With the Fed dropping the federal funds rate like it’s going out of style, the interest rates of many online banks have begun dropping as well. If you’ve been watching, you’ve probably seen many 5%+ fall to the mid 4%’s and many of the banks that once offered in the 4%’s now offering in the 3%’s. So, with all these falling rates, does one’s criteria for selecting the “best” high yield savings account change? Nope.

You might be tempted to swap because of rates alone but the difference of half a percent of interest reduced even further by taxes and fund transfer time. Let’s say you have $10,000 of savings, half a percent on that for an entire year is $50. Cut that down by 25% if you’re in the 25% tax bracket and now you’re talking $37.50 for the entire year. If you consider that the transfer time between accounts is about a week, that’s another 2% off. You’re not talking about a lot of money for the hassle.

So, what criteria do I use for picking the best online savings accounts?

Must Be FDIC Insured - I had to throw this one in there even though it sounds obvious, but always confirm the bank you’re looking at is FDIC insured through the FDIC’s Bank Find tool. I’ve never written about (or used) a US bank that isn’t FDIC insured (or credit union that was NCUA insured), but I suppose there may be some out there. If it’s not FDIC insured, skip it no matter what.

Now, onto the other criteria…

Interest Rate

While it may not be worth it to move funds from one account to another, it’s certainly worth it to keep up with the best rates when you’re moving funds out of your 0% APY checking account. The number one criteria for evaluating the best online savings account for you has to be the interest rate. It’s not the only factor, simply the first. It’s not the only factor for a variety of reasons but one big reason is that the rate could change the very next day. High yield savings accounts aren’t like certificates of deposit, there are no guarantees that the rate will remain the same.

Convenience

Convenience is the next thing I look for in an online bank. Banks that offer both a savings and a checking account, most of them do, win out because I can get nearly instant access to my funds. If a bank only has an online savings account, then to access the funds I’m forced to first transfer them out (takes about five business days for most), and then I can access them. If a bank offers both a savings and checking, I can instantly transfer from savings to checking and then access the funds via the checking account.

If you have a savings and checking account combo, you can start evaluating the bank with the criteria you reserve for regular banks. ATM access, branch access, branch services, etc.

Brand Name

Let’s be honest, brand name banks confer a sense of trust and permanency. It’s like the white coats doctors wear. Despite the recent bank failures and acquisitions, I still think that brand name confers a sense of trust if you recognize it. While your deposits are always protected up to $100,000 by the FDIC ($250,000 through December 2009), if all other things are equal, you want to go with the brand name.

The big names are the same as the big brick and mortar banks (such as Citi, E*Trade) but you have to add in a few of the big online players (such as FNBO Direct and ING Direct, both of which are big banks but not banks that were nationally recognized before their online versions appeared). I irrationally feel more comfortable with a brand name online bank like FNBO Direct and ING Direct than I do with higher interest offerings from WT Direct and UFB Direct, though all are FDIC insured.

Online Interface

While most banks won’t let you “test drive” their online interface, some will offer tours. If there is no tour, read reviews of the banks and pay close attention to what the reviewer says about the interface. Is it quick and responsive? Is it easy to open additional accounts or sub-accounts? Is it easy to transfer money? Is it easy to set up a recurring deposit and cancel a recurring deposit? Is it easy to link external accounts? Does the site load quickly or has it been historically slow? This interface will be one of your own touch points with the bank, you don’t want to be stuck with an antiquated system that’s difficult to navigate.

I have an example of online interfacing trumping interest rate. I have accounts at both ING Direct (2.75% APY) and FNBO Direct (3.25% APY). My emergency fund is with ING Direct because they offered a convenient one-page CD laddering form that helped me setup a CD ladder for my emergency fund. The funds were in there to begin with because ING Direct was the first to offer a high yield savings account, they remain there because of the online interface.

Offline Interface

What’s better about a Citi or an HSBC high yield online savings account is that if things go sour online, you can always try to find a branch in your area. Some online banks have extremely robust customer service systems because the phone is your only interface outside of the web, but some do not. Some online banks have better phone systems than brick and mortar banks because they know that the phone is the only other point of contact. Read reviews though if you’re concerned (I’ve never called an online bank, other than to unlock my account) because they are trying to keep their services lean and overhead low so that they can offer the higher interest rate.

What criteria do you use to help pick the best online savings account?

(Updated 11/6/08) High yield savings accounts are the rage these days, with people pouring billions of dollars into banks and certificates of deposit. A few years ago, the only online bank with a high yield savings account was ING Direct. The first time I saw them I was a little apprehensive - an entirely online bank? But they were FDIC insured and all turned out well. Since then, dozens have popped up to offer high yields because they run leaner than traditional brick and mortar banks. No branches, no tellers, no managers, no paper statements - all result in higher yields.

I’ve compiled a list of the best of the best FDIC insured (now up to $250,000 through December 2009) banks below.

High Yield Savings Accounts Rates

* Everbank offers 3.93% promotional rate for the first three months (if it were for the whole year, the APY would be 4.01%), then 3.18% thereafter (again, if it were for the whole year, that’d be 3.21% APY).

The UK just joined us i experiencing a phenomenon known as a “negative real interest rates,” where the rate of their central bank is less than the rate of inflation. The Bank of England’s base rate stands at 4.5% and their recent calculation of inflation puts it at 5.2%, meaning savers are seeing their savings erode at 0.7% a year. The Federal Reserve, the United States’ central bank, current set its target interest rate to 1.5% with inflation, especially if you don’t use the bogus sans food/fuel measure, being much much higher.

The economic climate has made it wrong, financially, to save money!

Individual Savings Accounts

One of the ways UK citizens can combat this is to use what’s known as an individual savings account, a type of account unavailable to us here in the United States. Individual savings accounts can get pretty complicated but the part that I find intriguing is that it incentivizes saving, something we Americans have a difficult time doing.

The ISA has two components, a cash component and a stocks and shares component. Without getting too deep into its inner workings, especially since I have no hands on experience with it, the part that I like and feel we need is the cash component. Each year, eligible persons can contribute up to £3,600 into the cash component and the interest earned is tax free. (The stocks and shares portion has a higher limit but all the income derived from that component are also tax free). I admit that I might not know all the details about ISAs, but at first glance they are very appealing.

We have nothing like this here.

We Need That Cash Component

Given the availability of Traditional and Roth IRAs, I don’t think introducing the stock and shares component of the ISA would add much (though brokers would probably love it!) but the cash component is something we should think about.

Imagine if some of those high yield savings accounts offered tax free savings accounts, like these ISAs. The prevailing rate of 3.50% APY at FNBO Direct would be the equivalent of 4.67% APY for someone in the 25% tax bracket.

We need to start incentivizing people to save, rather than incentivizing people to spend. The economy may be hurt in the short term but will be greatly strengthened in the long term.

What do you all think?

(Updated 11/18/08) Here is a list of the nationally available best CD rates, updated regularly. I looked at the best rates available for CDs of less than 18 months and listed the one with the highest rate. Typically the longer the term, the higher the rate, but for many online banks the best rates were for periods of shorter than 18 months. For simplicity’s sake, I put the cutoff at 18 months.

This list will be updated as rates change, I will try to keep it as up to date as possible.

Best CD Rates

FDIC Insurance: Each bank is FDIC insured up to $250,000 through the end of the year. You can confirm this by checking the FDIC’s Bank Find tool. The only bank on the list I hadn’t heard of was Dime Direct, they are owned by The Dime Svgs. Bank Of Williamsburgh (Cert #16012). Oh, and Bank of Internet is an FDIC insured bank in San Diego, CA - Cert #35546.

As a reference, the current Federal Funds target rate is 1.00% (New York Fed).

WaMu failed and was acquired by JPMorgan Chase, if you don’t have an account yet, I recommend going with FNBO Direct or one of these high yield savings accounts.

Washington Mutual sent me an email today indicating that they will be increasing their high yield savings rate from 3.75% APY to 4.00% (at midnight tonight, if you read this on Monday), which will beat all the banks on my list of best online savings accounts by at least half a percent (FNBO Direct is second with a 3.50% APY interest rate).

Nothing else will change about either the Free Checking or the Savings account offer, you can read my brief WaMu review to learn more about the accounts.

There have been concerns lately that WaMu was facing some liquidity concerns (mostly in the chaos that was last week, but the FDIC did send a MOU) but they are FDIC insured up to the same $100,000 as every other insured bank. WaMu benefits from the fact that its short term financing can come from deposits, rather than short term borrowing, so it’s not as exposed as investment banks. If the liquidity issue still concerns you and you don’t trust that FDIC will make you whole (it will), your next best option is FNBO Direct with a 3.50% APY rate or opening a CD somewhere else. I haven’t read a single thing about them having problems and they too are FDIC insured.

For anyone wondering what will happen to HSBC Direct’s 3.50% APY, wonder no longer. As of today, 9/16, the rate will fall from 3.50% APY to 3.25% APY. It appears that they’re shifting emphasis over to their CDs from their online savings account as the 6-month CD rate is 3.75% APY, 0.25% higher than the original savings account rate. Oddly enough, their 12 month is giving 3.70% APY.

Of the best savings accounts, this puts Washington Mutual with their 4.00% APY online savings account rate farther ahead though the liquidity and capitalization concerns pushed their stock down BIG on Monday. If you are worried that they’ll go under, FNBO Direct (division of First National Bank of Omaha, which has been in business since 1857) is offering a 3.50% APY and there hasn’t been a peep about them having solvency problems.

This is only a concern for people wondering where they should put their next dollar. I wouldn’t move my funds from HSBC Direct to FNBO Direct or WaMu because the 0.25% to 0.50% APY difference isn’t worth the interest you would lose as the funds shifted from one account to another.

FNBO Direct is a new high yield online savings account that offers a competitive 3.25% APY interest rate and they have a new $25 promotion when you open an FNBO Online BillPay account.

First, you’ll need a FNBO Direct Online Savings Account (review of FNBO Direct), then you need to visit the BillPay $25 promotion page to apply. The $25 promotion is part of their Pay Yourself First contest.

Limited Time Bonus Offer: If you are a current FNBO Direct Online Savings Account customer, you can earn a $25.00 bonus for opening a new FNBO Direct BillPay Account. We will credit the bonus to your BillPay Account within 30 days after it is opened. In order to earn the bonus, your BillPay Account must remain open for 90 days and you must make at least one BillPay payment during that period (we reserve the right to deduct the amount of an unearned bonus from any account you have with us). This offer is only applicable to BillPay accounts opened on or after 08/06/08 and is limited to one bonus per household. This promotion is set to end on 09/30/08, however, we may change or discontinue this offer at any time. The FNBO Direct BillPay Account pays an annual percentage yield of 2.50%. The APY is accurate as of 08/06/08 and is subject to change. Fees may reduce earnings.

Several years ago, ING Direct made a name for themselves when they introduced the Orange Savings Account. At the time, the concept of an online savings account was as foreign as its owners, Dutch-owned ING Group, and many folks wondered if the offer was a scam. At the time, I know my credit union’s savings account APY was sub-1% and here ING was offering 2.60%! It was unheard of!

I had my reservations though. First, the company was Dutch so I didn’t know if that had any implications (it doesn’t). I was new to managing my own money so I was always wary of doing something stupid (I still do stupid things). Lastly, I didn’t want to jump too quickly even with the $25 referral bonus dangling out there. Fortunately, my comfort with all things online coupled with my inexperience pushed me towards opening an account at ING Direct and I’m glad I did.

Since then, many banks have begun offering high yield savings accounts and ING Direct has ceased to be one of the top interest rates out there… but it still has some merits and a warm place in my heart.

Account Signup

Signing up for an account takes mere minutes and is actually one of the strengths of ING Direct when ING first started. Back then, opening an account online was practically unheard of. You always had to visit a physical branch so that a teller or account representative could go through the screens themselves. Now, a quick account signup process is the norm.

Account Features

One feature that is noticeably absent from many other online banks is the ability to add new accounts as quickly. Once your first account is opened, subsequent accounts can be added in mere seconds. Everything managed through the same login, which recently benefited from a face lift, and it really does help you save more.

For example, opening new savings accounts are trivial and, given the ability to name them whatever you’d like, you can easily open an account for the purposes of a saving goal. If you have a big expense, such as a vacation, coming up in the future you can set up an account specifically for that. Once you set up an account, you can establish automatic transfers between all of your linked accounts (ING Direct accounts are automatically linked). So, you could set up a monthly transfer from your checking account to your ING Direct savings account and then intra-ING Direct transfer from your main ING Direct account to your vacation savings account. This transferring feature isn’t unique to ING Direct but the ability to add new accounts so easily is.

ING offers a CD laddering form that makes CD laddering a cinch. While the interest rates aren’t especially competitive, the 12 month CD is 3.40% APY and the 60 month CD is 4.00% APY (compared to FNBO Direct’s 3.50% APY high yield savings account), this feature is the only one of its kind I’ve seen available anywhere. When their CD rates become more competitive, I can see this form getting a lot more use.

Overall, I was very pleased with ING Direct. While their rates have lagged their competitors lately, I think the intuitive and friendly interface really puts new online banking customers at ease. I have accounts at Emigrant Direct and HSBC Direct and their banking screens look very antiseptic and austere. While you can’t judge a book by its cover, ING Direct does a great job putting the softer elements into its interface that puts someone at easy.

A reader emailed me, after reading my post about high yield savings accounts, asking whether Emigrant Direct should even belong on the list. She recommended her number one choice, FNBO Direct, because it crushes Emigrant’s 3% APY interest rate. I think I was always partial to Emigrant Direct because they’ve been around for so long, but, she had a point. There are plenty of banks on the north side of 3% and Emigrant doesn’t offer any particularly innovative features that would justify it being in the top five with that rate, so I sought to review her number one choice. (Another name that appeared a couple times in the comments and emails was Provident Direct, the online bank of Provident Bank).

Application Process

Last week, I opened an account at FNBO Direct, a process that took less than five minutes. There were all the obligatory personal information fields, a quick credit verification (where they ask three questions from your credit report), and my online savings account was “opened.” A few more screens later (login credentials, funding the account) and I was done.

One nice feature in the process, one that HSBC Direct also uses, was online bank account verification. You enter in your online access credentials and they try to login to verify you are who you say you are. While it worked at HSBC Direct, it didn’t at FNBO Direct and I had to wait for the two trial deposits. Those arrived the very next day (the ETA was 3 business days). I went back to the FNBO application, entered my two trial deposits, and my application was complete. Within an hour, FNBO sent me an email indicating the initial transfer was being initiated. The next day, I was told my account activated and I could log in.

Here’s where I ran into problems, all of my own doing. I tried to login and was prompted with two security questions - two questions I had never answered. Turns out that at the end of the application, on the page that said “Done,” there was an Activate button. That’s where I was supposed to setup all the security information, select the personal message, etc. After that brief three page process I was set up.

If you were like me and somehow missed that, you can always return to the application, view the confirmation page, and then hit the “Activate” button on that screen.

Account Features

The features of the FNBO Direct account are your standard options for a high yield online savings account. To the right I included a screenshot but it’s very plain looking - which is exactly what I like in a bank website. I want a bank website to be fast loading, simple to navigate, and FNBO delivers on both points. You won’t find a fancy CD laddering form like you can on ING Direct (they’re the only ones, as of this writing, that offer it) but I’ll take a fast loading site over a fancy form any day (ING loads fast too). Plus, the less time they put towards their website, while still giving you the basic functionality, the better. It means they can offer a higher yield.

In the screenshot you’ll see the standard Account Detail, Account Services, Transfer Funds, and BillPay buttons. They all lead to your standard screens with all the expected functionality. I won’t go into those.

More FNBO Direct Information

Here’s some useful information you may need somewhere down the road if you get an FNBO Direct account:

• FDIC Certificate: #5452
• ABA Routing Number: 104000016
• Telephone: 877-370-3707, available 24 hours a day, 7 days a week.
• Official Website: http://www.fnbodirect.com

Overall, FNBO Direct is as I expected it to be. A functional high yield savings account with a 3.50% APY yield with no minimum balance requirements. I’m going to try to link up other high yield savings accounts to this one, to expedite any transfers, but otherwise this matches up with every other bank.

WaMu was recently purchased by JPMorgan Chase, for the latest on bank rates, check out the best high yield savings account rates page.

I just received an email that Washington Mutual will be raising the interest rate on their online savings account from 3.30% APY to 3.75% APY. This beats the rates of 3.50% APY rate found at FNBO Direct and HSBC Direct. It’s also a sign that interest rates are headed up. (FYI, FNBO’s top rate isn’t a “promotional offer” and has no set expiration date, HSBC Direct’s rate is a promotional offer and is set to expire in September)

With inflation heading upwards, the rate was 1.0% in June 2008, it’s getting more and more likely that interest rates will also move upward to counter. The Fed doesn’t like high inflation rates and will counter with increasing the funds rate, which will in turn increase bank’s interest rates. Whether or not that’s good for your pocketbook in the long run remains to be seen, there are simply too many factors pulling at one another, but a higher bank interest rate is better than a lower bank interest rate.

Update: For some reason I thought FNBO and HSBC were at 4.50% and mis-typed 3.50%, they’re not, they’re at 3.50% and now they lag WaMu.