business. We can move around quickly," said University of Minnesota's Carlson School of Management professor Andrew Winton.

Winton points to online banks lacking the overhead costs of traditional ones.

"But the Wells Fargos, the Citi Groups have fairly deep pockets," he said.

Many online banks, including Ally, Wealthfront and Marcus, don't require a minimum to open an account, nor do they have monthly service fees.

Traditional banks, however, have physical branches with person-to-person interaction. They also have ATMs in-network.

Winton also said that while the new companies use high yields as a way to get people's attention, the rates themselves can fluctuate daily.

"It's a teaser rate to try to get you in the door," said Winton. "And then they hope, once you've been there for a while, if they lower that premium a bit, it won't be worth your while to switch."

As for cybersecurity, Winton said there's no reason to doubt the safety of an online bank, but that the risk is often concerning enough to prevent some people from switching exclusively online.

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