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Here’s why online banks offer the highest savings interest rates

Plus, see which banks have the best rates on savings accounts and CDs today.

Bob Haegele
Updated 5 min read

The popularity of online banks has exploded since the internet was commercialized in the late 1990s and early 2000s. According to university researchers, online banks have increased their deposits by a factor of 30 since 2001, three times the rate of traditional banks in the same period.

Why? Customers are drawn to the higher interest rates that online banks offer on deposit accounts, which also often come with lower fees.

It’s no surprise that banking customers like higher rates and lower fees. But why is it that online banks consistently offer the most competitive savings options? Let’s take a look.

Read more: The 10 best online banks of 2024

Every bank is different, but their reason for paying higher deposit rates often comes down to a combination of lower costs and more competition.

Online banks typically face lower overhead costs than traditional banks. This is because they don’t maintain physical branches, which means they don’t have to pay to lease buildings, heat and cool them, pay people to clean at the end of the day, and so on. Simply put, there are far fewer expenses when banks aren’t paying to run hundreds or even thousands of branches five to six days a week.

Online banks don’t pocket the entirety of the cost savings they achieve through lower overhead. They often pass those lower costs on to consumers, which is one reason for the higher deposit rates and lower fees.

One of the primary ways banks make money is by lending out customer deposits to individuals and businesses. So they need to encourage customers to keep money in their accounts. However, online banks are often newer companies without the brand loyalty of big banks, so they may need to pay higher interest rates to encourage new business.

Competition can be fierce in banking, which is only amplified with online banks. Customers can now use more than just a handful of banks near home; they can open an account with an online bank from anywhere, within minutes.

There are dozens of online banks, all vying for deposits from the same customers. As a result, there can be a race to the top. In theory, the bank that pays the highest rates can win over more customers from competing banks.

The national average savings account rate is just 0.46%, according to the FDIC. However, many online banks pay interest rates upwards of 5% APY.

That said, deposit rates for online savings accounts rarely exceed the federal funds rate, which is the rate banks pay to borrow money from each other overnight. As of Aug. 22, the Fed’s target range is 5.25%-5.50%.

Even online banks looking to push the limit on deposit rates don’t usually exceed the top end of that range. And for those that are close, there may be caveats. For instance, Poppy Bank pays 5.50% APY, but the depositor must maintain a minimum balance of $1,000. MyBankingDirect pays 5.35% APY but requires a minimum of $500 to open. Flagstar pays 5.35% as well, but the minimum balance is $25,000, and the high APY is only guaranteed for five months.

As mentioned, online banks give customers high rates to attract their deposits and prevent them from going to competitors. However, competitive environments usually mean things are constantly changing, and online savings rates are no exception. That said, these are the best online savings rates currently available:

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See our picks for the 10 best high-yield savings accounts today>>

If you don’t want to be at the mercy of variable savings account rates, which can change frequently, you might consider a certificate of deposit (CD). These accounts often have fixed interest rates, allowing you to lock in your APY for the entire term.

The catch: You usually can’t make withdrawals from a CD before the maturity date without paying penalties, but some consumers might see that as a fair tradeoff to avoid the possibility of a drop in savings account rates. That is especially true as interest rate cuts seem increasingly likely this year.

If that happens, deposit rates will follow suit. However, locking in one of today’s top CD interest rates can help insulate you from falling deposit rates:

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See our picks for the best CD rates and accounts today>>

Online banks can offer many benefits, including high interest rates, few fees, and low minimum balance requirements. These perks can be attractive to consumers who want to get the most out of their money, especially if they already do most of their banking from a mobile device.

However, online banks can have drawbacks. For one, they don’t have physical branches, which means you can’t meet with someone in person if you need help (though many online banks offer 24/7 customer support via phone, email, or live chat). You may be able to find competitive savings account rates at your local community bank or credit union, where you’ll receive more personalized attention as well.

Many online banks also have a convenient mobile check deposit feature. However, it may be tougher to deposit cash. And when you can, you may need to pay a fee.

Similarly, while some online banks give you access to vast ATM networks, not all have this benefit. Those that don’t may reimburse you (up to a limit) for third-party ATM fees, but you still have to pay the fee upfront.

Overall, online banks have several benefits and drawbacks to consider. If you feel the pros outweigh the cons, they can be a great place to keep your money. However, you can always keep your traditional bank account active alongside an online savings account. That way, you will still have access to in-person services should you need them, along with the benefits online savings accounts offer.